All over the world, real estate industry is growing at an impressively rapid pace. Accommodation is the basic need of people and having a nest that they can call of their own is a dream for them. Due to population explosion, apartments and flats are high on demand. This demand will go up with the passage of time, thereby implying that the real estate property will cost you dearer in coming days. All these point out that venturing out in real estate market is a lucrative proposition.
People invest in real estate market to fulfill either of two purposes. They purchase a real estate either to live in or to make money out of its sale. In this article, we will restrict out discussion to the real estate investment that is made only to make profit and not just to move to a new location.
Know the Fundamentals of Investment
Before you buy, always make it sure that your present sacrifice in terms of investment will ensure a handsome payout in future. Location is an important consideration for property purchase. If your real estate is located in a developed area that is well connected to highways has some good facilities like medical service, university, colleges etc, you will get a good price for it in times of sale.
A property with positive cash flow is a worthy investment. By positive cash flow, we mean what remains after deduction of property related expenses. These expenses include mortgage payment, operating cost, taxes and other necessary expenditures related to real estate business. The amount of positive liquid cash flow depends on three important factors such as operating cost of the property, mortgage payment size and amount of rent.
It is crucial for any real estate investor to analyze the above-said factors before taking any investment decision. The best way to ensure positive cash flow is to make a small down payment but avail a long tenure mortgage with low interest. If you get an option of low mortgage payment, do not let the chance slip away as it will result into good cash flow.
A simple example will help in clarification of the above-said point. Let us suppose, you have bought a 4-storey apartment at $125,000 and rented it out for $600 per month. Then you will receive $2,400 every month from your rented apartment. So with $300 for operating expenses and less than $625 for mortgage payment, you will end up gaining $1,475 as positive cash flow. However, if the mortgage payment goes up to $925 per month, positive cash flow will plunge to $1,175 every month. This simple calculation explains why you should try to get low payment and keep the operating cost at minimum margin to enjoy higher cash flow.
An alternative way to get positive flow of cash is to avail an interest-only loan. It is a short-term loan that extends for 5-10 years. After the lapse of loan term, you have to either refinance or sell the property. The flipside is such loans often come with an obligation of high periodic payment. However, by ensuing positive flow from real property, you can utilize the cash for more prospective investment opportunities.
Guest Article by James, who is a finance advisor and author. To know more about him visit Basic finance Care.