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Big Payoff For Investing In Real Estate
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Big Payoff For Investing In Real Estate
If you are looking for a quick payoff, then real estate property investment is probably not what you are looking for. But, if you are looking for a really good payoff in the long term, investing in real estate is worth the effort because, if done wisely, will avoid the ups and downs of the stock market.
Rental properties can provide a good income and become an excellent building block for your wealth. The type of properties for an smart investment would be single-family homes. Why? Because of the higher quality of tenant is why. These are the people that will take care of the home, and they are more stable and less vagrant.
There are several other reasons why single-family homes are better investments. The tenants pay the utilities and maintenance. The appreciation is better than on other types of dwellings, in other words, you are not tied into rental market like multi-family dwellings. The cash flow is more stable because you have longer leases. A house is easier to sell and easier to finance and easier to rent.
The types of residents that will rent their home are quite varied: Newly married couples, a newly acquired job brings in a new family or a promotion to a new area. It is wise to understand the area where you decide to purchase and it is even wiser to understand the quality of the renters you rent to. Bankruptcy or foreclosure victims need places to live, too, as well as those families whose credit is stretched to the breaking point.
The type of investment property you are searching to buy would be one that is the easiest to rent. Those would be homes with three to four bedrooms, two bathrooms with at least two showers, quiet neighborhood with a nice backyard and a good location.
These not only rent well, but also resell easily, too. You want something that you wouldn't mind living in: roomy enough, clean, updated, nice paint job with nothing too trendy either inside or outside.
In order to get a good payoff, you must consider your initial investment. You don't want to over pay because that will lead to less residual income from the rents due to a higher mortgage payment. If you over pay, you run the risk of not being able to recoup your investment when you decide to sell later or may result in negative cash flow because the rent is lower than the payment.
Another thing to consider is the larger maintenance issues such as a new roof or a new air conditioner. These are things that the landlord is responsible for and are expensive. If you purchase property that is unusually low in price because it's a fixer-upper, then you should include costs of repair to the cost of your initial purchase to calculate if your investment is wise. Building wealth through real estate investment property has excellent payoffs over the long run.
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Use Net Present Value to Evaluate Property Price
Any real estate investor who has tried to evaluate the price for a rental property with time value of money consideration has undoubtedly used net present value (NPV).
Although it should not be used as the only factor to decide whether a real estate investment provides a good buying opportunity, NPV does provide the investor with a quick and easy way to determine whether the price that will be paid for the property will yield the investor's desired rate of return (discount rate).
What is net present value?
NPV is the difference between the present value (PV) of all future cash flows produced by a rental property and the amount of cash investment (or, initial investment; i.e., down payment and closing costs) required to purchase the property. For example, let's assume that the real investor desires a 10% yield on all future cash flows, must invest $100,000 cash to purchase the rental property that might produce those cash flows, and wants to know whether the price he will pay achieves his desired yield. He would calculate NPV.
Here's how it works.
First, all future cash flows would be discounted back at 10% to determine the present value of those cash flows. Secondly, the $100,000 initial investment would be deducted from the PV. The difference between the two is the NPV. For example, if the present value winds up equaling $110,000, the $100,000 would be subtracted to determine a net present value of $10,000 ($110,000 - 100,000 = 10,000). Whereas, if the PV calculates at $90,000, the NPV would be -$10,000 ($90,000 - 100,000 = -10,000).
What does it mean?
Whenever the NPV is greater than zero, it means that the discounted value of the future cash flows is greater than the initial investment. In other words, you are getting a good deal and getting a rate of return that is actually higher than the discount rate you desire (in fact, you can pay $10,000 more for the property and still achieve a 10% yield). Likewise, any NPV less than zero means the opposite. You are getting a lower rate of return than you desire, and would have to pay $10,000 less for the property to get a 10% rate of return.
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