WHY INVEST IN REAL ESTATE?
There are many different places you can stick your money other than under your pillow, including stocks, bonds, savings, mutual funds, CD, currencies, commodities, and of course, real estate. There are positive and negative aspects of each investment option.
One of the most commonly stated reasons that people give for investing in real estate is that they are seeking out financial freedom, but there are others as well -- of course, each person will have their own personal reasons why. They are typically seeking one or several of the following:
- Appreciation – is the increase in the property’s value, which generally occurs over time and can be increased by investors who add value to the property through repairs and enhancements. This is also a way to create equity in the property
- Cash Flow – whether you buy with all cash or use today’s favorable financing with a low mortgage payment, positive monthly cash flow will occur when the monthly debt is subtracted from the monthly rent. Giving you a monthly income from your real estate investment.
- Depreciation – Even with an increase in the property’s value the government allows owners a tax deduction of their property over its life span.
- Leverage – is a powerful reason for investing in real estate. If an investor used 100% cash to acquire a house worth $100,000, and the house increased in value by $5,000 in one year, then the investor made a return of 5% (assuming no other costs in this case). However, if the investor obtained 80% financing, only $20,000 cash would be required at the closing table, and a bank or other lender would loan the remaining $80,000 to acquire the property.
- Tax Benefits – In addition to depreciation, an investor can usually claim the interest portion of his monthly mortgage payment as a tax deduction.
The decision to begin investing in real estate is a personal one, and I absolutely recommend you make sure you and your family are 100% committed before deciding to move forward in doing so.
Is Real Estate Investing a Way to "Get Rich Quick?”
How many late-night real estate infomercials have you seen where the real estate guru is sipping drinks on the back porch of his beachside home, next to beautiful women in expensive (or minimal) clothing, telling you that this life is for you?
No doubt one of the largest draws to real estate investing is the image of investors driving fancy cars, living in large homes, and being all around "rich." While many real estate investors do build significant wealth over their career, real estate investing is not a "get rich quick" scheme. Yes – there are some who make a lot of money in a short time; however, these situations are generally the exception, not the rule. Investing in real estate takes planning, patience, and persistence. Don't expect to make millions of dollars in your first year. Instead, plan on creating a business through real estate that will grow steadily year after year to enable you to meet your financial goals -- and hopefully your dreams. No matter what you might hear otherwise, being successful in real estate requires hard work, just like it does in any other field. It is also important to know that there are no shortcuts to being successful in real estate -- there are no products or tools that will do the work for you, either. You must learn the fundamentals and then apply them.
Real Estate Mathematics: No More Complex than Junior High, You don't need to be a college calculus student to understand real estate math. In fact, most of the math you'll need is grade-school level. This section is going to quickly touch on some of the basic concepts and math formulas you'll need in your real estate investing career.
Income is simply the amount of money that comes in from a property. This math is perhaps the easiest of all: simply add up the amount of rent and any additional fees that comes in.
For example – you own a rental house. The home rents for $1000, and the tenant also pays $25 for the use of the garage.
Your total income was $1025.00.
Income could also include late fees, application fees, pet fees, laundry or other vending machines, or any other value you receive from your rental.
Expenses are simply the things that cost you money on an investment. For example, the garbage bill for a home is $50 per month, the loan from the bank was $500 per month, and maintenance was $100 per month. The total of these three expenses is $650.00. Your total expenses for this example were $650 for this particular month. Keep in mind that there are many other expenses that you'll face as a real estate investor, including things like taxes, insurance, management, holding costs, capital expenses and various others.
Cash flow is simply the amount of money left over at the end of the month after all expenses are paid.
To determine the cash flow, simply subtract the total expenses from the total income:Your total cash flow in the above example property was $375.00 for the month. Let's look at a few more math equations.
Return on Investment:
Real Estate Math Your “return on investment” (also known as ROI) is a fancy way of describing what interest rate you are making on your money per year. For example, if you invested $250 and you made $250 from that investment (for a total of $500) over the course of one year, you would have made a 100% return on investment. Similarly, if you invested $5000 and made an additionally $2500 over the course of a year (for a total of $7500) you would have made a 50% return on your investment.
The actual calculation for Return on Investment looks like this:
ROI = (V1 – V0) / (V0), (where V1 is the ending balance and V0 is the starting balance)
A simple scenario for using ROI to calculate an investment return would be as follows: On January 1, you put $1000 into a bank account. On the following January 1, you cash out the account for $1100. Your ROI on the investment is:
ROI = (1100 – 1000) / (1000) = .1 (or 10%)
You start with $1000 and end up with $1100 after a year for a return of 10%.
These simple concepts present the foundations upon which almost all other real estate calculations are based. The rest will come in time, but most calculations are simply related to these.