While many people are rightly skeptical of going into debt, experienced real estate investors know that the judicious use of leverage
can dramatically boost their bottom line. Leverage is used by real estate investors to boost what is known as their internal rate of return. This is simply a reflection of the fact that the less capital one has invested, the higher their potential return on invested capital is.
How does leverage increase returns?
If a new real estate investor had $50,000 to put towards the purchase of a property, they would have a number of options on how to best invest that money, starting with whether or not they wanted to use mortgage financing or pay cash. Some people may opt for the latter option, deciding that the risk of taking on mortgage payments is beyond their tolerance levels.
However, for the astute investor, using mortgage financing can provide a much higher rate of return. In the case of buying a property for $50,000 in cash, if that property nets $5,000 per year of income, then the total rate of return on capital for the property will be 10 percent. However, if that same $50,000 is used on a down payment to buy a $200,000 property with the same 10 percent return on the purchase price, the return on capital for the second deal will be 40 percent! This is because the investor is earning $20,000 per year of income but has only invested $50,000 of their own capital.
It is important to understand that leverage works best, by far, when rents and property values are rising. Using leverage can still work in other markets, but investors need to have sufficient liquidity to cover downturns, such as high vacancy rates or declining overall property values. Generally speaking, investors should stay away from using leverage in markets with a negative macroeconomic outlook for the short to medium term. While these investments can still prove to be highly profitable over the long term, the short-term capital requirements can bankrupt smaller investors.
The best way to mitigate the risks of using leverage is to perform in-depth due diligence on the local macroeconomic trends. Study trends in property values, employment quality, and quantity and net migration trends. Try to avoid entering into leveraged real estate deals near market peaks.
4 Ways Landlords Can Improve Their Relationships With Their Tenants
Investing in a rental property can offer many benefits. Not only can it help provide a steady monthly income, but it can help build your net worth. However, by investing your time with rental properties, as a landlord, you will have to maintain it, and make it attractive for tenants, and find renters who can be trusted.
Often the relationship between landlord and tenant is poor and strained. Talk to any landlord and they are bound to share a tenant horror story or two about an unruly renter. By establishing a more professional and positive relationship with your tenant, you’ll find that you will have less tenant horror stories to share. The following are four ways that landlords can improve their relationships with their tenants.
Often, tenants are afraid to contact their landlord about issues they are experiencing. Sometimes tenants don’t tell their landlords about repairs until the problem worsens or is out of control. Tenants are afraid of asking for help because they don’t want to bother the landlord or are afraid. Landlords should be both supportive and approachable to ensure that their tenants feel comfortable calling in their time of need.
Be An Effective Communicator
A good line of communication is essential to solving many rental problems. Tenants should have an understanding of why something is happening and be given proper notice for anything that may be disruptive. By landlords providing the most up-to-date information, the tenant will be more willing to work with the landlord rather than against.
Be Hands On
When you lease your property, you must be hands on. Often landlords will want to have rent out their property but make little repairs to the home. You should help your tenant feel important by going out of the way to make improvements. Not only will this make your tenants happy, but it will keep your resale value high.
One of the most important things that any landlord can remember is that tenants are people too. Sometimes it can be easy to forget that your tenants are people with feelings and not just a monthly profit. As a landlord, you have a direct impact on the social and emotional environment for other people. That being said, treat your tenants with the same support and respect that you would want.
Real estate investment has changed. House flipping is commonplace. Increased competition makes finding profitable investment properties more challenging.
Rising above the competitions often means turning to technology. There are two main ways that technology can benefit the real estate investor. Technology can help find new opportunities and improve upon the results of current investing techniques.
New Investing Opportunities
The main areas where technology can assist a real estate investor to find a profitable deal are in bidding, optimizing online efforts, and efficient property searches. Each plays a significant role in staying ahead of the competition.
DealMachine is an innovative tool for finding undiscovered properties. It is a simple idea with amazing applications. Investors merely take a picture of a house, then the app provides owner information. DealMachine’s other features include sending the owner information and express a willingness to buy their property. It also automatically follows up to encourage an owner to respond.
Optimized websites benefit real estate ventures. Carrot excels in this area. It also helps find relevant leads for buying and selling properties. HouseCanary is a nice compliment. It provides filters to determine which are the most profitable rental properties and areas within a community.
Improve upon Results
Managing customer relationships, finances, tenants, and cultivating leads all improve results of real estate investing. Most investors do not make the most of cultivating their leads, REIPro provides a tool for managing real estate relationships. It builds trust and nurtures relationships through features designed specifically for investors.
Another piece of software that benefits lead generation is Call Porter. Among its features is personalized phone communication. Overall, Call Porter is a specialty software that aids several aspects of investing like managing appointments and callbacks.
In regard to technical aspects, DealCheck goes a long way toward improving profits. It is a forecasting tool that estimates repair costs. This aids in analyzing properties and actualizing profits. Roofstock is of benefit in this area as well. Its focus is on cash-flow properties. Investors can purchase properties free of the concern of disrupting tenant occupancy. For out of state investors, Roofstock is a blessing.
More competition has indeed entered real estate investing. However, so have some very useful tools. The savvy investor can still rise to the top in profitable deals.
While your rental property can bring you in a nice passive income, it’s always a good idea as a property owner to reevaluate your property from time to time. Even though you can make money every month on your rental property, there are certain times when it might be more feasible for you to simply sell the property.
- When The Money You Invested Could Be Earning More Elsewhere
While you can’t predict the future, you can make an educated guess of how the real estate market will be by evaluating the present. If your rental property is located in a location with a dying industry, then it might be time to sell and reinvest elsewhere where you’ll be able to earn more in the future.
- When You Need Cash Now
If you need cash now or in the foreseeable future, you might want to consider liquidating your rental property. For instance, if you’ve had to undergo a major medical procedure or your need to fund your child’s tuition, then you might need to go ahead and cash out your rental property to get the funds you need.
- When You Could Get a Significant Tax Benefit
Tax laws are always changing, so it’s important for you to stay up on the latest. If you could realize a significant tax benefit from selling your rental property, then it might pay off more for you to do so than it would for you to keep the property. For instance, under Section 1031, you could avoid paying capital gains taxes when you sell your rental property so long as you buy another one in the next 180 days.
- When The Property Is Draining You
Sometimes you need to sell your rental property simply because it is draining you to upkeep it. If you’re ready to retire, for instance, you might not be up for all the property management and maintenance required to run a rental property. You could simply sell and cash out, or if you still want to keep earning the money from rents, you might want to consider automating as many tasks as possible and turning the rest over to a property management service.
Knowing when to buy and sell can be tricky parts of the real estate. If you already own rental property, the above situations can help you know when to sell.
There’s an age-old debate in the real estate market as to whether primary residences should be viewed as investments or simply as a place to live. While this debate is something that every homeowner should carefully consider, it is clear that there are reasons for buying a nice home, no matter the market conditions, other than simply to maximize one’s wealth. After all, everyone needs a roof over their head.
The same cannot be said, however, for professional real estate investors or anyone who is investing in a property that has the main purpose of income generation. These investors need to be much more careful about things like market timing. Real estate cycles can often last even longer than business cycles, meaning that an investor that buys into an overheated market could be waiting decades to realize any returns at all.
Unfortunately, there is currently ample evidence that real estate markets from coast to coast are overbought. While there still may be opportunities for solid long-term returns that can be located by savvy investors, the current trends in real estate prices indicate that there will be a reversion to historic averages in the near-term future. Buying into a market at a peak like the one we’re very likely seeing now can have disastrous consequences for the long-term performance of any real estate portfolio.
One of the key indicators that the real estate market is well above sustainable price levels is the number of hours that the average wage earner needs to work in order to buy the median home. In some cities, like Los Angeles and San Francisco, the average wage earner would need to work the majority of their waking hours in order to afford minimally decent housing. Contrast that with the norms of the 1960s when many American families only needed a single wage earner to work for 10 hours per week in order to afford the median home.
Another key factor that may bode poorly for the performance of real estate prices over the next five years is the almost certainty that interest rates will soon begin rising. The real estate market is exquisitely sensitive to interest rates, and worst-case-scenario interest hikes could put a big dent in the price gains that housing has seen nationwide since the financial crisis of 2008.
“In this current climate” is a cliché lately – but it is a valid cliché. However, in this current climate, some people might just not be able to afford a house. Or conversely, a homeowner finds that the value of their home is at an all-time high and wants to cash in. There are plenty of reasons why renting is a beneficial option for buying, especially in certain markets.
- Renting allows for major life flexibility. In major markets, younger people are renting over buying, and this seems to be an extremely popular choice. Due to unsustainable raises in the housing market buying a house may not be an option, therefore renting is the best option. By renting, renters allow themselves the greatest flexibility if a good opportunity presents itself, or if they are not happy with their current situation, or if they want to move to another place quickly. Renting keeps the lease down to one of two years, allowing for life improvements and possible pivots in the future.
- Renting does not lock your life down into debt for 30 years. If not subscribing to the typical white picket fence dream, the prospect of facing paying a mortgage for 30 years may not be the best life choice. The stress of having to maintain a payment for so long locks people down into lifestyle choices – possibly a job they may not like, or circumstances they may change, or unforeseen debts that may occur. There are also studies that show a person having a debt hanging over their heads is clearly detrimental to life.
- Investing instead of paying may lead to bigger monetary gain. The math seems to be there. There are some bets unconsciously made when buying – the result of investments, the real estate market prices (after all, the recession did a number on many people), the pace of inflation, property taxes, paying interest. These calculations have renters winning out in the long run, however, the numbers may be variable.
No matter how many facts and numbers are thrown around, it is ultimately down to the individual needs and desires of the person making the choice. Behavior is behavior, and people tend to seek out facts that support what they feel. Good luck!