In order to become a successful real estate investor, there are 5 key areas that must be mastered.
1) Become an expert in property acquisition
2) Understand the rule of 7
3) Use leverage to your advantage
4) Maintain strong cash flow
5) Tax benefits
While there are many other factors that the real estate investor must consider, here are 5 critical aspects of increasing wealth.
1) When searching for the right property to buy, DO NOT expect to find the perfect investment property in the early days. Hours of sorting through properties will be required to find the best property to maximize returns. DO NOT expect to find the perfect property just around the corner or in the next neighborhood. You need to be flexible and search abroad, even on the interstate or abroad. When looking for an investment property, you need to focus on the return on investment. In other words, how much money will I earn with what I have put in. For example, when I invest in a property, I will measure the return as a percentage, if I put $10,000 as a deposit and earn $10,000 in the first year, that’s a 100% return; not a bad result. How do you achieve these results and replicate them many times over to create wealth? Read on to learn.
2) The rule of 7 is simple. On average, the value of a property doubles every seven years. This has proven to be historically true for the last 50 years, so there is no reason why this shouldn’t hold well into the future. This underlying rule is what so many investors have relied on to create wealth, many times over. Understand this and you will be on your way.
3) Leverage is a wonderful tool for the investor. It allows us to place a small deposit on a property and reap all of the capital gains. For example, if I put a $20,000 deposit on a $200,000 house and the house goes up 10% in the first year, that’s a 100% profit. On average, the property has gone up 10% per year, so you would effectively earn 100% each year on the property. Any rental income would be used to pay off the $180,000 debt. Now if you did this on 10 properties spending $200,000, you would be earning 100% per annum. By comparison, if you were to shell out the entire $200,000 on a property, you would only make a 10% annual profit, since the property would only increase by 10%. Sure you would also get some rental income, but this would be relatively insignificant.
Now, once the property increases in value, you can use that equity to buy more property so that it continues to grow like a pyramid creating more and more wealth. The problem is that most people are afraid of debt and avoid it at all costs. Just be afraid of bad debts, which are loans secured by liabilities. Loans secured by appreciating assets are good debt.
4) Maintain a solid cash flow and ensure at all times that you can pay off the debt with the rental income you are receiving. If you can’t make it, move on to the next property on your search list.
5) Don’t overlook tax benefits, which can be used to improve your cash flows. Claim everything you can, expenses, repairs, loan costs, management costs, administration costs, and most importantly DEPRECIATION. If something is not claimed it is usually depreciation. This deduction is something you can claim without shelling out a dime (except maybe a depreciation schedule report). If your investment property is fairly new, it can add thousands to your bottom line. Don’t forget about this one.
Real estate investing is not complicated, it just requires a little research and a good plan of attack. If you can master these 5 key points, you’ll be well on your way to success. Good luck
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