To become a successful real estate investor there are 5 key areas that need to be mastered.
1) Becoming an expert at property acquisition
2) Understanding the rule of 7
3) Using Leverage to your advantage
4) Maintain strong cash flows
5) Tax Benefits
Whilst there are many other factors that need to be considered by the property investor these are 5 critical aspects to increase wealth.
1) When looking for the right property to purchase, DO NOT expect to find the perfect investment property within the first few 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 around the corner from you, or in the neighbourhood next door. You need to be flexible and look abroad, even interstate or overseas. When looking for an investment property you need to focus on return on investment. In other-words, how much money will I make on what I have put in. For instance when I invest in property, I will measure the return as a percentage, if I put $10,000 down as a deposit, and make $10,000 on that in the first year that’s a 100% return; not a bad result. How do you achieve these results and replicate them many times to create wealth? Read on to learn.
2) The rule of 7 is simple. It stats on average a properties value doubles every seven years. This has shown to be historically true over the last 50 years, so there is no reason why this shouldn’t hold into the future. This underlying rule is what so many investors have relied upon 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 the entire capital gains. For instance if I place a $20,000 deposit on a $200,000 house, and the house goes up 10% in the first year that’s 100% profit. On average property has gone up 10% per annum so you would effectively make 100% every year on the property. Any rental income would be used to service the $180,000 debt. Now if you did this across 10 properties outlaying $200,000 you would be making 100% per annum. In comparison, if you outlaid the whole $200,000 on one property you would make only 10% profit per annum as the one property would only go up 10%. Sure you would make some rental income as well but this would be relatively insignificant.
Now once the property goes up in value you can then use that equity to purchase more properties, so then it just keeps building up like a pyramid creating more and more wealth. The problem is most people are afraid of debt and avoid it at all costs. Only be afraid of bad debt, which are loans secured by liabilities. Loans secured by appreciating assets are good debt.
4) Maintain a strong cash flow and ensure at all times you can service the debt with the rental income you are receiving. If you cannot do then move on to the next property on your search list.
5) Do not overlook the tax advantages, 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 outlaying a cent (except for maybe a depreciation schedule report). If your investment property is fairly new you can add thousands to your bottom line. Do not forget this one.
Real estate investment is not tricky, it just requires a bit of research and a sound plan of attack. If you can master these 5 key points you will be well on your way to success. Good Luck!