Four Steps to a More Profitable Real Estate Investment
DETERMINE THE IMPACT OF LEVERAGE.
Leverage is the use of mortgage funds to reduce your cash investment out of pocket. Are you better off paying cash or using a mortgage? Generally:
- Pay Cash: if your Cap Rate + Your Annual Property Appreciation Rate is lower than your mortgage rate. That's because you'd have "negative leverage" if you use a mortgage. In other words, your rate of return would be higher if you pay cash.
- Use a Mortgage: if your Cap Rate + Your Annual Property Appreciation Rate is higher than your mortgage rate. That's because you'd have "positive leverage" if you use a mortgage. In other words, your rate of return would be higher if you used a mortgage.
DETERMINE YOUR LIQUIDITY STRATEGY.
How quickly can you liquidate the investment and get access to your cash? Generally, real estate is not liquid. That's why it's smart to never be 100% invested in real estate. For example, if your budget for real estate investments is $500,000, you may want to keep part of that cash in the bank, sitting on the sidelines. This way you're better positioned to weather the storm if the property sits vacant for a few months. Also, a cash cushion allows you to quickly take advantage of other investment opportunities when they arise.
TAKE INTO ACCOUNT YOUR SALES AND MARKETING COSTS.
What are the "costs to carry" the property if it sits vacant or if you can't sell it? These can include property taxes, insurance, utilities, and maintenance costs. Also, what are the costs you'll incur when selling the property? These can include commissions, taxes, seller closing costs, and seller concessions to the buyer.
EVALUATE INVESTMENT MANAGEMENT ISSUES.
With real estate, you have asset and property management. Property management is the physical management of the property. Asset management is reviewing the numbers and making sure the investment still makes sense. Should you refinance the mortgage? Should you change the rent? Should you sell the property? That’s where I come in. I can help you to run the numbers and evaluate your options. Contact me to get started!
Do you have the right mortgage advisor in your corner who can help you avoid common mistakes? Contact me so we can think through your options and create a winning strategy!
Source: Momentifi