How to Make the Best Real Estate Investment for You and Your Financial Plan
Investing in real estate can be a fantastic way to diversify your investment portfolio and create wealth for you and your family. Real estate investing also provides you with a variety of investment options, that can assist in not only gaining you profit but in getting you and your family on your way to meeting your financial goals and plan.
In order to succeed at real estate investing, however, it is important to adopt a different mindset than when you bought your family home. Unlike when purchasing a home for you and your loved ones, as a property investor, you will be looking at homes for their profit potential rather than their aesthetics alone. The first step to being able to do this is to have an investment strategy.
What is an Investment Strategy?
Your investing strategy will be the plan you use to reach the goals you have set for yourself in terms of your investments and the profits that they gain. There are a few key things to look for considering a potential property and its role in your financial future.
Supply and Demand
Location. Location. Location. It is imperative that as a real estate investor you are looking in an area with a lot of listing inventory. You want to find a neighborhood with more renters than properties available. By doing this you will be able to achieve the most profitable rental returns possible.
Economics
When looking for the ideal investment location you will want to ensure that you are investing where growth and advancement are happening. This means that there ought to be employers expanding and/or hiring, retail stores moving into the area, roads being built and/or expanded and other signs of strong economic growth.
Population Growth
When choosing an investment property you want to look for areas which have been predicted to grow.
Choosing a Profitable Investment
Here are five important steps to calculating whether a property is a profitable contender when investing in real estate.
-Determine how much gross income the property will deliver. Estimate both the best and worst case scenarios in order to provide a clear picture of yourself.
-Calculate all of your monthly expenses including, but not limited to insurance, property taxes, property management fees, financing costs, repairs, and vacancy costs.
-Subtract your monthly expenses from the monthly rent. This amount is your estimated net income (a.k.a your cash flow).
-Take a few minutes and calculate the cap rate and the cash on cash return. The cap rate compares the return on investment (ROI) to the purchase price. In order to figure out the cap rate, divide the net annual income by the purchase price. Aim for a rate of 8% or higher to get the best results.
-Determine the cash on cash return. This calculation tells you how much return your investment is going to be giving you. If you were to pay all cash, then this figure would be the same as the cap rate. However, if you are using financing, this calculation is a more accurate way to determine how profitable this potential investment is. In order determine this, divide the net annual income by the total cash invested. The difference between these last two calculations is that the cap rate tells you how good of a deal you’re getting on the purchase price, whereas the cash on cash return tells you how good of a return your money is getting.