Buying Investment Real Estate

What makes investment real estate a successful investment strategy?

The best way to think of Investment Property is that you control a property while you have someone else covering all the costs to hold the property. While the tenant pays the rent the mortgage is being paid down over time. At the same time the rent and the property value increases over time. This creates greater cash flow and ultimately, equity which can be used to buy another rental property.

This is a very simplistic view of investment property but it holds the keys to successful investing in real estate.

Let's look at each of the statements made in more detail.

You control a property while you have someone else covering all the costs to hold the property.

When you first buy a property in which you want to rent, the first item to consider is the cash flow position. Basically this is the rent, less the expenses of the property. I would encourage you to look for properties in which you can obtain a positive cash flow (more income than expenses). In some cases you may be willing to enter your investment in a negative cash flow position but this adds more risk to the investment.

While the tenant pays the rent the mortgage is being paid down over time.

The mortgage you obtain when you purchase the property allows you to purchase this investment with as little as 25% of the value of the property. Often these mortgages are taken out for an amortization of 25 years. This forms one of the expenses of the property and is paid for by the rent collected. With each mortgage payment part of the payment goes to interest and part goes to paying down the mortgage. Over time the rent collected for the property will increase and it may allow you to pay down the mortgage at a faster rate. With escalating payments the mortgage can be paid down much faster than the initial amortization period of 25 years.

At the same time the rent and the property value increases over time.

Housing is an excellent hedge to inflation. People always need shelter and in a major city there should always be some demand for homes. Over the long term you can expect that this investment will increase in value. Also, not that your investment is leveraged (you only put 25% of the cash required to purchase property as a down payment and borrow the balance) however when the property increases in value by 10% your return on your initial capital is much higher. Ex. You buy a property for $100,000. You invest $25,000. Your property increases 10% and your property is now worth $110,000. Yet your return on your money invested is $10,000 on $25,000 or 40% return on investment. Over time your rent also increases which changes your cash flow, positively, as the majority of your expenses are fixed expenses. You can see why some people get very excited about investment real estate.

This creates greater cash flow and ultimately equity which can be used to buy another rental property.

Some investors like to keep their money working. Over time you will find your investment property has increased in value. Some investors will refinance their properties with the bank and use the equity to buy another property. This is a very effective strategy to build your wealth.

Contact Me

If you would like to discuss the possibility of investing in real estate contact Real Phaneuf. He will be happy to discuss this wealth building strategy in more detail so you can decide if this is the right option for you.