Real estate investing has gained quite the reputation as a vehicle for growing wealth. It can be tough to decide whether it’s right for you though, especially when stocks are doing so well and bonds offer a guaranteed return. Real estate has a few tricks up its sleeve though- it offers the investor four different ways to get a return on their money, all at the same time.
Rental Income
Real estate investing is most famous for its consistent form of cash flow: collecting rent. This goes for any property out there, whether someone lives there, a business is run there, or goods are stored there. Residential is arguably the best bet when it comes to cash-flowing real estate; this is because when the economy goes into a downtrend, people will still need a place to live. Commercial real estate provides cash flow as well, but it is more susceptible to bad economic conditions since businesses are more likely to close than people are to become homeless.
On the other hand, investing in commercial real estate has an advantage when it comes to lease terms- instead of a year or two, commercial tenants typically sign five to ten-year leases. This protects the investor by assuring that they will have a paying tenant in place for an extended timeframe.
Nevertheless, fantastic investment opportunities can be found in all types of properties. Check out some of the properties that Birgo Realty has opened up to investors.
Mortgage Paydown
One of the most valuable aspects of real estate is the leverage provided by debt. This is the best kind of debt there is because it makes you money. Just like a mortgage for a home, banks will lend money for investment properties. By using a mortgage, an investor with $100,000 to buy real estate with can buy a $400,000 property instead of just a $100,000 home. This could allow them to buy a quadplex instead of a single-family home, letting them collect more rent from more tenants. The mortgage does add to the costs of operating the property, but the idea is that the extra rent that you can collect will outweigh those extra costs.
Leverage is a great tool for maximizing rental income, but it has another perk- the mortgage that the investor will be paying is not just a sunk cost. With each payment, some money will go towards interest that has been accrued and some will become equity. Since the payment each month is fixed, more interest will be accrued at the beginning when the balance is high. As years pass and payments are made, the balance will decrease and a bigger portion of those payments will translate to extra ownership in the property.
How does paying a mortgage make money? If an investor puts their $100,000 down on a $400,000 property, they will start with 25% equity. If they go to sell the property in a few years, they may have paid an extra $100,000 towards their mortgage balance, giving them twice the equity. If they sell the property for what they bought it for, they’ll get $200,000- double what they put in!
Appreciation
Collecting rent and paying down a mortgage are the two surefire ways to make money in real estate, but there are a few more variables at play. Throughout history, the housing index has shown a consistent rise in home prices. There have been some timeframes when this hasn’t been true, but in the long term, property values have done a good job of keeping up with inflation. Some ten-year periods have seen great gains, and different areas have done better than others. The Pittsburgh real estate market tends to have less price fluctuations than the rest of the country, giving its investors less exposures to the risks of events such as the 08’ financial crisis.
This sounds like a very risky aspect of real estate, but it’s actually an opportunity. A market usually sees appreciation when the area has a lot of economic activity that attracts residents and businesses. By the time the area gains value though, it’s too late to take advantage of the gain- but when demand is high, this tends to push residents into nearby neighborhoods, continuing the trend of appreciation. To take advantage of this, a real estate investor can identify a market that is doing well and buy in a neighboring area that they think will soon gain value too. By doing this, they can sell the property for more than they bought it for, adding a third source of profit.
Value-Add
The fourth main way that money is made in real estate is by adding value to a property. This is the main objective of house flippers, who buy a property for less than it is worth, do some remodeling, and resell it for more than they paid for it plus the work.
Longer-term investors can benefit from adding value to a property as well. While adding to the resale value of the property, renovations can allow for higher rents to be justifiable.
Streams of Income
When thinking about the different investment options, an investor should consider the streams of income. Real estate is extremely unique in that it provides four different streams of income: rent, mortgage paydown, appreciation, and value-add. An investor can hone in on one of these and do very well in real estate, or implement all four to make for an indestructible investment vehicle.
