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Benefits of Investing in Real Estate
Real estate is a low risk business investment with lucrative financial benefits. One of the beneficial features of real estate is that it produces relatively consistent returns and capital growth. Returns in real estate investment come from the capital appreciation which tends to be fairly stable.
One of the notable and significant differences between real estate investment as compared to stocks or bonds is that real estate is a visible investment in the form of bricks and mortar of a building and the land it is built upon. This makes real estate highly tangible, because unlike most stocks you can see and touch your property. This often creates substantial pride of ownership.
Some of the other components that make real estate worth investing in as compared to other investment alternatives are as follows:
- Real Estate has no fixed maturity Real estate investment unlike a bond investment does not have a fixed maturity date which an investor to hold a property for over a long period of time. Thus real estate allows an investor to acquire a property and then dispose of the property whenever appropriate.
- Real Estate has Physical Tangibility Real estate unlike other alternative investment has a physical look and feel. You can see it and show it off to your close associates. In real estate, you have certain degree of physical control over your investment it which does not exist in stock or bond investment.
- Timeline Growth Rather than shrink There is no other market investment that is as profitable and safe as real estate investment. Real estate investment unlike stock market or other alternative investment has a timeline growth with minor fluctuations. On the other hand, the stock market has high points and valleys that range from quick highs to sudden drops throughout its history.
- Ability to Influence Value Real estate is a tangible asset and as a result has the ability to influence and increase its market value. This can be achieved either by improving the exterior or retooling the interior with quality material that will add more value to your investment on the long run. A real estate investor posses a wider degree of control over the performance of his investment than other types of investments
While it is a great investment to start investing in real estate, it can also be a risky and dangerous one if not carefully followed. The only way to ensure that you reap all of the benefits as enumerated above is to make sure that you consult a professional real estate broker.
Talking to someone who has gone through real estate investing and has been successful at it, is the only real person who can help you to match that success. By talking to a coach who knows what they are doing, you can be sure that you are going about the entire process with the right steps in mind.
Understanding CAP Rates
One of the most misunderstood, but important, terms in real estate investing is the Capitalization Rate or CAP rate for short. This key metric is at the heart of all income property investments and allows investors to compare multiple properties to one another by taking into account their expense load.
Unlike the GRM which only accounts for a property’s Purchase Price and Gross Scheduled Income (GSI), the CAP Rate also accounts for a property’s expenses, with consideration for operational efficiencies or mismanagement as the case may be.
CAP Rates are basically the savings rate or yield of a real estate investment in which you pay all cash. For example, a 10% CAP property would yield a 10% cash-on-cash return if you purchased it with cash and no debt. You calculate a property’s CAP rate by simply dividing the Purchase Price by the Net Operating Income (NOI).
When calculating a CAP rate, it’s important to properly account for expenses.
Since your NOI is calculated by subtracting your expenses from your GSI, understating expenses will overstate your NOI and thus your CAP rate, making the investment appear better than it truly is. The key is to make sure that you verify as many actual expenses as possible (taxes, utilities, management, etc.) and predict others as realistically as possible (maintenance, reserves, etc.).
Your goal should be to arrive at a realistic CAP rate for the investment during your Due Diligence period so you can determine whether or not to move forward with the purchase.
One core real estate investment strategy when buying income property is to identify positive leverage situations where your CAP rate is greater than your borrowing rate, or interest rate. After all, if you could borrow money from a friend at 6% and invest it at 10% you’d make 4% on every dollar borrowed. The same holds true with real estate, where your goal is to invest as much capital as safely as possible in these positive leverage situations.
It’s important to note that CAP rates move in the same direction as interest rates, so as interest rates (borrowing rate) increase, so do CAP rates, and vice versa. Interest rates are currently at historic lows and so are CAP rates, meaning the return or yield you earn on real estate is low relative to historical norms.
However, this has to be taken in context with other available investments, such as the stock market (negative in 2009) or a traditional savings account at your local bank (offering around 1% in 2009). When compared to other traditional investment classes, the yields in real estate look quite attractive.
Where to Invest
When solving, ‘where to invest – real estate or ‘, you must have a time frame in your mind. The time frame for any kind of real estate investment ranges from 7 to 30 years depending upon the size and the purchase cost of the real estate. The actual amount invested in it would amount to about 15% or so of the equity value of the real estate.
To gain a good return on the total invested amount, you will have to look for a real estate which has a rising equity value, that is the market value of the real estate should be on the rise. So here’s how the usual mechanism works out: First off you will have to finalize the actual property or what kind of real estate you are looking for. It can be anything right from bare and barren land to a studio apartment.
Now, when you try to find and finalize the type of real estate there are some very essential factors which you would have to consider. How safe is the neighborhood?, is a prominent factor of these. A safe neighborhood means a rise in the equity value of the investment in future.
Similarly, a huge mall nearby, means a rise in the equity of the real estate. A New Mount Rushmore like site in construction near by, can bring rise in the equity. Thirdly, you have to improve your credit score as the more is your credit score, the less would be the interest on the mortgage. The interest on mortgage plus charges such as closing costs and commissions are your only expenses in the total investment deal.
Because the principle amount of the mortgage, which you would be borrowing and paying off in the mortgage loan, would be ultimately owned by you as the equity. The only problem with such an investment, is that the rate at which the equity would grow is unpredictable. It can be very fast or at the same time quite stagnant.
This real estate can be used as money maker in 3 ways. The first option is that you can rent it out to people. You can borrow loans and lines of credit by pledging the real estate and its equity as a collateral. Such loans are known as home equity loans and are personal loans.
Lastly, you can sell off the property if the real estate prices in the locality sky rockets.
Let’s take a look at the probable pros and cons of this investment.
Cons: There is always a chance of facing foreclosure, however you have the option of short sale. Secondly, you have the liability of the mortgage loan for quiet a long time period.
Thirdly, the investment is in bulk, you can lose everything in one go in case of any financial crisis which might result into real estate price drops.
Pros: Its a very secure investment and the chances of loosing everything is very, very less. Secondly, if you have a well paying secured job then getting and paying off the mortgage is not a big deal. Best of all, if you are in your middle ages, 35+, with a well paying job then this is a really, really good investment for you. Just make sure that you pay off the mortgage on time.
Stock Market Or Real Estate
The stock market is also another quite a good option, though there are quiet a few disadvantages of this investment option. Again like the real estate, its impossible to figure out the rate of return on investment. A very nice word can be used to describe this investment, ‘dicey’ yet profitable.
The thing that scares several people away from the stock market investments is that there is always a possibility that one might lose all the money invested. There are of course, several strategies and methods which are followed by the professional and institutional investors.
The following are the basic mechanisms. Now, when you invest into any stock related investment, you will need to consider the total commission, loads, charges and minimum balances that you will have to pay the brokers.
The amount though small, if not complied with can incur dire and mortifying actions from the United States Securities and Exchange Commission. Hence making appropriate and effective provisions for such charges is an absolute necessity.
Again note, compliance is of negligible cost. Now, the basic trick of the trade, to make money though the stock market is to buy the stock at lower market price and sell it at a higher one. This shall always be your basic motive of trade, buy at the lowest possible and sell at the highest possible.
Now, you would have to keep a watch on the stocks which you buy on a daily basis for this purpose. Secondly, you can also buy stocks which remain really stable yet, give a pretty good dividend. Lastly, it is also necessary to obtain a good overall yield.
A yield is chiefly, the total of the dividends that you received from a said investment plus the total sales value of stock minus the price at which you bought the stock. Now, it goes without saying that the dividend plus sale price of the stock should exceed the purchase price substantially.
The best way to attain the aforementioned objectives is to research continuously about the stocks, on company websites, stock exchange websites, economic news, etc. Being well aware would substantially help you purchase and sell at the right time and price.
Let’s take a look at the pros and cons of this investment option.
Cons: There is a possibility that you may lose everything that you have invested as, prices rise and fall rather quickly in stock markets. Secondly, you have to keep on updating your knowledge non stop and round the clock.
Pros: In comparison to the mortgage, you invest relatively low volumes in the stock markets. Yet you can have substantial rate of returns. Secondly, you do not have a prolonged liability on your balance sheet. If you are in your twenties, then this is the best investment for you as you can take the risk of trading.
In such a case, you can afford to take such a risk. If the investment fails you then you will still have ample time in your life to recover from it than an investor past his 50′s.
Before you invest, there are two things that you need to consider. Firstly, is the stock is worth investing in and which one is better for me. Secondly, can I take up other options such as annuities or mutual funds and still get similar (equal) rate of return on investment. I hope that the elaboration on ‘where to invest – real estate or stock market’, is resourceful.
Hard Money vs. Private Money in Real Estate
One of the first things people looking to start investing in real estate generally ask about is how to find investors, or how to generate the capital to do their deals. While a traditional bank or mortgage lender can be of some help, most real estate investment companies today use other options for funding. Two of these options are known in the business as “hard money” and “private money.”
In real estate investment, the term “hard money” refers to a short-term loan which is used to finance a property. Hard money gets its name from the fact that these type of loans are very expensive for the borrower and yet also very advantageous for the lender.
For real estate investment transactions, hard money lenders will generally only loan on properties up to 65% loan-to-value and will charge an interest rate well above the current standard mortgage rates. The reason for the high cost of obtaining hard money is that it is much easier to borrow, and because of this the lender is placed in a position with much more risk of default. Hard money can be good for very short-term needs or if a situation comes up without any readily available alternatives.
Private money, just as it sounds, is money you can obtain from private individuals for real estate investment funding purposes. Private money can be obtained in a variety of ways, and can be a much better deal than using hard money. The biggest advantage of private money is the lower cost than hard money, and the added flexibility of working with investors who come to know you and understand your business.
Finding private money lenders requires prospecting for investors. When you enter the arena of real estate investing, prospecting for investors needs to be something you do on a regular basis in order to insure that you always have the capital readily available to fund your deals. Finding the right real estate investors means that you can make the best deals possible, and you can make them on your own terms rather than the terms of a bank or a hard money lender.
Isn’t it time you learned how to capitalize on one of the best markets for real estate investing that this country has ever seen? With the recent flood of foreclosures now is the time to learn to invest correctly in real estate.