With winter coming and investors flocking back into real estate I wanted to give you my short guide to investing in real estate.
Benefits of real estate:
1. Leverage: You can borrow most of the money needed to buy the asset
2. Insurable: Insurance protects your asset
3. Income and Appreciation: If done right you can make money every month and then more when you sell or trade
4. Taxes: Depending on your status you can write off some or all of the depreciation of buildings [check with your CPA]. You can also do a 1031 exchange and defer your capital gains if you re-invest in more investment real estate. [again, see your CPA or 1031 exchange facilatator]
How it works: Investing means making more money than you’re spending and here’s how you do it.
1. Rent: You rent the property for more than it costs you to own and maintain the property. This is called positive cash flow. Here’s how you figure it out.
Take the Rental income and subtract the following:
2. Property Taxes
The sum of these things gives you your NOI or Net Operating Income
Take your NOI and minus your mortgage payments
The sum gives you your cash flow
You can take this a step further and see your pre and post tax cash flow as well.
I can give you a detailed analysis that will give you many more metrics and fancy acronyms if you make certain assumptions about the future, like appreciation, vacancy, changes in cost of expenses, etc.
Basically – you just need to use the best info you can get, be realistic about costs and vacancies and make sure you have more money coming in than going out.