This
article is not designed to teach anyone how to invest in Real Estate,
it merely discusses the theory of investing. The author of this article
and the website (www.comehometothewoodlands.com) do not recommend that
anyone take action based on this theory. Anyone considering investing
in Real Estate should retain qualified counsel such as Realtor Ray Ward
prior to implementation of any Real Estate Investment strategy.
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A common theme in considering real estate is, and has been, location, location, and location. While this remains to be true, location is not the only consideration. Should someone buy property simply based on location, I would ask questions like “Is the property vacant?”, and “What is on the adjacent land?” Improved Property should also create a list of questions all geared towards the potential profitability. To investors, this usually means dollars and cents while others could measure it in terms of enjoyment. The following theory considers financial profit from Real Estate Investment.
There are several factors involved when investing in real estate and when they are combined in harmony, they can equal profit.
The goal of most any investment is income, successful investors always strive for income-producing properties whenever possible.
Properties that include improvements are subject to Depreciation. Depreciation is such a decrease as allowed in computing the value of property for tax purposes. In short, it allows you to deduct money from the income taxes you owe each year. Depreciable, income-producing real estate is a major attraction for investors. A downside to this is that re-selling the property means you must use the depreciated value as your cost basis for the purpose of figuring capital gains taxes.
Equity is term most of us have heard and some may not understand. When you repay a loan for said property, your payment gets split. A portion of the payment goes to the principle while most of it goes to paying the interest. The amount you pay each month that is applied to the principle becomes equity and this typically takes a long time to build up. Equity can also be built up due to increasing market value when compared to your purchase price and the loan is not increased. Avoid buying properties that are depreciating faster than your ability to pay off the loan.
Properties that increase in value due to any of the various conditions that exist enjoys what is known as Appreciation. An example of Appreciation would be when the owner adds $2000.00 worth of repairs or upgrades to a property which results in a market value increase of $4000.00 (or anything over the $2000.00 investment). An owner of an apartment complex might enjoy financial appreciation simply due to a shortage of apartments and alternatively, should there be many available apartments, depreciation. The potential for appreciation in the real estate market is a major reason to invest in real estate.
Another factor to consider is Leverage; the ability to control a large asset with a small amount of input. An example might the combination of good credit, substantial income, and a property’s increasing market value could enable you to make a larger purchase with a lower down payment. The lever can be very powerful in that buying a $100,000.00 property with $1,000.00 down gives you 99% leverage. Using this tool with creative real estate work can equal profit.
The previously mentioned factors create what has been called the IDEAL investment and all are desirable in any real estate transaction. Ray Ward can help you implement your next IDEAL Real Estate Purchase regardless if it’s for living or investing.
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