Investors Report

How To Invest in Todays Real Estate Market
Investing in real estate is not for everyone. But if you're looking for a way to increase you personal wealth, purchasing a rental property may be for you especially in todays real estate market.

We're not talking sky-high appreciation rates like the late 1970's or mid 1980's which virtually guaranteed a solid return for may real estate investors regardless of what they purchased. What we are talking about is residential market in which a well-chosen, well-managed rental property of 1 to 4 units can be the shining star in an investors portfolio.

What's happened? Today's availability of fairly priced and even some undervalued homes combined with outstanding low payment interest rates and a solid rental market have boosted sales. Once again, opportunity-driven investors and finding the purchase and keeping it rented while making huge returns.

Keep in mind any opportunity has a down-side risk. Real estate is complex and each property is different. Buy right now, experience shows rental property investors can benefit from informed real estate professionals who can find the right location with the right financing. The key to success today is doing your homework and making sure the numbers work.

If you've bought your own home, you already know many of the advantages of real estate ownership. Here's a brief overview of the many ways you can profit from owning rental real estate. 

Lower your taxes

Investor tax incentives can be substantial. Some investors can use deductions from rental property to offset some of their wage income. Other investors, while not eligible for the offset, can avoid owing taxes on their rental income by sowing adequate expenses and deductions. Even if rental payments do not cover the investors expenses, tax breaks may actually make up the difference or more.

As an investor, you can claim deductions fro actual costs you incur for financing, managing, and operating the rental property. That means mortgage interest payments, real estate taxes, insurance, maintenance, repairs, property management fees (if any), travel, advertising, and utilities (if tenant doesn't pay them) may be subtracted from your adjusted gross income when figuring your personal income taxes up to the amount of real estate income you receive.

Also, don't forget deductions for depreciation. The tax code assumes buildings and improvements wear out over time. These losses are deductible from income, regardless of the properties actual market value. 

Have a Positive Cash Flow

A positive cash flow results when the rent you receive exceeds the total you pay for the mortgage, taxes, insurance, maintenance, and other carrying costs. That's not as hard as it sounds. First, decide whether you need a positive cash flow before or after taxes. A pre-tax positive cash flow translate into current income, a goal of many retired investors and others with current expenses. Properties yielding a pre-tax positive cash flow are harder but certainly not impossible to find.

If this is your goal, you need to buy wisely. Not all properties will yield high enough rental income to your expenses. Make sure you know the much rent to expect by finding out about rents for similar unites nearby, the properties current rental fee, and date of last rent increase. Keep in mind you may need to purchase with a large down payment so your mortgage payments are smaller.

A positive after-tax cash flow can come from a negative pre-tax cash flow. Generally, the depreciation deduction makes the difference. If you meet the eligibility test, youâll be able to use the depreciation to shelter some of your taxable income and reduce your tax bill.

Second, youâll want to ensure your tenants make timely rental payments and take care of the property. Of course, a positive cash flow is impossible without rental income. A through credit, employment, and landlord check on applicants will help you find renters, and a strong lease combined with a required security deposit will help put you ahead. 

Use Leverage

As an investor, you magnify the return on your investment by borrowing a large part of the purchase price. That is, by limiting the amount of cash you invest, you make your cash go a long way.

Leverage means using borrowed money to increase equity. And equity the difference between what the property is worth and the balance owed on the mortgage is what's important when figuring whether your dollars are invested wisely.

Assume you bought a $100,000 rental property with a 30% down payment and after several years the home is worth $135,000. The $35,000 return on your $30,000 investment is more then 100% (Several factors will actually lower your profit, but to illustrate the principle of leverage we're keeping the numbers simple). If you bought that same $100,000 property with all cash, the return on your investment would be 35%. Leverage puts other people's money to work for you. 

Benefit from Growing Equity
Eve at a modest rate of appreciation, real estate may well yield a higher return on the cash investment than would some other financial investments, such as bonds or long-term CD's. Each mortgage principle payment you make is a payment to yourself. You build equity as your mortgage principle shrinks, even if your investment property doesnât change in value.

Although homes in different parts of town may appreciate at entirely different rates, the key is shopping carefully for a purchase guided by knowledgeable professionals. Review your expectations and think about how long you plan to hold onto your investment. When you reach your predetermined equity target, its time to sell or refinance and perhaps use the cash you receive for other investment properties.

The years 2012 to 2018 promise to be the most profitable era in history for British Columbia Real Estate Investors. And, as youâll quickly discover, it doesnât matter if youâre a beginning investor or a veteran you are going to have the same opportunity to grab your share of this exciting market. We would be very eager to answer any of your questions about buying an investment property.