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:
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.
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.
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 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.