To state the obvious, everyone needs a place to live. And the current challenge in availability of affordable housing - especially for young, first-time home buyers - has led to a thriving rental market.
While real estate investing is not the “get rich quick” method of income some high-risk schemes might have you believe, there is a way to minimize your risk while still generating income. Real estate is also a great way to diversify your investment portfolio.
In this article, we’ll report on the methods and advantages of using real estate to increase your income, as well as the best (think most profitable) strategy for using a rental property once you have it.
Why Invest in Real Estate?
1. Cash Flow
Often, the best benefit of investing in real estate comes via the rent check you’ll receive each month from a tenant.1 For some, cash flow makes real estate their chosen option over investing in stocks. Cash income can also help you build and sustain a real estate portfolio. The rent you receive should cover the mortgage payment on the home, maintenance, and necessary repairs. If you’ve invested really well, you’ll also have some money left over to augment your income after expenses.
One point of caution: there’s no guarantee there won’t be periods of time without tenants in your rental property, or that they will remain for longer than the terms of your initial lease. To help mitigate that risk, there’s another positive investment factor to consider:2
For anyone dozing during your college accounting class, appreciation is simply the increase in value of an asset over time. It too is an important dimension of profitability to consider when deciding whether to pursue real estate as an investment.
Historically, the value of real estate has risen consistently, even though recessions have and do occur amid a cyclical market with natural ups and downs. If the idea of fluctuating real estate values gives you pause, you might want to do more detailed research and purchase a property with the potential for long-term prosperous ROI (return on investment) to put your mind at ease. Depending on the area in which you’re looking to purchase, be sure to check public records for any future development plans. You’ll want to ensure the zoning laws won’t change any time after you purchase an investment property.
Real estate prices also tend to rise with inflation. That means the value of the money you’ve invested in real estate will rise as well.
As referenced above, the cash flow aspect of real estate investing can make it a more popular option for some than perhaps the stock market. However, unlike investing in stocks, you can’t simply put a minimal amount of money down here and there and become a property owner.
Leverage is an investment strategy of using borrowed capital (essentially “debt”), to increase the potential return of an investment.3 This means you can put a smaller amount of money down and use debt (take out a mortgage) to finance the remainder of your investment and help you attain a return.
Using your own money is the easiest way to access leverage. Take a mortgage, for example - a standard down payment of 20% can be enough to purchase a home. Some financing programs require even less money down.
Another option is to utilize business partners to furnish a portion or all of the down payment for an investment property. Similarly, some sellers may be willing to finance part of the purchase price of the home they are selling.
Curious as to what your home would bring in today's market?
4. Tax Advantages
Given there are multiple deductions you can claim from real estate investments each year, the tax benefit is a top reason to add this form of financial investment to your portfolio.4 Costs of repairs and maintenance, service expenses (property management, legal consultation), utilities, and mortgage interest are but a few of the expenses you can deduct. You can also deduct travel costs associated with your properties, such as gas and mileage on your car.
You should consult a tax professional for guidance on your particular situation, but tax-saving strategies can definitely help you to build wealth even faster.
| Types of Real Estate Investing
There are of course numerous ways to invest in real estate, but here are four of the most common examples:
Remodel and Resell
Often referred to as “flipping,” investors purchase a fixer-upper property to remodel it in a short period of time and sell it - hopefully quickly - for a profit. Sometimes homes that need work are priced below the potential market value, so flipping can be very profitable depending on how much work it needs. It goes without saying that a home needing a lot of work typically also requires a lot of money. You’ll also want to consider how much of the renovation you will be able to do yourself vs hiring contractors.
If you’re really interested in this route, contact us to show you some older homes. You’ll be able to see a range of updates and repairs that fixer-uppers need and can determine the impact to your spare time and budget.
Flipping one or a few homes can also be a great way to obtain cash for down payments on properties you will keep and rent out. It’s not uncommon for investors to live in a home during the period of time it’s being renovated, then sell it for a profit and move into a more permanent home. Again, any profit you receive can be turned into capital for obtaining future rehab properties or rentals. And, once you know where to find rehab opportunities, you can repeat the process as desired.
Most importantly, investors need to understand the risks involved and be financially prepared to cover any unexpected expenses that may arise.
The most straightforward choice for investing in real estate is to purchase a traditional rental property. This route allows you to generate stable, predictable cash flow to cover utilities and expenses, while taking advantage of the long-term value appreciation and tax benefits referenced above. Plus, there’s no need to furnish the property, which is necessary when leasing out short-term rentals.
The net takeaway with traditional rentals is they’re a great way for first-time property investors to get started.
Platforms that facilitate short-term rentals (like Airbnb and Vrbo) are thriving. Often the property owners themselves stay there part of the year and rent out the remainder of the time. But it’s becoming more common for investors to purchase single-family homes, condos, and other properties for the sole purpose of leasing them out.5
A key advantage to investing in a short-term rental property is an owner can typically charge more per month (and should) than you would with a long-term rental, especially if it’s furnished. These properties receive more wear and tear and require more time for upkeep than long-term rentals, so that must be considered in determining rental fees. You will also pay all utilities on the property, year round.
Short-term rentals also allow you to maximize your revenue during seasonal peak demand, when travelers and tourists enjoy their vacation getaways.
Importantly, as with any other type of investment, you should know the ground rules before diving in. Legalities become a big factor with this type of rental, as laws and restrictions vary by location. Additionally, be sure to set realistic expectations and research the market carefully to truly understand and evaluate income potential.
Moving Up and Renting Your Current Home
Many people purchase their home with the plan to stay in it long term, or at least several years.
But sometimes life circumstances arise and you find yourself having to move. Should you rent your house instead of selling it? There are a variety of factors to consider.
The first step is to determine your home’s value. KC Homes 365 can prepare a current market analysis (CMA) to help you decide whether the current market will bring enough revenue from the sale of your home.
In conjunction with the CMA, we can help you understand the estimated net proceeds from selling your home, which would provide an estimate of your profit after any closing costs and transaction fees.
These numbers, plus factors such as your need for a down payment on a new home, debt payoff, or the amount of time if may take your home to sell, can all play a role in deciding how to proceed.6
You’ll also want to consider costs you would incur through having to manage the property (or hiring that out), unexpected repairs, and income tax you will pay on any rent collected - even if it’s only enough to cover the mortgage payment. There are also intangible considerations such as late-night emergency calls from a tenant.
Simply put, not everyone is cut out to be a landlord.
If you do decide it makes more sense to rent your home than sell, it can be both a great short-term solution and long-term investment.
Ultimately, the best approach is to do thorough research and weigh the pros and cons.
Purchasing a Future Home for Retirement
One investment option that plans for your future without requiring you to be a landlord, is to purchase a retirement home in a favorite destination location. This is a win-win: you can enjoy the home now while also creating long-term equity in a property you’ve pre-chosen for your golden years. Plus, you can get ahead of rising real estate prices and interest rates.
KC Homes 365 can offer valuable assistance even for out-of-town properties. Our team has access to a nationwide network of quality agents and we will personally interview/select 1-3 in your target area to help you with your search and provide superior service. We’ll help you consider factors like location, market demand, and property type.
However you choose to invest in real estate, please contact us to set up a free consultation. We have experience working with all types of investors and can help you determine the best strategy to meet your investment goals. We will also have access to properties that may not be publicly available.
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