Real Estate Investing :: Recognizing the Advantages of Owning Rental Properties
By: Harold Johnson
Real Estate Investor
ECROUP Property & Investments LLC
Due to the recent "fall out" of the mortgage industry in the United States, we have seen a sharp decline in the value of residential homes. The market is flooded with so many foreclosed homes that have hit historically low prices. These low prices have made real estate investing more attractive to the experienced investor as well as the potential investors looking to get into real estate. If you are the "potential investor" that has been asking the questions if this is the right time and how you should do it, then this article is for you.
We currently have a unprecedented opportunity to become extremely wealthy in real estate. The key to being successful in real estate investing is of course "location, location, location," but there are two other components. The first key is buying property at a low price. You can accomplish this either by using an outside source of money such as a mortgage or a line of credit or use your own funds. This is not a decision to make lightly which I will explain further in this article. The second key is your ability to turn your rental property into a "cash cow" by putting little or no money down during the acquisition phase.
In several parts of the US, many homes can be purchased for prices as low as $1000. Detroit, Michigan is an excellent example of an open market. (Visit "www.MoveInMichigan.com"). According to the Detroit Free Press, the average sales price for homes in Detroit in 2008 was $7,500. Here is where that unprecedented opportunity comes into play where you can now buy real estate at a historically low price. Real estate has never been this affordable in many of our lifetimes and there is a short window of opportunity for us to capitalize on it.
The great advantage of building wealth through real estate is that you can use other people's money to do it. I'm a big advocate of this method. I have bought most of my investment properties using the bank's money. Your initial purchase of rental property will likely be achieved by obtaining financing from a lender. Your tenant's rent will help you pay your monthly debt service (loan), your ongoing operating expenses (cost to maintain your rental) and capital improvements (improvements needed such as new carpet and paint to make your property more attractive to tenants).
The availability and low cost of real estate financing make real estate investing a viable and realistic option for virtually everyone. Most people purchase real estate using leverage gained by borrowing from the seller or a lender. Leverage is when real estate is purchased with financing, and it usually consists of a cash down payment from the buyer along with a loan (other people's money). There are two types of leverage:
✓ Positive leverage: Positive leverage is where you're able to earn a return not only on your cash investment but also on the entire value of the real estate. The ability to control significant real estate assets with only a small cash investment is one of the best reasons to invest in real estate. For example, you may purchase a $40,000 rental home with $5,000 in cash in the bank and a bank loan for $35,000. If the home value doubles in the next five years and you sell this home for $80,000, you've turned your $5,000 cash investment into a $40,000 "cash cow".
✓ Negative leverage: Real estate has enjoyed a long steady appreciation from the mid-90s through 2005, but you must remember that real estate doesn't always appreciate and can even decline. Negative leverage can wipe out your entire investment with just a 20 percent decline in the market value of your rental property. Negative leverage is unfortunately the experience of many investors and homeowners who've purchased real estate in the last few years using little or no cash down payments. The real estate market has stopped appreciating and has actually declined significantly in most areas of the country, and many owners find that their mortgage balance exceeds the current value of their property.
Over time, you may find that your rental income collections grow faster than your operating expenses for increased monthly cash flow. That's why many economist feel real estate is a superior investment, because historically real estate has been a very effective hedge against inflation. And after your tenants have finished paying your mortgage for you, you suddenly find that you have a positive cash flow - in other words, your making a profit.
Harold Johnson is a real estate investor with ECROUP Property & Investments LLC, a Detroit based real estate investment firm. ECROUP Property partners with Strather & Associates, a real estate brokerage firm that specializes in teaching individuals the art of real estate investing. If you want to contact Harold about your real estate investing questions or about investing in real estate in Detroit, email him at info@ecroupproperty.com
www.EcroupProperty.com
