Whether you’re hoping to invest in property yourself or you’re just hoping to satisfy your curiosity about the investment potential of real estate, it’s worth learning how investment properties make money. As long as people have been living in homes, investors have bought, sold, and rented real estate. That’s because property investing is a reliable way to build wealth.
But let’s get to specifics. There are several different ways that investment properties make money. You may be able to make money in more than one way concurrently, depending on your strategy and finances. And real estate investing has the flexibility to offer you different methods of investing at different stages of your life.
The following are several different ways that investment properties make money./p>
One of the most obvious ways people make money on investment properties is to collect rent. This is not to say that every rental property is profitable right away. Some people purchase a property knowing that they won’t make a profit the first few years of ownership. If the mortgage is more expensive than the amount of rent they can collect, they may find themselves in a negative cash flow situation.
To new investors, this can sound like a daunting prospect, but a negatively cash-flowed property can be the right strategy for several reasons, including strong potential for capital growth.
Repairs and maintenance also factor into rental income. At times, you may find that an expensive repair wipes out your profits for several months in a row. Overall, however, many new investors opt for properties that allow them to earn some income on rent every month.
They do this by purchasing a property in an area where rents are higher than what they’ll have to spend on the mortgage, taxes, insurance, and maintenance. Calculating these costs before ever looking for a property will help you to establish a healthy cash flow down the line.
Generally speaking, capital growth is the increase in value of an investment over time. In most cases, real estate increases in value over time, and if you look around at what’s been happening in Australia lately, sometimes those increases happen very rapidly!
For instance, residential property prices in Sydney increased by over 14% between March 2016 and March 2017, and Melbourne saw a 13% increase in the same time period. That’s an incredible return on an investment! While it’s not realistic to expect these kinds of returns year after year, many property owners take comfort in the fact that their real estate continues to grow, even if it’s not producing an impressive cash flow from rent in the immediate term.
Earning money through rental income and capital growth are great, but there’s one more important way that investment properties make money.
Because investment properties are tangible assets with value, they can be leveraged for the purchase of more real estate. Let’s say you purchased a home in Sydney back in 2010. With the amazing capital growth we’ve seen in Sydney, that home is (more than likely) now worth much more than you paid for it.
You could refinance the property and use some of that equity to purchase another property, thus compounding the power of your original investment. This power is also referred to as ‘good debt’. It’s important to remember, however, that leveraging like this should be done with the advice of a property consultant.
To learn more about how investment properties make money, get in touch with us at Full Financial Services. If you’re hoping to get started in real estate investing, we can help you to create a plan and work toward your goals.
For a detailed look into getting started with property investment, download our DIY Guide to Buying Your First Investment Property today.