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Real estate investing has become a popular way to diversify your portfolio and create a great return on your investment. Anywhere you go people are talking about success stories of investing in real estate and there are many real estate seminars hosted by real estate gurus across the country. Before making your first real estate investment decision, let’s understand what unique benefits real estate investing can offer you.
1. Passive Income
A big advantage that real estate investment has over other investments is that it can produce positive cash flow on a monthly basis. Positive cashflow is generated when your expenses required to pay the loan and all other operating expenses subtracted from your revenue which comes from rent and other ancillary income is positive. This can be a great investment asset if you are looking for cashflow to fund your retirement.
Revenue: rent, garage rental, parking, laundry machine
Expense: loans, management fee, insurance, tax, utilities, repair and maintenance
In the above property, you have a small POSITIVE cash flow of $59 / month.
Leverage is a technique used by real estate investors to expand the potential for returns, while equally expanding the downside of any risks involved if things don't work out.
When you buy an investment property, in most cases you need 20% down payment only instead of 100% of the property value to purchase a house. In other words, you are borrowing money to increase the potential return of an investment
This method of leveraging investment works to your advantage when real estate values rise, but it can also lead to losses if values decline.
For example, for a common real estate investing, when you want to invest in $500,000 house, most lenders require you to pay 20% of down payment. That is $100,000 on a $500,000 property. By putting down only 20% and borrowing the rest, the investor only uses a smaller percentage of his or her own money to make the purchase. The remaining 80% or $400,000 is provided by the lender. This ability to only use 20% downpayment to access 80% of the lender’s money is called leverage. By leveraging you are taking advantage of return on $500,000 value asset instead of $100,000 value asset. Of course, your return on $500,000 value asset should be bigger than $100,000 value asset.
When you invest in real estate, there will always be long term value in your land and in your home. Equity investment can sometimes leave you with little or no asset value when it dips to zero. This can also happen to real estate investment but in real estate, your investment is tangible and doesn’t disappear. It is secured by a physical asset that you can touch and feel. An expert real estate investor will patiently wait until the market recovers so that your asset value starts to appreciate again. This way you are hedging against the market volatility and taking advantage of tangible real estate asset.
Real estate investing is not merely another type of investment portfolio. Real estate investing is a business. This means firstly, that you have control over your investment decisions unlike little to no control in equity investing. Your control includes but is not limited to location, type of property, tenant profile, marketing, property management and so no. You even have the power to negotiate purchase price in certain markets conditions.
Secondly, you can control your revenue to maximize your return on investment. Depending on the location, property type, and market conditions, you can maximize income by changing the revenue stream. For example, in areas where hotel rooms are sold out every weekend, you can consider short term rental. If new businesses are booming in your area there is a high demand for business travel, you may consider furnished rental for corporate clients.
Lastly, you can control the value of the property and your exit strategy. In real estate investing, even small improvements, such as new paint or upgrading the flooring, can go a long way toward improving the look and the value of your home. This strategy is especially effective in the buyers market when you are competing with other sellers to sell your property. If you are looking to further increase the value of your property, garage suite, basement suite, and subdivision are your other options.