Rental Property 101: Why you NEED to invest in rental property!

April 28, 2014

We passionately believe that Real Estate is the greatest vehicle for creating wealth.

It is tangible, appreciable, leverageable, rentable, improvable, deductible, stable and liveable.

It is the best vehicle for creating wealth, if you find another, seize it!

People usually buy investment property for 1 of 2 reasons:

1) Cash-flow

Cash flow is the most common reason why most people invest in rental property. Positive cash-flow is achieved when the monthly expenses for the property, are less than the rental income.

For example: 123 Mainstreet is a 1 bedroom 1 bath property that rents for $1000. If the owner/ investor’s mortgage is $350, Taxes per month are $100 plus the condo fee is $150, the cash-flow on this property is ($1000-$350-$100-$150) $400 per month.

Some may think that this is not a lot of money but what if an investor had 10 properties with these numbers? His/Her cash-flow would be $4000 per month or $57,600 per year.

Keep in mind that rent increases every year and if the mortgage is a fixed-rate loan, every year the investor's cash-flow can increase.

Negative cash-flow is the opposite but should not be always seen as a bad thing. Rent in our Metro DC area increases about 3-5% per year so even if a property has negative cash-flow. It should only be a matter of time before the property is cash-flow positive.

2) Equity

This is the increase in value of real estate compared to the amount owed for the real estate. Equity is the difference between what is owed on a property and what the property is worth.

For example: If 123 Mainstreet was bought for $100,000, 5 years ago but the property is now worth $250,000.

The equity is ($250,000-$100,000) $150,000. Equity in property is tied to the investor’s Net Worth and so the greater the equity, the greater the Net Worth of the investor.

In the game of creating Wealth, think of Net Worth as your score-card.

Note: Investors often use the equity in one property as the down-payment to purchase other real estate property.

We are always happy to work with more investors so reach out to us for assistance.