You need to do these 5 Things before investing in Real Estate
You might have heard many people complain about how they lost their investment when they bought a property? Or how they were not able to make the most out of a deal that apparently looked too good to be true? The reason behind them saying these things is that they probably didn’t do their research right and jumped to seize the apparently great opportunity. It is really important to educate yourself before you come to a conclusion and learn a thing or two about the mechanics of investing in real estate. Here are some boxes to check before considering a real estate investment.
Due diligence in Real Estate:
The real estate sages are often found stressing on due diligence, whenever asked for an advice. It is important to analyze the opportunity from all sides; this includes the financial side as well as the paperwork. The real estate investors will never buy unless they are sure of their gains.
A rental property is like a money machine. It is made up of three important parts:
- Income
- Expenses
- Financing
The four financial benefits in real estate:
All the above mentioned parts- income, expenses, and financing—work together in harmony to create four financial benefits. These benefits then work as your product and result in what we call overall profit:
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Cash flow
A rental real estate can provide you with a steady cash flow. Once you have signed a rent agreement, you know for sure that the particular amount of money will be added to your bank account for a designated period. After meeting all the expenses on operating expense and mortgage, the left over finances get you going for a positive and stable cash flow.
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Principal reduction
Possessing a property on rent helps you in many ways. It not only produces steady cash flow but also reduces the initial principal that was required while purchasing the real estate. It is as if the tenants are paying off your loan and buying the property for you.
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Tax savings
The tax rules are flexible and they come with an option of allowing the property owners to depreciate their property cost. For this to be understood, let us assume your rental property generates $2,000 cash flow per year. Along with the cash flow, your property also helps with an annual reduction of $1,000. You need to know that both these earnings are taxable and you get an annual $3,000 benefit.
The best way to save the earned money is to head into the shelter of depreciation. The tax rules allow rental land owner to depreciate their cost over a number of years, this is also known as cost recovery. Usually, it is observed that land owners merely divvied their cost between land and building. This is a mistake and if avoided can save you tax money.
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Appreciation
As we have discussed that there is no depreciation on land. This means that the land value will increase over the course of time. We know that a property bought a year ago is not worth the same now because of appreciation (increase in value).
In the end, be sure that you have considered the above mentioned financial benefits before investing in a property. Never skip a detail and skim through everything the first phase of due diligence. After that, you need to take a look at the financial gains and if all that’s pleasing, go for the kill!