Cash Flow And Equity – Worst Kept Secrets Of Property Investing

By on April 15, 2013

The underlying concept of property investing is to use rental cash flow to pay for mortgages and maintenance while home equity is quietly building up. Although it does sound a little too simple, the work involved for a classic buy and hold strategy can really pay off in the long term. Cash flow and equity plays can be generally grouped into 3 methods.

Leasing with option to buy. This occurs when you sign a lease agreement with a property owner with an option to buy or not buy the property at the end of the agreement period. It is also an option that requires the least money down. You will be able to use the property or sub-lease it to another tenant. Even better if there are existing tenants in the property. At the end of the period specified in the lease, you can see if value has increased to your expectations and decide whether to exercise the option to buy. The drawback is that in a growing market, owners will only agree on a high selling price to be negotiated in the agreement since value is expected to rise in the near future.

The difference between rent collected from your tenants and rental paid to the property owner is your arbitrage. While at the end of the specified period, if the market value is higher than the agreed transaction price, the difference is you equity gain.

Another way to look at this method is by being the property owner. Lease out the property to cover your mortgage and expenses on the property and agree to sell it off at an agreed price on a future date. This is a shrewd move if you are fully in tune with how the property market is moving.

You mean I need to buy and hold?!

You mean I need to buy and hold?!

Classic buy and hold. Even non-investors understands that one can buy property and hold onto it while value increases. As properties tend to appreciate in value over time due to economic growth, Buying and holding for the long term is one of the surest ways for wealth accumulation.

Buying properties with existing tenants have it’s pros and cons. The main benefit is definitely having an immediate cash flow to service your mortgage on the property. The biggest disadvantage is that you are taking over tenancy terms that were not agreed upon between you and the tenant in the first place.

Buy, enhance and hold. For property investors that are less passive, the work and fun with improving a property can reap massive rewards. Remodeling a common way to enhance property value. But a bigger enhancement play is increasing the build-up area of the property. This can be done by building more storeys or erecting extensions. All these translates to increased rents and market value.

Investors who understands the concept of creating value almost always use this method for property investments. Lower grade property can easily be improved upon to go a grade higher. But it will be a challenge to take a luxury property and make enhancements to move it up a grade. Depending on your personal investment strategies, decide on which which types of properties to target.

It is easy to get carried away with making improvements to your property. Remember there will always be a point where the market will not pay for any more additional improvements. The goal for you as a property investor is getting as high a return as possible from as low an investment as possible. You will also perform best with improving a property when you have experience in contracting and a dependable cost efficient contracting network. If not, it is best you stick with the classic buy and hold method of investing.

Home Equity

A more advanced strategy that investors keep in mind is tapping onto the equity in the property for more assets acquisition. This is when they cash out and refinance the property at it’s increased value to get funds for more investments. It can be high leverage and you are advised to stay away from this if you are not experienced in leveraging investments. Using home equity loans to buy more properties are risky. Individuals doing this are somewhat stacking tin cans on top of each other. One mistake can cause the whole structure to collapse. It could also be a considerable challenge to get a bank to grant you a loan fully knowing that you are going to throw those funds back into more properties.



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