Ask any property investor and they’ll likely tell you that the reason why they’re in real estate is that it provides passive income. Also called “cash flow”, the consistent stream of income is one of the things that encourages people to put their money into property. After all, who wouldn’t want a security blanket like that?
However, while cash flow is important, it’s not the most important return in real estate. There are other ways that real estate creates returns, which we will outline in this article.
#1 Cash Flow
First of all, what is cash flow, anyway? Cash flow is, essentially, the net amount of money that moves in and out of an investment. In real estate, it contemplates the amount after the expenses (for example, property management fees, mortgage, etc.) are deducted from the rental income. As a simple example, if your rental income is $2,000, and your expenses pile up to $1,300, you’ll end up with $700. In other words, cash flow refers to profit.
Investors tend to set $100 as a benchmark for their profit per property. We know, it’s not a big amount, but it does bring consistent cash into your bank account. That way, you can slowly grow your wealth.
#2 Appreciation
Another way that real estate creates returns is through appreciation. Throughout the years, people have invested in property intending to sell it at a higher rate. While appreciation isn’t guaranteed, there is a good chance that it will. Consider this: if you purchase a property for $100,000 today and sell it for $150,000 in the future, you’ll earn around $50,000 in profit.
The idea is to purchase a property that’s in a location with potential. You don’t always need to purchase a property in a popular location now – you can look for a property that’s likely to appreciate. For instance, if your property is in an area where a college town is going to be built, you can anticipate appreciation as the demand for residential real estate rises.
Of course, you could always count on forced appreciation. Tasks like enhancing the curb appeal have been proven to “speed up” the appreciation process. Hence, if you own a property that you want to appreciate now, consider consulting a property management company to assist with forced appreciation.
#3 Equity
What is equity? In layman’s terms, it’s the amount that remains when the liens (i.e. what you owe) are deducted from the total worth of the home.
If you owe $200,000 on your mortgage, and your house is worth $250,000, your equity would be $50,000. However, as you slowly pay down your mortgage, your equity will increase.
Let’s say you purchase a house for $300,000 that you finance with a loan of $280,000. If your house’s worth is $300,000, you would now have $20,000 of equity ($300,000 minus $280,000). Fast-forward two years into the future, and now you owe only $270,000. However, your home is now worth $320,000, so your new equity increases to $50,000 ($320,000 – $170,000), as well.
So, what can you do with equity? Being “equity-rich” enables you to buy more properties. When you sell your house, you will profit, and you can use that to pay a large downpayment on your new property. And if your downpayment is good enough, your mortgage payments will be lower, as well.
To determine the value of your home, get a real estate appraiser through a South Florida property management company. They can determine the valuation of your home at any one time.
#4 Tax Benefits
Tax deductions do not apply to private residences, only to investment properties. When you invest in real estate, you can leverage a wide range of tax deductions, for example, capital gains and depreciation. You can take advantage of these to make more money. At the end of the year, you might not even have to pay a penny due to the deductions.
Below, you’ll find a few of the deductions you can benefit from:
- Mortgage Interest
- Legal Fees
- Costs to Pay Independent Contractors
- Property Upgrades
- Advertising Costs
- Casualty Losses
- Property Management Company Fees
If you aren’t a CPA, contact a property management company today. They have a team of accountants that are ready to assist you in terms of real estate deductions.
#5 Inflation
Finally, inflation.
Inflation refers to the rise in prices, including rent and real estate. Although inflation isn’t always good news (e.g. rising construction costs), it’s generally beneficial. Let’s take a look at how it affects your real estate assets:
Rent
Rent is guaranteed to rise during a high-inflation period. While this isn’t the best news for renters, it’s favorable for real estate investors since it means more money.
Construction Costs
Unfortunately, inflation also causes the cost of construction materials to increase. However, if you already own a rental property, you will outperform the investors that still need to construct a new condo, multi-unit, etc.
High Mortgage Rates
It wouldn’t be wise to get a mortgage at an inflationary time. People don’t want to deal with high mortgage rates, so they end up continuing to rent. This increases the demand, which is good news for property owners.
Why Partner with Luxury Property Care?
Investing in real estate shouldn’t be a spur-of-the-moment decision. In order to succeed as a real estate investor, you need to do a lot of research. That’s why you should consult with a property management company in South Florida. At Luxury Property Care, our experts will evaluate your real estate investment to determine whether or not it will result in the returns that you want. We will also properly take care of our property to make sure that it delivers the investment returns that you deserve.
Contact us at (561) 944 – 2992 or complete our contact form for more information. We’ll start with an obligation-free evaluation of your real estate investment. Once you give us the go signal, we’ll get to work to make sure your investment remains lucrative for years to come.
