Rental Income Through Real Estate Investments
Passive Income Through Real Estate Properties
Real estate investments are a great way to increase your monthly cash flows. This can be accomplished through the simple expedient of parking your excess cash reserves in a property. A property that can be rented out and thereby accrue income. This would be income separate and distinct from the one you have already been earning. Most of the mature investors would prefer to rental income investments over capital growth investments.
Renting out a property to increase your monthly income is very simple to understand. It is also very easy to implement. Here is how it works:
Purchasing the property
You have to first acquire the property either through utilizing any financing or even cash up front. However, it is prudent to purchase only those properties that can easily be rented out. Make sure you buy properties that have a very high monthly rental yield on average. This means that it is imperative that their monthly rental income should be (considerably) higher than the sum total of the expenses that may be required to maintain that particular property.
The main reason why properties are rented out is to ensure rental income. Some expenditures may accrue on a regular basis due to the ownership of the property. Here, you should remember that the goal of renting out the property is not just to pay off its expenses. The goal is to earn a handsome monthly profit. Basically the idea is to ensure a tidy sum of money that may be incorporated into your monthly income.
The best part of renting out a property is the fact that it can easily generate real income. Let us see how it works in a real-world situation through the following example:
Rental Income Example
Ms. jane Doe has just retired from her job and has been given a substantial gratuity from her grateful employers for her years of faithful service. Under the circumstances, the best possible means of earning a living without losing her liquid cash reserves will be to acquire a property that she would be able to rent out as soon as possible. Furthermore, the rent income has to be greater than the monthly expenses (maintenance, taxes etc.) of owning the property.
Keeping this specific aim in mind, she should choose to invest in commercial or residential properties. This type of properties will be able to generate for her a strong return on her overall investments.
Here, she has to check the annual ROI (return on investment) ratio so as to be able to ascertain that the huge investment is justifiable and to what extent. If for instance, she has determined that her monthly income should not be less than $600 (over and above the property’s expenses), then the property has to be able to generate the desired amount in rental income to be able to justify the expense incurred in its acquisition.
This is why whenever you consider acquiring property for the purpose of earning profit by renting it out, it is imperative that you take into consideration the above points so as to ensure that it pays you rich dividends in the long run.
Cash Flow vs. Capital Growth
The kind of strategy that you may opt for, when you decide to invest in property will depend almost entirely on your very own outlook towards that particular investment in question. Broadly defined, there are two major types of objectives with regard to any sort of property related investments.
These include the following:
- Cash flow
- Capital investment
However, before you come to a decision regarding either of the above-mentioned options, you need to know why either of the two strategies is the right one for you.
Cash Flow option
A cash flow strategy is by far the simpler of the two. Cash flow is inherently a less complex strategy when compared to capital gains.
It basically involves investing only in commercial or multi-family properties. The type of properties that tend to give a markedly high rental yield per annum. This essentially means that the overall rental income of such a property is significantly higher than the expenses required to keep it.
The key to maintaining cash flow is to ensure that the property offers a high rate of rental income. The expenses associated with the ownership of the property must be covered by the rental income. This means that maintenance and property taxes will be paid in full. Also, there will still be a hefty sum left over every month that will be incremental to the income of the property holder.
In the short term, this strategy sound reasoning. On the other hand, rental income properties can have some disadvantages. The first one is the fact that most of these type of properties are non-liquid assets. Another disadvantage is that when the property is sold, the amount might be lower unless the property have been kept in mint condition.
Capital growth investments
From the short-term perspective, most people will agree that it is an ideal strategy. Many proponents and experts in the real estate field tend to prefer it over the cash flow strategy especially when buying a house.
They believe it is possible to increase your real wealth simply by purchasing properties in places where there is a steady increase in prices. Within a few years, the property market may even double. You will be able to reap the windfall of your investment. However, the main drawback of this strategy is that there is no ‘immediate return’ flowing from your investment. You have to basically invest and sit tight for the market prices to increase. Sit tight until you are in a position to sell off your investments. The number of years you may have to wait is entirely dependent on the whims and caprices of the real estate market as a whole.
In conclusion, we can say that whatever strategy you opt for has to be based entirely on your own needs and personality. If you want immediate returns, then cash flow is the ideal strategy for you. However, if you are willing to be patient, then capital investment just might be the thing for you.
Flipping vs. Long Term Investments
When considering a real estate investment, you have to focus on either one of two main strategies. They are:
- Long term property investments
Once you have purchased property for investment purposes, then you can either decide to hold it as a ‘long term investment’ till the time you decide to liquidate your investment by selling the property. Or alternatively, you can ‘flip’ it by selling it within a very short period of time.
Both of the following strategies have their very own pros and cons.
The advantages and disadvantages of flipping
The greatest benefit by far, of flipping your property investments is that it is quite possible to immediately realize the capital gains. Just make sure that your capital does not remain tied up for extended periods of time. Unlike the securities and stock markets of the world, property prices wont change their values multiple times a day. The property market, in contrast, is relatively more easily predictable. The market can give the investor the time to flip properties. Most of the time the have more control over the investment. Therefore they are able to make a certain amount of profit from each investment. Here, flipping properties is a markedly less risky investment strategy when compared to most other types of liquid investments.
However, it is pertinent to note that flipping properties can easily create cost and tax issues.
Pros and Cons of long term real estate investments
When it comes to real estate investing, many experts opt to prefer long term real estate investments over flipping. This is because land prices almost always tend to recover in the long run (especially in urban areas). Also, barring on a catastrophe (such as the Chernobyl nuclear disaster, for instance), prices are almost guaranteed to rise. Land is limited and the steadily increasing populations tend to ensure that even after a recession in the market, prices eventually tend to creep upwards.
On the other hand, long term investments are extremely capital intensive. For an extended period of time they are completely tied up to the investor’s capital. Apart from that, the owner has to take care of the property. He pays all relevant taxes and spend on the upkeep and maintenance of the property. Most of the expenses end up being included in the investment cost of the property. So, when the time comes to sell, they have to ensure that the price at which they sell is not only higher than the actual investment. This will determine the amount they spent on its overall upkeep. Also they continue to vector in the cost of inflation.
Ultimately, both of these investment strategies have their own pros and cons. They are entirely dependent on the personal aptitude of the investor. Finally, most of the the property investment advice will be available to them courtesy of their real estate agent.