My investors are always looking for the high performing yields which are found in the spread between the cap rate of a property and the interest rate for a financed property.
The spread of the two reflects your positive leverage on the property. Today, with such low interest rates and low acquisition prices along with high rent demand, we are fortunate to create positive leverage with our investments.
I always like to remind the investors that while the positive yield to investment is a necessity to a great investment, sustainability of that investment is of top priority to ensure the investment yield stays positive.
Here are the 7 must-have items that make up a great real estate investment:
No. 1 – A great and sustainable market location
Yes, real estate is and always will be, about location. Recently I have seen a lot of real estate gurus touting that timing is more important than location. I believe the real estate gurus are creating drama.
Timing a real estate investment is extremely important. The question to ask your self should be where, today, is the best location where the timing is optimum for real estate investing.
As Roy Rogers said. “Do not wait to buy real estate, buy real estate and then wait.” Do not let opportunities pass you buy while waiting for your location to be ripe, this may never happen. Seasoned investors go out and make the opportunity. Investing in best emerging markets for sustainable returns is job one.
No. 2 – A great property at a great price
This one sounds simple and often I have conversations with investors who have conflicting points of view on this. Some believe it is low cost, while others believe it is best value. My experiences tell me that a low-priced house does not necessarily make up a great investment as they tend to be full of deferred maintenance. It is a good property, with a fair price, that may prove to be your best value.
No. 3 – High demand for rentals
Nationally, roughly one-third of the population rents the home they live in and this number is expected to rise each year for the foreseeable future. When you invest in markets that are 40 percent and 50+ percent renter-occupied, such as Memphis, Atlanta, Philadelphia, Birmingham, Cleveland, etc ., you have a very strong customer base which translates into more sustainable returns.
No. 4 – Large positive cash flow
I find that often buyers assume if you have a great market with all the fundamentals in place that you are sure to get great cash flow. Within these great fundamentals you also want to buy properties within the sweet spot of the market to ensure nice cash flows.
No. 5 – Ability to reduce tax liabilities through tax deductions
The hidden benefit of tax deductions is often overlooked and creates a great surprise at tax time. Depreciation is a widely misunderstood benefit that can save you thousands of dollars in taxes. While most every investment within real estate can provide tax benefits, some offer more than others. Raw land for instance may only provide a small amount of tax deductions off of the property tax. Income producing property can offer everything from expenses to interest deductions to depreciation.
No. 6 – Ability to gain further equity growth for future wealth building
Cash flow is king and should be one of your top priorities for an investment. Many believe you should only count on cash flow as any equity growth is speculative. I do however believe that a purposeful investor can indeed invest within best emerging markets to increase the likelihood of equity growth. Knowing that more wealth within real estate is created through equity growth than any other income source of the investment, suggests to me that focus and attention should be given to increase the likelihood of strong growth in equity position.
No. 7 – The ability to use leverage
This one is not for everyone. Everyone has their own risk tolerance and investing objectives. Leverage when used responsibly can help to accelerate your investment portfolio and is used by many as a great wealth building principle. I find most of my investors like to use leverage when prices are climbing and housing demand starts to slow. As this happens, sellers are less likely to demand quick cash closings giving investors ample time to secure financing.
Today we indeed are required to provide more documentation for loans but with inflation on the horizon and such cheap access to money now, we can easily increase our yield on financed properties.
With investor loans running around 5% and cap rates running around 10% an investor today can realize a 5% positive yield on a financed property.
As exciting as 10 % cap rates or 5% positive yield is remember these hidden benefits:
• Great tax benefits
• Tenants literally can pay for the investment for you
• Ability to gain equity growth for future wealth building
• The ability to gain positive leverage
People are always asking me about how much time is left with the window of opportunity for great real estate investing.
We as a nation have seen some of the best opportunities of our lifetimes. While prices are rising, there are always markets within the U.S. that represent great opportunities. Markets have a number of influences that will cause them to rise and fall. When investing in the correct location, at any given point in time, you will always find a great window of opportunity.