All over the world, the real estate industry is growing at an impressively rapid pace. Accommodation is the basic need of people and having a nest that they can call of their own is a dream for them. Due to the population explosion, apartments and flats are high on demand. This demand will go up with time, thereby implying that the real estate property will cost you dearer in the coming days. All these point out that venturing out into the real estate market is a lucrative proposition.
People invest in the real estate market to fulfill either of two purposes. They purchase real estate either to live in or to make money out of their sale. In this article, we will restrict our discussion to the real estate investment that is made only to make a profit and not just to move to a new location.
Know the Fundamentals of Investment
Before you buy, always make sure that your present sacrifice in terms of investment will ensure a handsome payout in the future. Location is an important consideration for property purchase. If your real estate is located in a developed area that is well connected to highways has some good facilities like medical service, university, colleges, etc, you will get a good price for it in times of sale.
A property with positive cash flow is a worthy investment. By positive cash flow, we mean what remains after the deduction of property-related expenses. These expenses include the mortgage payment, operating cost, taxes, and other necessary expenditures related to the real estate business. The amount of positive liquid cash flow depends on three important factors such as operating cost of the property, mortgage payment size, and amount of rent.
Any real estate investor must analyze the above-said factors before making any investment decision. The best way to ensure positive cash flow is to make a small down payment but avail a long tenure mortgage with low interest. If you get an option of the low mortgage payment, do not let the chance slip away as it will result in good cash flow.
A simple example will help in clarification of the above-said point. Let us suppose, you have bought a 4-story apartment at $125,000 and rented it out for $600 per month. Then you will receive $2,400 every month from your rented apartment. So with $300 for operating expenses and less than $625 for the mortgage payment, you will end up gaining $1,475 as a positive cash flow. However, if the mortgage payment goes up to $925 per month, positive cash flow will plunge to $1,175 every month. This simple calculation explains why you should try to get low payment and keep the operating cost at a minimum margin to enjoy the higher cash flow.
An alternative way to get a positive flow of cash is to avail of an interest-only loan. It is a short-term loan that extends for 5-10 years. After the lapse of the loan term, you have to either refinance or sell the property. The flipside is such loans often come with an obligation of the high periodic payment. However, by ensuring positive flow from real property, you can utilize the cash for more prospective investment opportunities.
Property Investments – Spend or Save?
Kerry stated ‘Cash is king’ after Alan Bond had offered him $1 billion. But most of us without the luxury of a “Bond” must start investing our money to save it for the future.
The latest Reserve Bank’s decision to hold the interest rates will appeal to property investors to come back to the market and invest.
There are specific depreciation timings that are offered to the investors when they buy a property. This helps them to claim huge tax reductions in the early years. Furthermore, buying this plan gives investors stamp duty savings.
Although these things are vital, these shouldn’t be driving you towards choosing the asset. These are short term cash tax benefits which are why they have little to no influence on the long term investment. Stamp duty savings are a one-time benefit that is offered at the time of the purchase. Most of the depreciation received by the investor is used up within 5 to 10 years.
Buyers have to be cautious that these particular tax advantages are often employed as promotion tools to market property however since they’re simply short-term buyers, it will not be able to make use of these marketing tools to promote their investment plans. The majority of the investors get attracted to these short-term cash benefits while taking decisions on their investment plans.
Timber Corp is one such company that was sold on short term cash benefits.
This company was motivated to take credit and spend in these kinds of plans by the property experts who had been benefiting from huge upfront commission rates.
Where to Invest?
If property investors choose their investment areas based on the fast cash benefits without thinking about its future performance, then they are at great risk. It is vital to look into the long term benefits while investing in a property. This will help in the asset’s capital growth in the coming years.
Often the factors like land value, demand vs supply factors, and demographic trends should be looked at while choosing a property to invest. The land value is one key ingredient in determining the value of the asset.
The common old rule! Land appreciates whereas construction over that land always depreciates. You sure can claim huge tax deductions when investing in a new property but they have to understand that depreciation is the polished terminology used to depict the property’s losing value.
This depreciation normally hides and holds back the land appreciation value resulting in a negative equity period.
Areas to Avoid
However, investing in areas that have a limited supply of properties and any future supply is capped often benefits the investors. The cap on supply means that any future projects about that area have no planning restrictions or land to take on. Together the property has to be underpinned by powerful primary marketplace demand pushed by area, location, facilities, and lifestyle features.
To achieve this, we need to have a clear understanding of the area demographics. Buying an asset in a suburb dominated by investors, first-time buyers or home buyers will probably promote them to a more unpredictable, vulnerable market.
Areas having demand from a broad section of the market tend to be more stable and have long term development. I wouldn’t say there is something wrong with short term tax benefit investments, but, yes, investors should consider the overall investment strategy and its long term growth.
Well, if the investment doesn’t make any money at the end, or, even worse, loses some, do you think it is worth looking for the short-term cash benefits alone? What I look in such investments is the “future money” it yields at the end.
For the rich, cash is king but for investors like us, the long-term investment is the “king” with a bonus of everything else that we get from it. So be sure that you don’t miss this point while you are making any investments.
How to Invest in Property in this Fluctuating Economy
The dynamic nature of today’s economy has invested in property a hot topic and people are wondering when they should invest, where they should invest; so on, and so forth.
There are lots of questions in an individual’s mind similar to the above when it comes to investing money in property but it is imperative to make the right choices and make the right decisions with regards to the parameters like development cost, the value of the holding, future aspects, area, etc.
One must realize that there are risks when it comes to investing in property as well and therefore, careful planning and execution of a strategy is essential to minimize those risks.
Things to look out for
The first thing that one should ensure about a property before buying it is that it is free from any kind of loans taken against it and it is not overpriced. Secondly, the location of the property needs attention because it will affect the rates of the property in the future and a good location means that the owner can always expect higher yields from his investment.
For instance, if you want to invest in a property in Perth, Australia, you must consult a property developer to obtain a clearer picture of the property rates in the region. It is very difficult in today’s fluctuating economy to determine which properties will give higher yields and which ones will see a drop in their rates in the future. Therefore, careful examination of all the aspects is important.
Property investment is a very important decision and the amount of money that you are willing to invest is the biggest question. The biggest impediment to this decision is inflation as one cannot be sure how much inflation will rise in the future so that you can invest accordingly and save the rest of the amount in case there is a price rise everywhere.
Also, if you have to resell the property, how early does the money come into your hands depend a lot on the type of contract that has been signed initially?
What is the right choice for investment?
An investor must have a clear idea about which property will be high yielding, safe investment that would repay him to its maximum capacity. It often happens that people settle down with a low yielding investment because it makes them feel secure and safe regarding the investment they have made. Commonly there are two types of safe and high-yielding investments that are pursued.
One is a short-term investment that generates high returns within a two to five-year time frame while the other is a long-term investment that delivers both good returns on investment as well as brings about asset security for at least twenty years. Finding the right deal for you is very crucial for property investment. If you want to invest in Perth then you should take a look at the property developer to have complete knowledge of the investment option you have in the region.
Reasons to Invest in Real Estate
There are many ways of earning money through investment, stocks, and real estate being two of the most popular ways. While investment in shares comes with heavy risk, real estate is a safer option. People have been investing in property for years and reaping the benefits.
Though the rules of real estate investment are unlike the stock market, it can help you earn a lot if done wisely. Even if you are a successful entrepreneur going sturdy with your primary business ventures, you should probably consider rental real estate as a crucial part of your portfolio. The following article discusses why you should invest your money in real estate.
1. Get more leverage – Real estate is among the few investment tools where using a financial institute’s money is very easy. They have the power to make a down payment, optimize your capital, and ultimately maximize your overall return on investment.
2. Grow, tax-free – Purchasing rental property based on speculation of its future value can be a risky tactic as cash flow is involved. But the appreciation, in the long run, is more realistic and you should be contemplating a tax-deferred plan. You can even consider charitable trust, an installment sale, or a 1031 exchange to further decrease your tax liability.
3. Tax-free cash flow – You should be aware that due to mortgage interest deductions (if you optimize your capital) and depreciation, your cash flow becomes tax-free. A majority of the time, the investor will not pay taxes on his or her cash flow and should wait for capital gains that can come from the sale of the asset in the future.
4. Tax write-offs against other earnings – Based on your categorization as a Real Estate Professional or an Active Investor and your income slab, there is a bright chance that other than your rental property generating tax-free cash flow, it will also create many tax deductions that can be used against your other income. Make sure you discuss this with your tax professional or advisor before investing to keep your expectations realistic.
5. More tax deduction strategies – Rental real estate investment provides the investors with yet another option to convert personal expenses into possibly viable business deductions. Remember that rental property and related activities are a part of business, which means that the travel expenses to make payments to relatives who look after your real estate or a trip to simply check on your properties can be deductible and can boost your tax benefits when talking about cash flow and the property’s future sale.
6. It becomes a forced retirement plan – It is an incredible investment option for those who can’t save. Some people may lack the discipline to make regular deposits into retirement or pension plans. Thus, acquiring a rental property is a major commitment that will compel you to stash away money for the future. You will see how it helps you in the long haul and shall be grateful if you don’t sell it. You can generate future cash flow and huge wealth from it later.
Making profits in the real estate sector may not be easier than in the stock market, but less volatility and high appreciation are major factors why you should invest in it, even when it demands heavy research, patience, and sometimes luck. Real estate does not promise an overnight “rags to riches”, but you get security for yourself and your family. Real estate is a long-term investment and making it a part of your diverse portfolio will certainly produce high returns.
What Real Estate Investors Need to Know About Hard Money Loans
Hard money loans, also known as bridge loans, provide funding against collateralized property, based on its value. They normally have higher interest rates than banks as they normally do not meet the set bank standards.
The companies that lend hard money loans are called hard money lenders. The rules regarding hard money loans differ from country to country and state to state. Many states in the US, such as New Jersey, stop hard money lenders from operating in their usual way. The rules also differ, based on the kind of the borrower.
Most people who cannot get loans from normal institutions (banks and mortgage companies) turn to hard money lenders. There are many reasons why people are not able to get loans from other institutions. Bad credit history, low earning and other credit problems play a major role here. Hard money lenders are a bit lenient in such cases, as they are more inclined in knowing about the profits you will make from the transaction you are taking the loan for.
These loans are taken to save or procure assets. In case of a default, the lender (company) is the first one to have the right of lien on the property. This is how they secure their money. The borrower is the one who runs great risk here. You can know more about these kinds of loans from online estate agents.
Things that you need to keep in mind when applying for a hard money loan are:
Hard money loan contractors generally have higher interest rates. Mostly, the interest rates they offer are 20 percent above the market rates. They make money this way. It is preferable to go to the bank if you have this option. It will save you a huge sum of money in the form of interest. But the importance of hard money lenders cannot be denied either.
The Changing Value
The loan you receive is against the property’s value. Some lenders will allow you a loan against 100 percent of the value, whereas some will only give it for 50 percent or less. The rate differs from lender to lender. At times, it is not certain and the lender decides it based on the property’s worth and your standing.
You need to have a strong case if you want to get a better deal out of the loan. You will be required to have a good credit history. Everyone likes to play safe, and you might not get a loan if you do not have all the papers.
Another important thing is property. This is what you put as collateral. The amount you receive in the loan is directly related to the market value of your property. You are to first submit documents showing the worth of your property. The loan is approved once the lender has done his or her side of the verification.
The Easy Way
You don’t have to worry about finding a hard money lender. Thanks to the internet, you can easily run a search for online estate agents or online hard money lenders on your favorite search engine, such as Google to reach hundreds of potential online estate agents offering such services.
But when doing so, make sure you are positive about the company. The ratio of scams isn’t very high, but still, there is always the chance of things going wrong. Do your research properly and get referrals from online estate agents and your friends or family.
A lot of people are turning towards this option as they consider it very easy. But, there are some truths that they are not aware of. It is not really an easy nut to crack. Since the interest rate is higher, you will automatically be required to make higher profits in order to securely pay off the interest and the whole loan. The loan should only be taken against ideas that guarantee a good return. The return on investment factor should be high.
The trick is to find a property at a discounted price, in a location where property sells like hotcakes and fetches a high price. If you are not able to earn a good profit margin on the deal, you will most probably end up in hot water.