Cash Flow is Sexy: Which type of real estate investing is right for you?
Which kind of real estate investing is right for me? This can be a complicated question because for many people they don’t connect their WHY with their investment strategy and sometimes end up in a situation they were not prepared for.
Here is where you need to know what options are available, and some of them may be surprising to you. When investing in real estate, it doesn’t have to be about the traditional idea of owning bricks and mortar and crossing your fingers that you get a good tenant, in fact, that is just one of many ways to be an investor.
There are generally considered to be 3 ways that you can use to grow your wealth using real estate- properties, private lending and private equity. We will be looking at properties in the greatest detail and then just touching on private lending and private equity.
Properties:
There are 4 different paths to success that properties can bring you and it really is up to you and your goals to help you determine which path will bring you the greatest return on investment.
Cash Flow: What is cash flow? Cash flow is sexy! Cash flow is that extra money left over after all the bills are paid like mortgage, insurance, taxes, utilities, as well as money set aside for repairs and maintenance and a vacancy fund. Having an extra $150.00 or $450.00 in your bank account every month is pretty exciting and it can open a lot of opportunities for you and your family. In order to determine the cash flow a property can bring you, it is just a matter of crunching your numbers properly and using the basic formulas, to determine just how much cash flow a particular property could bring you.
Principal Returned: Approximately 3% of the amount you borrow is allocated to the principal on the mortgage. With every mortgage payment, made by someone else (your renter), you are paying off that property and it will eventually be money in your pocket in the long run.
Passive Appreciation: The value of a home increases annually approximately 3% in most markets, so your asset increases in value without any effort on your part (other than maintenance). This is where considering your purchase as long term hold can bring you the best results, as you watch the market fluctuate, you don’t have to concern yourself as things move because you don’t intend to sell. It’s not until you are ready to sell, after 5–10 years possibly, that you begin to see the principal returns and the passive appreciation.
Active Appreciation: Whenever there have been improvements made to a property, you are actively forcing the value to improve. The property value after repairs can be significant with a little financial effort, but you have to be careful not to over improve for a neighbourhood or property. These are the changes to countertops, new faucets in bathrooms, new paint or flooring that can really add value to your home when you are ready to finally sell, or to help bring in greater rent potentially.
Private Lending:
Private Lending is another avenue for real estate investing, without owning a property and this way, you can still make money and build your wealth. Private lending allows a person (or company) to receive funds from another for the opportunity to secure financing and can give you access to the funds you need when perhaps the bank isn’t your best option.
You are assisting others to purchase a property by lending them funds at an acceptable interest rate. You don’t own a property or any of the work required, but you have grown your money by assisting someone else. Your money is not just left it in the bank, earning less interest. The funds you can lend might be to help a potential buyer consolidate credit cards, improving their credit score, it could be to help finance a remodel or renovation, whatever it is, you are acting as a bank for a borrower, who may not want to utilize traditional funds. This is a great way to passively grow your fund wealth without having a mortgage or property to care for.
Equity Lending:
The last way to invest in real estate, without owning a property is Private Equity. Private equity can be a great way to invest in projects like a large-scale a new development or working with a company that offers you an interest in a product like mortgages and you receive fixed returns on your investment. By providing funds to a developer, for example, you can invest in a large scale project like a condo building, then at the end of the project, receive your funds plus the anticipated Return on Investment at the end of the project. In some instances, you may participate in a project like this with an investment of $25,000 and in three years receive an additional $15,000 back on top of your $25,000. It is unlikely you will find ANY bank that will pay you that kind of interest. A development project is just one way to look at equity lending, and there are others that mean you don’t have to buy properties, but still be in the real estate investing game.
Deciding on YOUR path
There are a number of factors to consider when deciding which path is right for YOU.
Do you have available time? Do you have access to financial resources? What specific skill sets do you have? Do you enjoy project management? Are you prepared to work hard? Do you want to work with people (tenants) or do you want to just have your money grow, and at what rate of return?
You need to be realistic about the time you will be required to spent on any investment. This where it is important to determine the approach you want to take towards building your wealth. In the beginning, you may be more interested in one path over another, but over time, as your needs change, as your circumstances and experience change, you may find that you want to diversify, or you may want to change directions all together. That is one the reasons that real estate investing is so popular, it gives you the freedom to be flexible.
Marilyn Clark is an experienced real estate associate in the Calgary area and an experienced real estate investor in the Canadian real estate market. As a real estate associate, Marilyn works with individuals to find properties that will benefit her clients personally and professionally, to help improve their quality of life and meet their needs. Marilyn educates and informs new investors, works alongside them and experienced investors to find the right properties or opportunities to reach their goals and offers access to additional resources that can help those people to succeed.
You can find Cash Flow is Sexy on Amazon.ca and receive the Companion Guide for free at Williamandmarilynclark.com.