Real Estate Investing - Class 101

Why should you invest in real estate, you ask? Over the years many people have invested in property and are now living comfortable lifestyles. They were the small percentage of people who did not procrastinate and followed their vision to financial success.

Many people have lost their investment and some their retirement funds in the stock market. Enron and Nortel are prime examples of people losing their nest egg. Try and remember the last time you heard of someone going bankrupt investing in real estate, there are not many instances that come to mind, usually it involves someone selling off some huge property, like Canary Wharf, to an even bigger investment company.

What are some of the benefits of investing in Real Estate?

1. The biggest benefit is that you are your own boss, who sets his or her own hours. Your investment is working for you 24/7 and is even growing when you are on vacation.

2. As property values increase, your investment grows accordingly, even with the eventual market down turns, real estate has consistently increased in value.

3. Cash flow. With wise investment choices you should develop a positive cash flow position that would allow you to re-invest or control repayment options.

4. Leverage. Current mortgage choices allow you to leverage your investment up to 95% of purchase price. No other investments allow this kind of leverage.

5. Expenses. All interest payments, renovation costs, and maintenance expenses are all tax deductible, allowing you to increase the value of your property while saving tax dollars.

Your vision for investing should include whether you are a long term investor or short term speculator. If you are just interested in flipping houses you might consider reading my article on Flipping Houses for Profit, located at diy.napoleon.cc under Real Estate category.

Renting units can be a daunting task, you have to deal with good and bad tenants. This is one situation where you should maintain a healthy positive cash flow position to cover all possible eventualities such as bad tenants, damage to rental unit, or unexpected vacancies. The positive side of renting is that your tenants are paying your mortgage payments, where the principal is paid right up front, increasing your equity position.

There are many ways of financing your investment. Assuming existing loan is one option that has a bright spot in that you are in the fat part of the mortgage where more of your payment is being used to reduce the principal, the beginning of a mortgage is where the least amount of principal is being paid.

Beware of buying another investors mistake. Creative financing can get many people into trouble, especially if you invest in a neighbourhood that is experiencing a down turn due to property being allowed to deteriorate. You could end up with property that has mortgage greater than property value, and remember the first years of a mortgage do not develop much equity due to the small amount being paid of principal amount.

How do you set your rents for your investment property? You go back to the 3 most important items when buying property; location, location and location. A property that might rent for $500 in one area will most likely rent for upwards of $700 in a desirable area, and you would most likely have a better tenant.

Before jumping into the real estate investment market there are some simple things you should do first. Talk to an accountant to accurately identify your disposable income which will set the amount of money you can finance for your investment. You should also read, read and read some more until you are fully aware of all the hazards of real estate investment. How can you expect to avoid something if you don't know what it is.

Get out there, find an investment property and make some money!