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Why Invest in Real Estate: 7 Key Benefits to Know

Why Invest in Real Estate: 7 Key Benefits to Know

Investing in real estate can be an incredibly rewarding and lucrative endeavour, but if you’re like a lot of new investors, you may be wondering why you should be investing in real estate and what benefits it brings over other investment opportunities.

In addition to all the amazing benefits that come along with investing in real estate, there are some drawbacks you need to consider as well.

We’re going to cover the 7 top reasons why you should be investing in real estate (and a few reasons you may not want to jump in right away!)

Opportunity for Cash Flow 

Purchasing real estate to rent out for additional cash flow is becoming a very popular investment strategy, and it’s easy to see why.

Not only do rental properties give you the opportunity to generate additional cash flow month-over-month, but they allow you to build up a portfolio of long-term, stable assets and benefit from all that appreciation over the life of your investments.

There’s another big advantage to cash flow: it provides an opportunity for new real estate investors to “house hack”.

It’s no secret that real estate prices are going up and pushing a lot of new investors out of the market. When you decide to purchase a rental property, you can use the cash flow to fund your living expenses and pay your mortgage down faster to continue investing in more real estate!

Many newbie investors buy duplexes or houses with additional dwellings to make extra cash to fund their real estate business.

If you’re looking for a way to buy into the real estate market without having to spend hundreds of thousands of dollars, check out the properties at BuyProperly. They use a fractional ownership model that allows investors to start with as little as $2,500.

High Return on Investment

Another major benefit of real estate investing is the ability to make a high return from buying, renovating, and reselling (a.k.a. house flipping).

Although this requires significantly more upfront cash than rental properties, there’s huge potential for profit if you buy the right property.

Most flippers look for undervalued buildings in great neighbourhoods. These properties need work (and money!) to get them up to average market value, but, once renovated, the returns from these resales can happen relatively quickly.

Appreciation 

The wonderful thing about investing in real estate is that the value of the property is expected to appreciate. The principal amount that you invested in the property will grow over time and should be worth more than what you paid for it when you purchased it.

Real estate is a fantastic long-term investment because it’s almost always guaranteed to appreciate in value.

Investors patient enough to buy and hold their properties will benefit from predictable appreciation year-over-year. Depending on where you buy, you can expect annual appreciation rates anywhere from 2-8%.

In Canada, there’s been an average of 6.11% annual appreciation over the last 15 years.

Tax Benefits

Another major advantage of investing in real estate is all the tax benefits you’re eligible to take advantage of!

Many investors can write off costs associated with depreciation, mortgage interest, operating costs, repairs, and property tax. These incredible tax benefits are a fantastic way for investors to save and build wealth.

For example, if you are charging $2,000 rent per month and you incurred $1,500 in tax-deductible expenses per month, you will only be paying tax on that $500 profit per month.  That’s a large difference from paying taxes on $2,000 per month.

The profit that you make on your rental unit for the year is considered rental income and will be taxed accordingly.

It is vital that you keep good accounting records on your investment property. If you are claiming maintenance and repairs, for example, be sure to keep those receipts as proof. If you are to be audited by the government and can’t supply the proof of expenses in form of official receipts, chances are you will be disqualified from claiming those tax deductions.

The appreciation of the property will be assessed when you dispose of the property and capital tax will come into play.

You will be taxed on the capital gains that you earned on the property from when you invested and purchased the property to the day you sold it.  The difference between the sale price and the price you paid to purchase will be the capital gain, which will be taxed, but only in the year that you dispose of the property.

Low Volatility

Real estate isn’t subject to the same volatility as other kinds of investments. Unlike stock trading, the real estate market isn’t like to have the same massive overnight shifts.

For this reason, it’s an option for people who want something more stable and predictable. It’s a great addition to a more risk-averse portfolio, making it an all-around fantastic investment.

It’s important to note that real estate investment doesn’t come without risk. The US housing market crash of 2008 showed investors the importance of not over-leveraging and making smart investment decisions when growing their portfolios.

Leverage Your Investment

One of the most appealing aspects of real estate investment is the ability to leverage your assets. In a nutshell, leverage refers to “the use of debt (borrowed funds) to amplify returns from an investment or project”.

This means you can put 20%, 10%, or even 5% down and control an asset worth significantly more than that.

It also means you have the ability to borrow against your assets to continue investing. This creates a snowball effect and, when done effectively, can skyrocket the value of your investment portfolio.

Passive Income

This last point ties into the other benefits we’ve mentioned above. Rental income aside, real estate accumulates passive wealth through its inherent tax benefits and long-term appreciation.

In addition, the rental income you collect can be done with minimal involvement and effort. With the right property managers and rental team, the ROI on your investment becomes relatively passive.

At BuyProperly, they help investors start with as little as $2,500 and see projected annual (passive) returns of 10-40%! Find out how.

What are the cons of investing in real estate?

Real estate is a fantastic investment to add to your portfolio, but it doesn’t come without risk. Here are a few things all new investors should consider before jumping in.

Upfront costs

It’s no secret that investing in real estate the traditional way takes a substantial amount of money. If you’re buying a property to live in, expect a minimum of 5% down plus closing costs. Most investment properties and second homes may even require a 20% down payment to buy.

Real estate isn’t cheap, and it’s important for new investors to be prepared for the costs.

At BuyProperly, they leverage a fractional ownership model to allow investors to buy real estate for as little as $500. This means they can get started quickly without having to wait and save up huge lump sum deposits for investment properties.

Sourcing deals

In addition to financial costs, investing in real estate comes with a significant time cost when you take into account sourcing property deals

Unlike buying and trading stocks which can be done with the click of a mouse, property investment often requires more time, research, and preparation.

Not only do you need to find great deals, but you need to analyze them and gather the necessary paperwork to get the deal done. On top of this, if you don’t have a good team in place, managing your repairs, maintenance, and tenants can turn into an overwhelming process.

Fortunately, sourcing great deals doesn’t have to be complicated. At BuyProperly, for example, they’ve created an AI-powered platform that allows investors to view, buy, and sell real estate digitally (much like they would trade stocks).

Difficult to unload

As much as we love real estate for its security and predictable returns, it’s not the type of investment that can be bought and sold quickly. In fact, the highest returns are earned when investors are willing to buy and hold.

If you think you may need to free up cash quickly, or if you’re looking for an exceptionally quick profit, real estate may not be your main investment vehicle.

Conclusion

Investing in real estate has several major advantages. In addition to cash flow potential, you can also take advantage of steady appreciation, reduced volatility, and investor tax benefits.

It’s important to remember that real estate is a fantastic long-term investment, and not well suited to people who want instant returns. It’s a reliable, predictable asset with great cash flow and ROI potential.

Real estate is a great addition to any investor’s portfolio.

Interested in learning how you can get started in real estate investing for as little as $500? Learn more at www.buyproperly.ca

How to Calculate ROI in Real Estate to Maximize Your Profit

How to Calculate ROI in Real Estate to Maximize Your Profit

If you’ve dabbled in real estate investing (or even if you’re brand new) you’ve undoubtedly heard of “Return On Investment” (ROI) and how important it is to consider when making your investment decisions.

But what exactly is it, and how do you calculate ROI in real estate? Is it crucial for investment success?

We’re going to break down the basics of ROI, how to calculate it, and how to use it to make smart investment decisions so you can grow your real estate portfolio with confidence.

Ready? Let’s dive in!

What is ROI?

Because ROI stands for “return on investment,” it’s a very important concept to understand when it comes to real estate investing.

It is a standard metric used to calculate the profitability of an investment on a case-by-case basis. It measures the financial return of a particular investment relative to its cost. The higher the ROI, the more profitable the investment and (presumably) the better it is.

Why is ROI so popular for measuring profitability?

Two reasons: first, it’s incredibly simple to understand and easy to calculate the ROI on almost any investment.

Second, it provides a simple way to get a financial snapshot of an investment, relative to other investments, so you know when to buy, sell, or simply measure whether or not your portfolio is on the right track.

Although it’s incredibly important to know the ROI of any investment, it often doesn’t take into account the complexities, nuances, and “life factors” involved in growing a successful real estate portfolio. For this reason, it should be used as a tool to give broad feedback on the quality of your investments.

Why is ROI in real estate so important?

Although many ROI formulas paint a simplistic picture of investing, they can also give a very quick and solid overview of a property’s profitability.

In a pinch, you can figure out the “health score” of any potential investment you’re interested in and ditch some of the lemons along the way. Properties with an obvious cash flow issue or negative ROI can be identified quickly.

When taken into account along with your overall investment goals, using ROI calculations will help you make smart financial decisions and build a solid real estate portfolio.

At BuyProperly, an online marketplace for fractional real estate investments, they calculate ROI for investors and use it as a benchmark to measure the profitability of their properties. Most of their investors can expect to see projected annual returns of 10-40% Take a look at their properties.

The formula for calculating ROI

There are a few different ways to calculate ROI depending on the type of real estate investment you have. Let’s look at how to calculate ROI for real estate investments that are resales or rental investments.

Here are some examples:

Resales

When calculating the profitability of resale real estate investments, use this simple formula:

Your equity in the property (total gains minus your total costs) divided by total costs

There are two methods real estate investors can use to calculate their gains and costs:

  1. the Cost Method
  2. the Out-of-Pock Method

Let’s look at them both in detail.

1. The Cost Method

This method for calculating ROI uses the total equity in a property divided by that property’s costs (renovations, repairs, and sale price). The Cost Method works for properties purchased with cash and/or financing.

For example, say you purchase a home for $250,000. After putting in an additional $100,000 for repairs, you sell the property for $500,000.

First, you need to calculate your equity in the property. If it sold for $500,000 after your total costs were $350,000 for the purchase and repairs, you had $150,000 left of equity.

Next, calculate the total costs. As mentioned above, the total costs for the property were $350,000 ($250,000 purchase price plus $100,000 in repairs).

After you divide your equity ($150,000) by the total costs ($350,000), you get 0.43, which is a 43% ROI.

2. The Out of Pocket Method

The second popular method for calculating ROI looks at only what you’ve spent out-of-pocket for property costs and expenses and doesn’t take into account the property financing.

When would investors use this method? The Out of Pocket Method can be used to calculate ROI only when investors purchase a property with a mortgage. Both the down payment and financing on the property are calculated as equity, making the overall ROI higher.

Let’s use the same example as above.

You purchased the property for $250,000 and put in $100,000 of repairs, only this time, let’s say you put a 20% down payment on the house and used a traditional mortgage to finance the rest.

This means your out-of-pocket expenses are only $50,000 (your down payment) plus $100,000 (repair costs).

If the property is worth $500,000 after repairs, this means you have $350,000 of equity (including your bank financing as leverage). After you divide $350,000 by the total sale price ($500,000), you’re left with an ROI of 70%.

Rental properties

Calculating ROI on rental properties is slightly more complex since we need to factor in year-over-year profitability.

For this ROI, we use the following formula:

Net operating income (annual rental income – operating expenses) divided by the total out-of-pocket expenses.

Using the example from above, if you purchased your property for $250,000 with a 20% down payment, that means your out-of-pocket expenses would be $50,000. Add in closing costs ($5,000) and some money you spent on repairs ($20,000) your total expenses are $75,000.

Now, let’s say your monthly rent is $1,200. Multiply this by 12 to get the average yearly rent. Subtract operating expenses (let’s assume these are $500 a month). This leaves you with a yearly net operating income of $8,400.

Divide $8,400 by your out-of-pocket expenses ($75,000) and you’re left with an ROI of 11%.

Other important factors when considering ROI

When you’re trying to paint a more detailed picture of your ROI on a property, there are two other important factors to consider:

  1. home equity
  2. year-over-year appreciation

Using the above example, if you buy a $250,000 property with a $50,000 down payment and a $200,000 mortgage, your equity grows over time as you pay down the principal balance on your loan.

Let’s say that, according to your mortgage amortization schedule, you paid $2,300 on the principal balance of your loan in the first year. This $2,300 now becomes equity and can be used in your ROI calculation.

Furthermore, it’s important to consider year-over-year appreciation. If we assume your $250,000 property appreciates at 6% each year, then next year, your property will be worth $265,000, adding an additional $15,000 to your equity.

At BuyProperly, they calculate ROI using net cash flow, mortgage repayments, and capital appreciation to paint a more accurate picture of the returns investors will make over time.

What is a good ROI for real estate?

Determining your acceptable ROI for real estate investments depends on your personal goals and your ability to tolerate risk, which means there’s no right or wrong answer.

Investors looking to rent will normally be content with lower yearly ROI numbers knowing they plan on holding the property as a long-term investment. For rental properties, it’s common to expect a 5-10% ROI.

Property flippers, on the other hand, are more interested in the immediate ROI and are looking for a property with the potential to generate higher returns. In this case, an ROI of 20% or above is ideal.

At BuyProperly, they help real estate investors get started for as little as $2,500 and see projected annual returns of 10-40%. Want to know how? Learn more >>

Conclusion

ROI is an important consideration when investing in a property. Whether you’re looking for a quick return or long-term cash flow and appreciation, calculating ROI can help make your next investment decision easier.

Remember, since ROI is a simplistic method of sizing up your next real estate investment, it’s important to analyze it alongside your risk tolerance profile, as well as your long-term and short-term goals ,before making any investment decisions.

Looking to get started in real estate investing without feeling overwhelmed? Check out BuyProperly’s properties and see how they use a fractional ownership model to help investors build their real estate portfolios.

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