Blog | Real Estate

Skyrocket Your Real Estate Returns with These 5 Strategies

Do you want to make the most return out of your real estate investments? Here are some key factors and rules that can help you do just that!

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It is no secret that real estate investing can have big returns. Long-term investing in properties (buying properties to sell in the future for their appreciation) can lead a big cash out from equity but also leads to capital gains tax. A long-term investment is risky, and you aren’t making money from it until you sell it. You are essentially tying up your money for longer investment periods when the property value increases. For this reason, investing in Cash Flow real estate which is more short-term can be the best strategy for increasing your returns.

Here are 3 reasons to focus on Cash Flow Investments and NOT long-term, capital gains focused investments:

  • Timing. One problem with investing in long-term capital gains is that you have to get rid of the property at the right time to get your gains. You only have one chance to make a good return on your investment.

  • Predictability. With long-term investments in real estate, you have little way to predict what the market will be like in 10-15 years. Forecasting that far out is virtually impossible.

  • Losses. Every investor suffers some loss at times. It is an inevitability. The idea of ‘failing fast’ is a good rule in real estate investments. If your current property is going to be the ‘bad egg’ in your basket, it is better to find out sooner rather than later. If you hold a property for long-term investing and find out 10 years later it was a bad investment, you’ve lost time AND money.

  • More Ways To Gain. A cash flow real estate investment has 4 methods of prospering whereas a long-term, capital gains focused investment has only one: sell.

To skyrocket your returns in real estate investing, follow these 5 rules.

Rule 1: Realize That Cash Flow Is King.

If you are investing with real estate, you need to forget about equity. Focus on cash flow because over time, cash flow generates the real profit. Rental properties will generate more cash flow with consistent income. Here’s why.

If you are trying to build equity over time, it will likely cause you to lose money. During this time, you are still paying taxes, insurance, maintaining the property and paying on the debt (interest) of the investment. The profit from your long-term or capital gains investment only comes once, but cash flow investments put cash in your pocket monthly. Equity returns only manifest after years of holding on to a property. But cash flow begins immediately, sometimes with little to no waiting.

Equity profits are nice, but it is the cash flow that will pay off more in the long run.

Rule 2: Know the Four Real Estate Profit Centers.

When investing in cash flow real estate as a business (not your personal home) you create 4 ways to profit. These ‘profit centers’ generate profit that outpace most other investment types, even booming stock markets.

First, cash flow investing means you’ll have tenants, and those tenants pay monthly to rent the property. For example, if you charge $1,000 a month for rent, that is $12,000 a year in cash flow. You then subtract your taxes, insurance, maintenance, and debt service to see what profit you are making. Usually it is somewhere between 3-10% annually.

Second, while you are paying down your debt (or mortgage) on the investment property, that principal and interest is being paid by your tenant. They are paying down your debt on a property that you own. This is amortization. This is profit to you and usually comes in around 10-20% annual return.

Depreciation is the third profit center. Depreciation is often called a ‘phantom return’. It involves no actual cash payment, but because the government usually lets property owners take a tax break or deduct the depreciation of an investment, this results in a savings on your income. This can produce another 5-10% of annual return. For the three centers of profit so far we have accumulated 30% or more in annual return.

The fourth center of profit is appreciation. The opposite of depreciation, it is the increase in value of your investment property. This is the ‘icing on the cake’. So during the time you’ve been accumulating cash flow and returns on rent, having someone pay down your debt, and taking tax breaks on depreciation, you are also building equity in a property that will likely be worth more than what you’ve paid for it. This can push your annual return to 50% or more.

Rule 3: Select the Right Property in the Right Market.

The best advice is to do your homework and choose a rental property located in a market with long-term potential and high occupancy rates. Not a property in a volatile area. If you choose a property where markets fall sharply over the years, you have a lower cash flow potential. You are investing in the market, not the property.

Once you’ve chosen a property, you want to evaluate all the relevant location factors such as transportation, crime, safety, schools, established retail and restaurants, and more. Get a feel for the area. If you were a potential tenant or buyer, how would you feel about the area? This helps to determine the value of a property long-term.

It is not always about the purchase price of a property. Sometimes, a newer and more expensive property can be far more lucrative for cash flow if it is in a steady, desirable, high yield area as opposed to an older, less expensive property in an area that has a lot of turn over with tenants and the potential to have a big market dip in the future.

Rule 4: Manage Your Properties Well

Some of the biggest ‘hidden’ expenses in a rental property are those related to repairs, turnovers, and vacancies. If you rent a property out and the rental payments start coming in, it is important not to lose focus on things that help keep your property rented and your tenants happy. Positive tenant relations, upkeep, response to maintenance issues, are big factors that keep those checks coming in.

It is work and expense to keep up a property, but by staying focused on making sure your property is desirable and safe, and that your tenants are happy will keep the cash flow coming in.

Rule 5: Trade Up in Value.

There is a great example of ‘trading up’ in the game Monopoly. Four green houses lead to one red hotel. This is a simple, but effective reminder of how to build wealth.

Big profits come from larger properties. But you have to start somewhere. Investing in smaller properties for cash flow can give you the stepping stones to trading up and investing in bigger properties. Selling your smaller or less profitable properties at a point when it makes sense, and using those cash proceeds to purchase larger and more lucrative real estate can catapult you into bigger returns. However, there is one catch. When you cash out or sell an investment property for more than what you paid for it, you receive a ‘capital gain’. Capital gains are taxed by federal government and some states as well. This tax is a lower percentage than income tax but it will cost you to cash out with a profitable investment property.

It’s simple (and legal). Using an incentive from the IRS called a 1031 Exchange, you can take the capital gains from a sold property and use that money to invest into another property. This allows you to roll over that profit and not be subject to the tax. There are strict requirements, and you must fill the forms out correctly, but it is a good option to avoid the capital gains tax when trading up.

The 5 rules outlined above can help you skyrocket your returns as a real estate investor. The factors, rules, and tips will keep you educated, moving forward, and focusing on ways to build your wealth in real estate investing. While a simple rental can bring income and cash flow, knowing how to build upon that rental, how to keep your tenants happy, how to utilize tax breaks and ultimately trade up for bigger, more profitable investments is the key to your success.

Original publish date: October 24, 2022

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