Real estate investing is one of the most profitable ways to invest your money. It is one of the only asset classes that offer a mix of cash flow, appreciation and multiple levels of tax shelter. However, because it is also a hands-on investment, you can lose a great deal of money if you buy the wrong asset.
The secret to producing cash flow from real estate investing is to start with properties that produce cash flow. While there are a number of vacant properties available for extremely attractive prices, if you are unable to rent/lease them, they will quickly sap your operating capital and you will end up losing them. Although you will typically pay more for the actual real estate, look for properties which have positive cash flow in place at the time of acquisition.
Many of these assets present themselves as having positive cash flow but, in fact, do not. To find one that will perform well for you and have a margin for error, look only at its potential or actual rental income for the year and subtract a minimum five percent vacancy factor, just in case. The annual expenses should include a management fee of four to eight percent depending on the size of the asset. In states where property taxes are re-assessed on sale, adjust them up to reflect what you will actually pay. Once you have done this, subtract the expenses from the income to find the net operating income (NOI).
Since leverage is one of the secrets to real estate investing, you will not be taking home the NOI. Instead, you will be making mortgage payments and take home what is left after them. Dividing that net cash flow by your down payment should yield a return of 4 to 15 percent, depending on the type of asset and its location.
If you follow these safeguards, real estate investing can be amazingly lucrative. In many cases you can not only earn returns higher than those available in the stock or bond markets, but do it with 50 to 100 percent tax shelter.