Why to Invest in Real Estate

Investors can realize attractive returns from multiple income streams in real estate investments. Here is a look at some of the reasons why real estate can be beneficial for your investment portfolio:

Rental Yield

This is the percentage yield from direct rental income and can be calculated as either gross or net. Experienced investors prefer to calculate the net rental yield, which takes the expenses, taxes, and other costs into account, and divides by the property value or cost. The net rental yield can be negative, however, as it doesn’t take mortgage payments into account. For this reason, many investors prefer to look at cash-on-cash rental yields.

Appreciation

Rental properties normally appreciate in value with inflation. Increased value can mean a sale and reinvestment in higher value properties, or provide an equity line of credit to use for other investments.

Inflation-Proof Investment

Rents usually increase with inflation, while mortgage payments on the property remain stable. This increases cash flow, without the increased expense of holding the property. When inflation goes up, it can also mean more renters as mortgages become more expensive for average consumers. More renters increase demand, so rents can escalate.

Leverage

Leverage can provide greater returns but adds risk. For example, using $100,000 in leveraged assets to purchase three properties with down payments, instead of one for $100,000 cash.

Paying Down Loans

Amortization, or paying down loans, can free up more investment resources. Some investors use the increased equity in one property to free up funds to invest in others.

Property Improvement for Equity

Many investors intentionally purchase properties that lack certain features or could use improvements, calculating that the value of the improvements will exceed their cost and result in an increase in equity.

How Real Estate Investments Return Profits

When you purchase a company’s stock certificates, you’re looking for appreciation in the stock value, and perhaps dividend income, if the company pays it. With bonds, you’re looking for income yield on the interest rate paid by the bonds. With real estate investments, there are even more ways in which to realize a superior return on investment. Learn the ways in which your real estate investment can increase in value, as well as provide good cash flow.

Cash Flow From Rental Income

As is the case with a stock that pays dividends, a properly selected and managed rental property can provide a steady income stream in the form of rental payments. Rental property returns typically exceed dividend yields.

Real estate investors also have more control over risks to their cash flow. Though there are slumps in real estate prices and slow markets, people who own residential investment property usually lease it for many years, without experiencing corresponding decreases in rent amounts.

Increases in Value Due to Appreciation

Historically, real estate has shown to be an excellent source of profit due to the overall increase in investment property value over time. Of course, analysts cannot always predict real estate trends, which vary significantly across the United States.

Improving Your Investment Property: More Value at Sale

While it’s providing cash flow, you can also improve your investment property to earn more profit should you choose to liquidate it. Upgrades to the appearance and functionality of an investment property can significantly increase its value. As trends and styles change, keeping the property interesting to renters can help you retain its value.

For a maximum return on investment, make note of improvements that actually increase a property’s value. Installing energy efficient appliances and windows increases a property’s value, as does​ by adding a bathroom and remodeling a room. Insulating a property also increases its value.

Inflation Is Your Friend (When It Comes to Rent)

Though your fixed mortgage payment will remain constant, inflation drives up home construction costs as well as rents. Population growth also creates housing demand and drives up rental prices when supply cannot keep pace.

Making Use of Equity

The equity in your investment property will increase as you pay down your mortgage. Though equity is usually determined when you sell a property, some real estate investors take out equity loans when interest rates and loan terms are favorable and use those funds for other real estate investment projects.

Find That “Steal of a Deal”

Finding a value-priced property is the most effective way to increase your net worth. Such deals aren’t easy to come by, and savvy investors do their homework, browsing property listings frequently in order to quickly take advantage of opportunities when they arise.

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Investors who wish to increase the value of their portfolio with real estate should also ensure that they have their financial ducks in a row. Good credit scores are a must, as is having the cash savings for the required down-payment — usually 20 percent for investment loans.