Clearly Defined Profit Objectives for Rental Property Investment

By Denis Obrien

 

After you've made the scary, exciting first step of selecting a property for your investment property portfolio, your next step is to determine the best options available for structuring the financing. First and foremost, you must clearly define your profit objectives.

If you're just starting out and you have less than $10,000 to $20,000, generating cash should be your number one objective for future investments. In order to raise the cash, you will need to focus on quick re-sales or flips of your bargain purchase.

You will never tend to outgrow your need for cash, so incorporate a second objective into your investment plans to generate cash flow. Keep some of your bargain purchases to produce an on-going source of income for your security and retirement using two techniques - rentals and wraps.

For the properties that you rent, make your financing objective neutral cash flow. Neutral cash flow occurs when your mortgage payments equal the amount income from rents you receive. The objective when making offers on real estate is to structure the offer so the mortgage payments will be no more than the rental income.

You can control the amount of mortgage payments you will make each month by using the strategies and financing techniques that will be covered a little later in this article.

Vacancies and maintenance are the other two factors that will have an effect on your cash flow - in a negative way. Employing a simple, hassle-free approach to real estate management will aid you in learning how to reduce both these factors.

Real estate requires investment capital, either yours or other people's money (OPM). Your personal capital is better utilised in investments like mutual funds, asset management accounts and annuities.

Use mostly other people's money in your real estate investments and as little of your own money as possible - and practical.

OPM is real estate is called mortgage money and a major benefit is that its use increases your return on investment. Your return on your investment capital (ROI) is the per cent of interest, appreciation, dividends or tax benefits you earn. You can determine your ROI for real estate appreciation in one year using the following formula:

ROI = Cash Profit, or increase in value / Cash you invested

Your cash profit is the net cash you make from flipping a deal. The "increase in value" is the appreciation, or the difference in last year's market value of your property and this year's market value.

So, the less of your own cash you use, the greater your return on investment. When anyone ask why consider real estate as an investment vehicle, the answer is always - where else are you going to have the potential for a 50% to 100% per year return on your investment capital for a few hours a year of extra effort?

When a property is offered for sale, the seller's terms are usually, "I want all cash for my equity at closing". These terms, however are not the best for you as an investor. Don't judge property based on the original terms offered by the seller. Most sellers will be far more flexible than it appears on the surface.

One thing to always remember is that you're in the driver's seat. There are any number of properties on the market from which you can choose to buy, but the seller on the other hand only has one property to sell.

When making offers on a property, continually modify the terms until they are acceptable to both you and the seller. If you can't agree, you simply move on to the next property.

Controlling real estate requires new but easy to apply strategies for financing. Get seven of the most important, most profitable, and most unexpected secrets to profiting like a true real estate mogul - absolutely free!

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