Real Estate Investing: What You Need To Know To Make Money

By Author: James Kobzeff
Total Articles: 44
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There is little doubt that real estate investing has made a ton of wealth for a number of people who have invested in real property. In fact, it can be said that the earning potential of most smart real estate investors measures high to extremely high; in most cases we might even say that they are set for life because of real estate investing. How did they do it?

In this article I want to share why real estate investing can build and keep your wealth like nothing else and why for most individual real estate investments, the level of analysis is not that terribly difficult. So if you are looking for a way to ensure your security for the future in order to build a retirement portfolio then this one is for you, because there are just four things you need to know about making money with investment property.

1) Purchase Equity - Repeat the adage "you make money when you buy a property, not when you sell a property" until you dream about it. This is one of the simplest ways to succeed at real estate investing but at the same time can be easily abused by sales people if you aren't careful. What you want to know ...
... about the purchase price of a property is how it relates to the current selling prices of other similar investment properties in the area.

You don't care what price other properties are listed, or what they may have sold for sometime during the last year; you want the price a real individual in the area would pay to own your investment property "today". How do you get it? Have the real estate agent that you're working with run you a comparable marketing analysis. At the end of the day, unless you are reasonably sure that you can purchase on Monday and resell on Friday for a profit (after updates) you might want to opt out and keep looking.

2) Annual Property Appreciation - This is a bit murkier because appreciation is an opinion. Regardless what the so-called experts say, the fact is that no one can say with certainty what tomorrow might bring. Therefore, do your homework and form your own opinion about whether the property is likely to appreciate. Consider things like job growth in your area, lack of similar product, and future demand for your property.

Remember, appreciation is just an opinion. But if you do your homework you should be able to correctly decide whether the investment property you are interested in buying has the juice to sell for more than you paid for it or not.

3) Annual Cash flow - Over time you will either be making or losing money on this investment. It may turn out that small amounts of negative cash flow make sense if the annual appreciation and purchase equity are strong, otherwise not. The components that you have to gather for annual cash flow are the rental income, operating expenses, and mortgage payment.

Here's the schema:

* Gross Operating Income
* less Operating Expenses
* less Mortgage Payment
* = Cash Flow.

In other words, all the income produced by the investment property less some allowance for vacancy less the costs to keep the property in operation such as property taxes, insurance, trash, utilities, repairs and maintenance less the amount you pay to the bank for the loan.

You can gather market rents data that you believe are comparable to estimate the gross annual income and then apply some reasonable vacancy allowance rate. Most of the operating expenses can be estimated pretty closely, and, of course, the mortgage payment can be calculated to the penny.

4) Tax Shelter - The tax code permits investment property owners deductions for mortgage interest and depreciation so it can be a sweet deal for real estate investors. For rather than paying taxes on the proceeds you actually might receive during any given year (i.e., cash flow and sale proceeds before taxes), the IRS allows you to deduct the interest and depreciation and in turn taxes you on the cash flow and sale proceeds after taxes.

Here's the concept in very simplified fashion.

* Income
* less Operating Expenses
* = Net Operating Income
* less Mortgage Interest
* less Depreciation
* = Taxable Income

Okay, now do your homework and run the numbers (real estate investing software makes it easy). If you believe your assumptions and like the result, and believe the risk to be low, then you have done what you should to make a prudent real estate investing decision about any investment property. At the end of the day smart investors simply look at all the facts, make some estimates of key parameters, estimate future performance, and then play some "what if" games about what happens next in the event that things don't work out exactly as thought. Here's to your success.
James Kobzeff is the developer of ProAPOD - superior real estate investment software since 2000. Create a rental property cash flow analysis in minutes! Easy to use and affordable. Learn more => www.proapod.com