Why do real estate investors leverage their investment properties? The most obvious answer is that the more they leverage, the more properties they can purchase. If purchased correctly, each property should generate positive cash flow. Not only do the investors get more monthly cash flow with more properties, but they also have more renters paying down more mortgages creating more equity.
Another reason investors leverage their money is because of the Return on Equity (ROE). The ROE is calculated by dividing the total annual return by the equity. As you can see in the chart below, your ROE goes down as your equity goes up. This is why some investors choose to pull their equity out of existing investments and use them to obtain new investments.
One word of caution: the more you leverage, the more you risk. Some investors choose to pay their mortgage off and simply receive returns on through cash flow.
Chart is from The Millionaire Real Estate Investor
Keep Your House as a Rental
Have you considered buying another house and renting your current residence? Have you wondered how much cash flow you would get but aren't sure how much you could bring in for rent?
Determining a rent price is very similar to determining the value of a property. Ultimately, the value of a property and the rental cost are what people are willing to pay for the property. Finding comparable houses that have been rented out is the best way to determine a rent price for you home.
Finding Rental Comps
If you are planning on using a property manager, contact me to give you recommendations. You don't need to read further because they can do most o the leg work for you.
If you want to manage your own property, finding rental comps can be difficult. There is not a good system used in this area to keep track of agreed upon rental prices. What you can do is check what people are asking for in your neighborhood and/or in similar homes nearby.
Anything in the MLS will be listed on my website.
You may be able to find a few additional resource on Zillow
Craigslist will likely have a lot of different advertised rentals.
Local property management groups can also be a useful resource. Check out the following local property managment web pages:
Mountain Valley Management
Finding the Average Rental Price
You'll want to take the average or median price amount from the group of similar homes you find. Depending on your situation, you could begin advertising the house at the higher end of the rental price range and see the responses you get. Ultimately, you will want to be very selective when choosing a renter. It's best practice to contact their past 3 landlords to learn about evictions, property destruction, or failure to pay on time.
If you want to discuss this further, or help in finding comps, contact me at: (540) 246-9067.
Have you been thinking about making a Real Estate investment? Is having rent come in once a month the only benefit to having an investment? Below I outline the four ways of making money with an investment property.
1. Cash Flow
Cash flow is rent that exceeds the monthly mortgage payment. When looking to invest, talk to a mortgage adviser to see what your projected mortgage payments. Then, talk to a Realtor about going rental rates.
2. Appreciation in Value
The average rate of appreciation is around 3%. Keep in mind, this fluctuates and you should be ready for a long term investment.
Start getting to know areas around town where you may want to invest. Look for trends, does the neighborhood seem to be improving, or declining. Finding an up-and-coming neighborhood is a great way to accelerate appreciation in value.
3. Tax Benefits
The government thinks it's beneficial for people to own homes. So, they offer tax benefits to home owners. You'll want to consult with a tax accountant about your eligibility for tax benefits.
4. Mortgage Payoff
Finally, while your property is going up in value, you are enjoying tax benefits, and a monthly rental income, your renters are also paying down your mortgage. The rate at which your mortgage is paid down depends on your interest rate and the term of your loan. Theoretically, your renters could pay for the whole house aside from the down payment.