Purchasing a real estate means purchasing a future inflow. Of course, you will be taking some risks, it will take time to attend to the property, deal with tenants, etc. Unlike investing in bonds and stocks, real estate is tangible, so the investors who like to see their investment would prefer this type of investment. No one says investing in real estate is low risk, affordable, simple and easy. However, there are certain aspects you can pay attention to when buying the property, in order to prevent or minimize the risks/ potential issues related thereto.
Investing in real estate requires considerable start up capital, and it takes some time to get the returns. The owner is expected to make mortgage and tax payments even though he may fail to rent the property right away. In addition to this, remodeling and renovating needed to make the property rentable may cost more than you would expect. Typically, the costs calculated before the renovation works start are set lower than the actual amount. Thus when calculating the budget for renovation and remodeling, one should add 30-40% of unexpected expenses. In case the owner does not rent the purchased property as soon as possible, prospective earning can turn into debt. Of course, the risk can be reduced if the prospective buyer avoids properties in need of renovation or remodeling. Unlike taking fee simple title in one’s name, private real estate funds and Tenant-In-Common (TIC) investments have considerably higher risk profiles that makes it easy for you to lose money if something goes wrong. Of course, it is necessary to take precautions, review reports, conduct due diligence investigation in order to reduce the risks. Click here.
Cash On Cash Return
Purchasing property requires spending liquid financial assets to get a property which is an illiquid asset. Cash on cash return is calculated if we divide cash flow before taxes by the total amount invested. This simple calculation can help you make the right decision when it comes to purchasing real estate; buying property with minimal or negative cash on cash returns would take you to the verge of financial ruin.
Consider Properties Very Carefully
Purchasing a property is a big decision that will affect your future. Purchasing a real estate certainly is not a way to get rich quick, but if you choose wisely it can be a good long term plan. Properties in poor condition usually require considerable amount of time and money and they are often located in bad areas. Purchasing this kind of property would be expensive with doubtful cash on cash return. In addition, vacation and college rentals are not properties you want to purchase/rent. This does not mean you need to buy exclusive/luxury real estate, however properties in nice neighborhoods with carefully selected tenants are probably the best way to get your return on investment. Of course, a good communication with your tenants will make things easier so treating them fairly is highly recommendable.
If you make a good research and consider the aforementioned points carefully, real estate can be a long-term, stable source of reasonable income.