What is the objective of a good residential real estate investment? Same as any other investment – to make a profit!!!
So what makes a good residential real estate investment? Generally, it is appreciation. Appreciation in real estate is a common objective and generally obtainable as real estate typically escalates in value over the long term. Appreciation is the escalation in the market value of the property over time. However, lets take a moment to think about how you as an investor should see appreciation when considering “Other Peoples Money”. Lets look at a couple of points quickly.
First, lets try to make this a positive cash flow game. This means you should have enough of a down payment so that your rental income covers your mortgage and the other regular bills for the property. This is to keep your stress level down and feel good about your investment. This is important!!! You do not want to feel that you are at risk of having to sell in a poor real estate market because something happens in your personal life and then being forced into selling.
You should have a mortgage. You want to leverage the property. If you are not leveraged you should buy another property!!! Make use of Other Peoples Money (OPM). Remember the renter is paying the interest and principal because you have positive cash flow. While this is happening not only are you making a return through appreciation on your down payment but on OPM as well. Quickly, your property is worth $300k and your down payment is $100k and you mortgage $200k and the property appreciates 3% this year. That is $9,000 in appreciation. That is a 9% return on your down payment. Remember, your renter is paying the principal and interest and other expenses.
You might think there is a risk in being leveraged. Well, your correct but where there is no risk there is no return. Why does the bank loan you money? To make a return. They see your value that you are bringing to the table as well as the value in the property. Do you have more risk then the lender? Absolutely, but you get the return on the appreciation full stop as well as access to the renter to pay the operating expenses. I have to say this again – real estate is insurable!!
Let me ask the investors out there how much can you borrow against your stock investments? 50%? The lenders see too much risk. How much can you borrow against real estate? 70%, 80% or more? Ask yourself why!!