Mary Burgess – RE/MAX Realtor – Richmond, VA and Chesapeake Bay

Investors

More and more, people are turning to real estate as a viable investment option. The market is flooded with opportunities and if done right, purchasing property for the purpose of an investment can provide a lucrative return.

I have prepared some helpful information specific to real estate investing. Ask me how you too can create a positive cash flow through real estate investing. Most savvy investors have found that investing in real estate has been one of the most profitable and safe investments.

How to Size Up an Investment Property

If you currently own investment property or are thinking about buying your first real estate investment, you need to understand two significant elements that determine profitability: Cash Flow and Return On Investment (ROI).

Expenses vs. Revenue

Cash flow is extremely important since it dictates whether the investment will cost you out-of-pocket money or put money back in your pocket on a monthly basis. To determine monthly cash flow, you must consider all expenses related to the property and then subtract this from the revenue being generated.

Finding the obvious expenses is pretty easy, but you may have to do some digging to uncover the not-so-obvious ones. These line items are real and can significantly impact your monthly cash flow, so don’t leave anything out! They can include:

  • Vacancy-Rate Impact
  • Replacement Equipment
  • Maintenance
  • Advertising
  • Tenant Repairs
  • Payment delinquencies
  • Any Home Owner’s Association Dues
  • Property Management Fees

After you subtract all expenses from the revenue, you’ll know whether you’ll be making money or paying money. You may ask yourself: Why would I involve myself in an investment that is going to cost me out-of-pocket money? This brings us to the next important variable when evaluating your real estate investment decision: Return On Investment (ROI).

What Is ROI?

First, the technical definition: the rate of return based on an initial investment that generates a cash annuity for a specified time period. Now, in plain English: ROI is basically the money going out (including your initial investment) banked against the cash flow that the property will generate in a given amount of time. This creates a net cash flow stream, and your return percent is calculated off of this figure.

Keep in mind that when compiling these cash flows, you must include all expenses related to the property, and the revenue stream must include all monetary benefits derived from it as well. ROI is heavily determined by the initial investment, because that is most likely the largest cash outlay related to the investment. All other variables held constant within the same scenario dictate that the bigger the down payment, the less return you will have on the investment.

So a new question emerges: If my return is less, why would I put a larger amount down? You must consider the trade-off between the amount of the down payment and the monthly cash flow. The more you put down, the more likely you are to have a positive cash flow — the investment paying you dividends. There is a fine balance between cash flow and ROI. Depending on your current and future financial goals, you can determine the best scenario that suits your needs. In order to attain this balance, you must have the knowledge and skills to determine the best scenario.

Whether your goal is to generate an annuity stream, prepare for retirement or create a college fund, real estate investments can be an excellent place for your money, if you do it right. With interest rates at record lows, profitable inventory and opportunities throughout the Richmond area, it may be time for you to invest in real estate. Call me so we can discuss opportunities for you!

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Mary Burgess – RE/MAX Realtor – Richmond, VA and Chesapeake Bay