Best method to use real estate to generate income
Are you at a standstill when it comes to figuring out the best method to use real estate to generate income? During these times when the market is uncertain, it may be tiresome to think about how to make the most out of property investment. Let's talk about some strategies that may ease your mind.
Real estate investors frequently argue about whether it is better to concentrate on cash flow or appreciation when developing an investing strategy. The purpose of investing is to make money, but how you do so is important. Although both have advantages, in my opinion, investors should concentrate on cash flow prospects when property prices are high, as they are right now. You could get into trouble by betting appreciation now.
When you exclusively purchase for appreciation, the only time you can profit is when the value rises. To preserve the property, you must have excellent financial stability. There are fees associated with selling the property, such as commissions paid to agents, closing charges, title insurance, and taxes. These expenses could cost between 10% and 15% or more. If you solely purchase for future appreciation, you must sell the property for 20% more than you paid for it to break even. This tactic becomes problematic because housing prices skyrocketed during the pandemic, and the market is currently showing symptoms of cooling.
How to generate income when house prices are high?
The two secret words that can help you increase your income are "cash flow" because you reside in an expensive market like the Bay Area. Cash flow is the amount of profit you make each month after collecting all income, covering all operational costs, and setting aside cash reserves for future repairs.
If your lot size is greater than 6,000 square feet, building an accessory dwelling unit (ADU) and renting it out might seem like a decent alternative to increase your income flow. An ADU is a secondary living area attached to or built on the property of your existing house. Renting out an ADU can be so lucrative that it can help you pay your mortgage and other housing expenses in full or in part.
Another option is buying multi-family homes. A multi-family home is a single family home that is split into multiple units. They can be duplexes, triplexes, and quadplexes. These could benefit first-time home buyers who want to purchase a primary residence and rent out the additional units. Multifamily homes are popular because they are more easily financed than other rental properties. Investors can benefit financially from both homeownership and real estate investing by living in one unit while renting out the others. The monthly rent can be used to pay for a portion of the monthly mortgage.
Non-owner-occupied rental properties may be an option for investors with established and stable capital. In an expensive market, it can be challenging to discover properties with positive cash flow, but if you do, the high rent can generate fantastic returns. When calculating your cash flow, you should factor in your mortgage, property taxes, insurance, property management, tenant turnover, repairs and upkeep, and homeowner association (HOA) dues.
Real estate investing is all about knowing your numbers. It is critical to establish your investing standards and objectives. You will be well on your way to making enough money to comfortably supplement your income once you have mastered a few tactics. You might even earn enough to become a full-time real estate investor.
Posted by Leon Le on
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