Today, we’ll be looking at the three most common ways to make money through real estate investment.
1. Flipping property. This is the riskiest investment you can make. You’re at the mercy of market volatility and, very often, high-interest loans. You can reduce some of this risk by choosing a prime location or an emerging market close to one. If something happens in the market and you have to carry the property, these areas rent well and will likely come back in three to five years.
Make sure the property you’re purchasing can withstand a 10% to 15% market correction, and understand that the standard minimum profit for flipping a property should be a 25% profit after all expenses (including closing costs).
Let’s say you buy a property for $100,000 and spend $50,000 on renovations—you’d need to sell for $187,500, plus an extra $11,250 in commissions and $15,000 in financing costs. You’d need to sell at $213,750 just to make the minimum profit.
“Take into account the tax benefits you receive from owning investment properties.”
2. Cash flow property. Investors in our area want to receive a 5% to 8% return on investment, referred to as the cap rate. What we’re talking about here is the yearly return on your money.
Let’s say you buy a $500,000 property and put down $100,000. You want to see at least a $5,000 return on that $100,000 each year. This doesn’t take into account the tax benefits you receive from owning investment properties. You’re also owning an appreciating asset and its tenants are paying down the mortgage for you.
Over time, that $100,000 makes you $5,000 per year, which could be appreciating by 1% each year. 10 to 15 years from now, you’ll have earned anywhere from $150,000 to $200,000 on your initial investment.
3. Asset in usage. This is a property you’re purchasing as your primary residence with the plan to sell it later for a profit. This one is interesting because although you’re paying down a mortgage, there are some really great tax benefits. When you go this route, plan on staying in the home for three to five years to avoid market volatility.
If you sell the property after living in it for more than two years, there is a tax exemption for any capital gains. Let’s say you make $100,000 on the property—you normally have to pay a minimum of 20% tax, but since you have lived there for two years, you can defer the tax and keep the entire amount of your profit. You also get a $250,000 exemption per spouse, so if you’re married and make a $500,000 profit, you keep it all!
Markets are currently trending downward or flattening, so you need to be diligent about your investments. Just keep in mind that there are a lot of investment opportunities in down markets. We can help you with navigating these investments—contact us and we can set up a strategy for when you decide to buy. We look forward to hearing from you.
