Make sure you’re generating profit over the long term
Owning property costs money – and when you’re investing in real estate, it’s important to make sure that your bases are covered. After all expenses are paid, what should you expect as a return on your property?
There are two metrics that you can use to determine the rate of return on a rental property. The first is if you are collecting rent because you then have income on an ongoing basis. Remember, this is your rent minus all of your expenses, and one of the largest expenses is the tax that you have to pay every year on that rental income. Hypothetically, let’s say you have positive cash flow and you have money left over after you pay your taxes; this now constitutes a financial return. Second, there’s also a return that is being accumulated if you have a mortgage and you’re paying it down; this is the equity that you’re building in your investment. In addition, you have the appreciation in the home’s value because it’s assumed that when you buy a piece of real estate, you are doing it with the expectation that the property value is going to increase. You can now put those three numbers together to determine your total rate of return.
What’s a good return on real estate and what’s the minimum that you should be making in order to make it worth your while? I’d say that this number hovers around 8% to 10% just in the form of cash flow and equity. In addition, you’ll need to make sure you’re not paying money out of pocket every month to cover bills (you want your rental income to cover these costs). Additionally, you want to check that your yearly tax bill isn’t being paid out of pocket because this will put a serious dent in your rate of return!
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