The real estate business involves generating profit by buying, holding and selling of real estate. More specifically, real estate investing involves using cash inflows to invest in property that is likely to generate future cash outflow and a favorable return on investment (ROI).
Real estate has certain advantages over stock. Property can be leveraged to yield a higher rate of return than shares and similar investments. Property also has the potential of generating residual returns in the form of rental and lease income. Property is a type of investment that will assure long-term growth. The property market is not usually subject to the wide variations or corrections of the stock market. It is a better insurance against inflation than stocks and shares. Owning a property provides other intangible benefits such as sense of security and a pride in ownership.
Understand the parameters for determining profitability.
As with any business, investment decisions in real estate investing are based on return on investment (ROI). It is ROI and the following factors that decide on the individual potential and investment merit of a piece of real estate.
1. Net cash flow – The net cash flow of a property is defined as the difference between cash inflows from income and the cash outflows on account of operating and incidental expenses and money spent on debt servicing. It is necessary that you make an accurate estimation of these figures before investing in a property.
2. Capital appreciation – Property appreciates over a period. Appreciation depends upon the income potential of a property. The higher the income generating capacity of a property, the higher you can expect the property to be worth.
3. Property financing – Obtaining finance for purchasing property depends upon a number of factors such as your own credit standing, the level of appreciation that is likely in the value of the property and the potential of the property to generate a rental income. These factors will definitely influence your getting favorable finance terms. So make sure that you have your facts and figures in place.
4. Tax Liability – Tax rules for income from properties vary a lot from one region to another. It is very important that you speak with your tax consultant to make sure what your tax liabilities are vis-à-vis various types of income from properties.
Do your homework
1. Think beyond buying a piece of real estate as a place in which you can live or build a home. Attune yourself to the fact that real estate is a business. Think like a prospective investor who weighs decisions in terms of cold and hard returns on money.
2. Define your goals very clearly and develop a clear strategy on how and by when you plan to achieve these goals.
3. Make sure that you familiarize yourself with all the factors that may influence the future value and possible rental income from a piece of real estate before making your investment. The simple rule of caveat emptor is very relevant before purchasing property.
4. Become fully acquainted with the nuances, the terminology and the concepts of the real estate business.
5. It is a very good idea to consider using reliable real estate investment software. Software solutions help by providing cash flow statements, level of appreciation in a property over a period of time and in calculating return on investment (ROI) and internal rate of return (IRR).
Jim Mack is a successful real estate investor and short sale expert in the Kansas City area. Visit him at http://www.buymysouthkansascity house.com and http://www.buymybeltonhouse.com
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