Real Estate News, Reviews and Investment
Generating income is the point of investment. Income may either be ongoing (such as rent from letting a house) or a single lump sum (such as the income from selling that house). Both are necessary to for an investment to be considered worthwhile.
A real estate investment earns an income either from rentals or from the profit of sale (capital gains), and may be combined to form the total income scenario for the investment.
A capital gain occurs when you sell an item, such as a house, for a higher price than you paid for it.
(sell price) – (buy price) = (capital gains)
For this to happen, the value of the item needs to increase. This could occur for many reasons including:
Changes in the market may take years to occur and may not be favorable. However, if you can anticipate a change in circumstances or add value to a property you may be able to realize higher capital gains.
Will capital gains be worth the investment?
As capital gains are usually realized only on selling the property, a successful investor will need to ensure that they:
In order to do this, you need to calculate the probable return and assess the risks. The expected capital gains should outweigh several other factors including:
Capital gains do not show the full picture of real estate – the land or buildings may be rented out in order to generate an income.
Rental markets rise and fall and income may fluctuate over time. Income can be difficult to accurately predict although an investment can still be assessed by considering:
Calculating rental returns
The percentage of a property’s price that can be charged as rent is the rental return for the period:
(rent) / (buy price) x 100 = (rental return %)
For example, an apartment bought for US$120,000 and rented for US$600 per month will have a monthly rental return of 5% per month.
This number provides a quick way to compare two investments and may be helpful in assessing if a lender will finance the deal. It does not, however, provide a complete picture.
A number of factors can affect whether an investor gets the full rental return they expect on a property. Rental profits or income are usually lower than rental returns would suggest, as the simple calculation above does not include any of the following:
These are costs of investing in a rental property and need to be accounted for when calculating the profits. The rental returns should be high enough to cover these costs for the property to be worth the asking price.
The rental market will affect future rental income and is hard to predict. It is nevertheless always worth looking at the status quo to see if the market is favorable. A market will generally be:
The big picture of generating income from a real estate investment means running a lot of numbers and researching markets. It’s not always easy, and there’s always a risk. But for a smart investor, the returns may be worth the effort.