The value of long-term rentals
Regardless of the specific real estate investment strategy you employ in your business, real estate represents the best method of building sustainable, long-term wealth available today. While the stock market can be extremely explosive and subject to radical changes in value from day to day based on economic news, oil prices, and political instability around the world, real estate is remarkably stable and its value has had a constant upward trend for the last 100 years. . While it’s true that real estate values have taken a heavy kick in the teeth of late, investors using a buy-and-hold strategy are still making money while the rest of the market is struggling.
For this strategy to work, you need to buy as cheap a property as possible and ensure that the cash flow generated by your property is consistently greater than the expenses associated with owning it. To ensure this happens, you need to do an accurate cash flow analysis of your property before you make the purchase. The following components are critical to your success:
Income – Rent is the largest income item associated with your property. It is imperative that you know the local real estate market and the rental price of similar properties. If you estimate that your property will rent for $1,500 per month and market conditions will only support $1,200 per month, you can get into trouble very quickly with negative cash flow.
Expenses – Novice real estate investors often have no real idea of expenses or how to accurately estimate them. Due to this lack of knowledge, many investors have been known to blindly accept the expense figures offered by real estate agents or the seller of the property. This is dangerous because the seller has an incentive to minimize expenses to make the investment look as attractive as possible to sell; the real estate agent can earn a hefty commission check. When calculating your property expenses, use proven and documented expenses whenever possible, but also use the sniff test. Don’t forget to factor in a vacancy allowance because no property can remain rented 100% of the time without fail. You should also make sure you factor in an expense for property management, whether you intend to manage it yourself or hire a professional to do it for you.
Reserves: Regardless of how new a property is, things are likely to break or need to be replaced. For example, water heaters, furnaces, and appliances will invariably break. When this happens, they need to be replaced. By setting aside cash for these situations, you can be prepared when repairs need to be made. If nothing ever breaks, the cash will be available to you for any other purpose.
As long as your property provides you with positive cash flow on a consistent basis, you will not be affected by market fluctuations, including rapidly depreciating real estate values. You will continue to have positive cash flow to rely on for consistent monthly earnings. Also, as the number of properties you own increases; your monthly income will improve. If each property you own has a positive cash flow of between $200 and $500 per month, you can see how lucrative owning 15 or even 20 properties can be.
This monthly income is ongoing and life changing. You can literally reap the rewards of real estate investing by creating a generational cycle of wealth creation that will last long after you leave the stage on the left.
Owning a property as a long-term rental also offers you huge tax benefits through depreciation, a clever creation of the Congressional tax code that allows you to take a depreciation tax credit as the actual value increases, while deferring income taxes of capital until you sell.
Invest early and invest often in properties that provide you with ongoing cash flow. As this cash flows into your real estate business, you can use the leftover funds you don’t need for your day-to-day needs to finance additional property acquisition costs that will allow you to better leverage other investment strategies that will potentially provide you with infusions. huge amounts of cash, further enhancing your bank account and allowing you to live YOUR American Dream.