Cashflow is the movement of cash in and out of your hand, your business or your investment.
Positive cashflow is the money that is left over after covering all your expenses- so your inflow of cash is more than outflow;
Negative cashflow is when your expenses or inflow of cash is lesser than outflow.
Like any other investment, your ultimate long term goal in real estate investing is generating positive cash flow, and paying minimum tax on your tax return. So act smart.
For example:
You buy a rental property as an investment. Say, you earn a rent of $1000 a month. But if your expenses like mortgage, insurance and repairs are $800, then you are in a positive cashflow situation of $200. In the case that your total expenses are $1200, then you will be in a negative cashflow situation of $200.
Here are some cash flows in real estate investing:
Positive (Inflows): Rental Income, Tax refunds (benefits), Sale of a property
Negative (Outflows): Mortgage payments, Repairs and Improvements, Property Taxes
Goal- Generate Positive Cashflow:
Your initial return from your investment house or unit may not be cashflow positive. As long as you are not in a financial hole (also depending on your current financial situation) and are close to break even, go for it. Let me elaborate. You could be either make money (cashflow positive), not be making or losing any money (breakeven) or be making losses from your investment venture (negative cashflow).
Remember also that you could be breaking even the first few years, when you buy a rental property. Be patient, and strategize how you will get positive soon. That is why real estate investing is a long term planning process and it is for the players who stick on.
So, how to make your returns positive cashflow:
One word: With Time
Over time, as other expenses go up, so will your rent that you charge your tenant. Rent is your main positive cashflow item.
Take a look at your negative cashflow items - Mortgage payments, Repairs and Improvements, Taxes, and lets discuss what will happen to those over time.
If your loan is a fixed term then your mortgage payments pretty much will stay stable. Also, the later payments will have more of the principal pay outs, and less of interest payments. That’s a good thing, it increases your ownership in the property.
Repairs and improvements will stabilize as well, since most of the major tasks and repairs show up initially in the first few months. Although, I must tell you all, that one of my properties is a very old dumpy house that I bought and renovated it. And every month, something or the other breaks down and needs fixing. This is something to be kept in mind if you buy very old houses, or even foreclosures for that matter. Buying a newer house, getting the house well inspected before buying it and before tenants move in, and being your own property manager will help you reduce your expenses greatly.
Property Taxes might go up each year, so, each year, do a thorough evaluation of your house, the comparative houses in the neighborhood, and make sure your house increased tax appraisal is justified. If not, dispute it. Even if the taxes do go up, it won’t be significant, and you could take a deduction for it on your income taxes.
If your intention is to sell your property in the next few years, you have an added advantage. Not only can you increase the rents every year, but your property values increases as well- that’s a fact. It could be 5 years or ten years, but you will be an increase in property value. So, if and when you sell it, you can take advantage of the property appreciation and make money.
Saturday, November 14, 2009
Saturday, October 17, 2009
Real Estate versus Portfolio Investment
So, you would ask, if real estate market can go bust just like stock market, then why real estate? Here are my thoughts:
Consider a very simplistic example, not taking into account a lot of factors, including market downfall or upside, in any year. Say you have $15,000 that you want to invest- either as a portfolio investment or in real estate, both growing at 10% each year. Here are some numbers.
I always recommend investing what money you have left, after making sure you have enough savings.
Conclusion: So, compare almost $22K that you would earn with portfolio versus $35K with real estate. Keep in mind also:
1. Remember, for simplification, this calculation ignores the rent income, mortgage payments, property taxes and expenses during those years. If you are cashflow positive (i.e. have enough cash left from rent income, after paying off all expenses), that is great. If you are break-even (no profit, no loss), you still make money at the end of the 5 years if you own real estate.
2. You get some tax benefits with real estate. You can deduct most expenses in your Income taxes (depending on whether it is a capital or operating expense). So you may pay very little or no tax on your profits by sale of real estate. Whereas any sale of portfolio is fully taxable. Check the IRS website or your tax attorney/CPA for more details on this.
3. You could have issues with your rental property like late or no rent payments, tenant eviction, possibility vacant property for sometime. Always have some extra cash to allow for unfavorable circumstances.
4. You can invest this extra money to buy another property and over time you can make some good money. You could also decide to keep this investment property and keep earning money through your retired life. Remember, with time, your rents will go up, your mortgage payments down, and you will get to a point where you will get to keep all the rental income from this and other properties (i.e. positive cashflow).
Consider a very simplistic example, not taking into account a lot of factors, including market downfall or upside, in any year. Say you have $15,000 that you want to invest- either as a portfolio investment or in real estate, both growing at 10% each year. Here are some numbers.
I always recommend investing what money you have left, after making sure you have enough savings.
1. Remember, for simplification, this calculation ignores the rent income, mortgage payments, property taxes and expenses during those years. If you are cashflow positive (i.e. have enough cash left from rent income, after paying off all expenses), that is great. If you are break-even (no profit, no loss), you still make money at the end of the 5 years if you own real estate.
2. You get some tax benefits with real estate. You can deduct most expenses in your Income taxes (depending on whether it is a capital or operating expense). So you may pay very little or no tax on your profits by sale of real estate. Whereas any sale of portfolio is fully taxable. Check the IRS website or your tax attorney/CPA for more details on this.
3. You could have issues with your rental property like late or no rent payments, tenant eviction, possibility vacant property for sometime. Always have some extra cash to allow for unfavorable circumstances.
4. You can invest this extra money to buy another property and over time you can make some good money. You could also decide to keep this investment property and keep earning money through your retired life. Remember, with time, your rents will go up, your mortgage payments down, and you will get to a point where you will get to keep all the rental income from this and other properties (i.e. positive cashflow).
Thursday, October 15, 2009
Investments 101
Simple stated, Investing is basically when you take your hard earned money and use it to generate more wealth, either immediate or long-term. People do this in numerous ways. Remember, it is very important to have some savings before you start investing. And never put all your eggs in one basket.
So lets look at the different types of investments. Remember, this is just a rough guideline of types of investment, and I have not covered them all. Do research other sources at bottom of this post, for additional details.
Usually 401K and IRA are considered to be in the category of savings, rather than investments, they are the first step to financial planning and well worth mentioning in this post. If you qualify and/or your employer offers it, make use of it.
401K – Putting money aside in your 401K is probably the most basic and important step in financial planning. If you have a job, and your employer offers a 401K benefit, its very important that you use it. Usually the employers match a percentage of your savings, and it’s a great way to save some pre-tax (before paying taxes) money.
IRA (Individual Retirement Account)- Some people call it savings, whereas other think its investment. Either way, its putting aside your post-tax money in an account, which is invested in a portfolio of your choice. Again, like 401K, this is a good financial strategy, and if you can, max it out. You could put your money in traditional or Roth IRA.
Portfolio investment – These are the shares, bonds, mutual funds, that you can buy and are usually controlled for you, by financial managers or asset managers. In the case of mutual funds, your money is invested in a group of stock or bonds, and you get to pick a group, and not individual companies. As a result, you have very little say in where your money is invested- which is what also makes it easiest to manage.
Real Estate – When you invest in any type of real estate, whether it is land, ranch, commercial or residential property, it is termed as real estate. I won’t elaborate too much here, since you will get a lot of information on this type of investment in this blog. For a short summary, refer to my first post "Why Real Estate".
REIT – A Real Estate Investment Trust is hybrid between traditional real estate and paper assets like stock. It’s a security that sells like stock on the stock exchange, but all investors money is invested directly in income-producing real estate property (such as residential apartments, offices complexes and/or commercial developments) or in property mortgages or mortgage-backed securities. This is a growing investment and provides several tax benefits for the REITs.
There are some good websites if you want to learn more on investments, a specific type of investment, or economy in general. Do check out http://money.cnn.com, http://online.wsj.com (paid site), http://www.businessweek.com, http://www.investopedia.com.
So lets look at the different types of investments. Remember, this is just a rough guideline of types of investment, and I have not covered them all. Do research other sources at bottom of this post, for additional details.
Usually 401K and IRA are considered to be in the category of savings, rather than investments, they are the first step to financial planning and well worth mentioning in this post. If you qualify and/or your employer offers it, make use of it.
401K – Putting money aside in your 401K is probably the most basic and important step in financial planning. If you have a job, and your employer offers a 401K benefit, its very important that you use it. Usually the employers match a percentage of your savings, and it’s a great way to save some pre-tax (before paying taxes) money.
- You can use this money after you reach a certain age. You pay taxes on your 401K when you withdraw it. Remember, there are ways to reduce your taxes at the time of withdrawal, just make sure you do your research.
- Having a 401K in itself is not an investment. It is merely an account that you put your pre-tax money in. This money is invested in a portfolio of your choice- usually mutual funds.
IRA (Individual Retirement Account)- Some people call it savings, whereas other think its investment. Either way, its putting aside your post-tax money in an account, which is invested in a portfolio of your choice. Again, like 401K, this is a good financial strategy, and if you can, max it out. You could put your money in traditional or Roth IRA.
Portfolio investment – These are the shares, bonds, mutual funds, that you can buy and are usually controlled for you, by financial managers or asset managers. In the case of mutual funds, your money is invested in a group of stock or bonds, and you get to pick a group, and not individual companies. As a result, you have very little say in where your money is invested- which is what also makes it easiest to manage.
- If this is how you would like to invest your money, that is fine, but remember, you are at the mercy of the market or the asset managers.
- Something else to keep in mind, always diversify your portfolio, never put all your money in one company’s stock, even if you work there and have utmost confidence. Safeguard yourself from becoming another Enron victim.
Real Estate – When you invest in any type of real estate, whether it is land, ranch, commercial or residential property, it is termed as real estate. I won’t elaborate too much here, since you will get a lot of information on this type of investment in this blog. For a short summary, refer to my first post "Why Real Estate".
REIT – A Real Estate Investment Trust is hybrid between traditional real estate and paper assets like stock. It’s a security that sells like stock on the stock exchange, but all investors money is invested directly in income-producing real estate property (such as residential apartments, offices complexes and/or commercial developments) or in property mortgages or mortgage-backed securities. This is a growing investment and provides several tax benefits for the REITs.
There are some good websites if you want to learn more on investments, a specific type of investment, or economy in general. Do check out http://money.cnn.com, http://online.wsj.com (paid site), http://www.businessweek.com, http://www.investopedia.com.
Tuesday, October 13, 2009
Types of Income
To be able to understand the concept of investment and money saving, it is important to understand different sources of money, i.e. where is your income coming from, how much of it are you spending, hence how much disposable income do you have, etc. So, lets start with the basics and understand why income diversification, and investment diversification is necessary.
So, lets categorize common sources of income:
1. Earned Income: This income is what you earn in your job in the form of paycheck. Its related to the time you out in your work, so, if you stop working, you don’t make any money. It’s the most common type of income. Some examples are:
3. Portfolio Income: Income derived from holding a paper assets, like:
It is very important to diversify your investments, and your income. If you depend on just one type of income, say a paycheck, you lose everything if you lose your job. Or if you put all your savings and money to buy stock, you could lose thousands if the stock value goes down. Although this blog encourages increasing and retaining passive income through real estate, please remember, you should be money smart and not put all your eggs in one basket.
So, lets categorize common sources of income:
1. Earned Income: This income is what you earn in your job in the form of paycheck. Its related to the time you out in your work, so, if you stop working, you don’t make any money. It’s the most common type of income. Some examples are:
- Job paycheck
- Owning a small business (unless you are a dormant partner and have employees who can take care of it in your absence)
- Consulting
- Any other job/ activity that pays you based on your time input
- Royalty from authoring a book
- Royalty from an invention
- Rental income from investment porperties
3. Portfolio Income: Income derived from holding a paper assets, like:
- stock portfolio, bonds or mutual dividends from stock or mutual funds, etc. This is probably the most common form of investment income, it is easy to manage, but very volatile. Also, you don’t have much control over your asset values.
- A new investment that folks are looking into is REIT – Real Estate Investment Trust, which is an investment in real estate, but without the headache of managing a property. I will discuss REITs it in later posts.
It is very important to diversify your investments, and your income. If you depend on just one type of income, say a paycheck, you lose everything if you lose your job. Or if you put all your savings and money to buy stock, you could lose thousands if the stock value goes down. Although this blog encourages increasing and retaining passive income through real estate, please remember, you should be money smart and not put all your eggs in one basket.
Wednesday, October 7, 2009
What is Real Estate
I am a real estate investor and here is how I am planning to retire early, and build a safe financial nest for myself and my family. With real estate values low, this is probably the best time to make money buying real estate. This is my personal opinion and goal; always consult a real estate agent and/or tax attorney for real estate regulations in your area.
This strategy is for people who are in it for long term. This is not an easy business and takes lot of time, effort and some starter money to get set up. Keep in mind, you will not become a millionaire overnight (only lottery tickets can get you there!), and probably never become a millionaire at all (as claimed by the real estate “gurus”). But, if you stick on and invest wisely, and you can plan an early retirement, and buy your dream vacation home in the Caribbean! Personally, my goal is to have enough money to retire early, afford the best education for my children without having to cut corners, and do what I really want to do in life--travel.
Just as an FYI, there are lots of people who claim to be real estate “gurus”, and ‘offer’ advice and workshops at ridiculous prices. Please be very wary of such hoax, because after a while, their bread and butter comes from these workshops, training, and book writing, not real estate! There are several free sources out there, please do plenty research before you decide to spend thousands of dollars, attending such workshops. Yes, advice helps, but real estate investing is a lot of research and common sense.
So, what does investment in real estate mean?
Investing in real estate does not refer only to buying investment properties, like houses, condos, town homes and renting them out. It also refers to buying and renting out commercial property, like a store in a strip mall, or buying land, farms or ranches, or easier still investing in real-estate investment trusts (REIT) or buying shares in home builders and other housing-related businesses. I will explain all of them in detail in my later posts and pros & cons of each. Also, please remember, timeshares are not an investment- they are merely an expense that you incur for your entertainment.
The biggest roadblock in buying real estate is financing. Yes, it is a toughie, but not impossible. I will go into more details of financing and options available in later posts. In short, if you’re on the edge about buying real estate, the time is now. It is still a buyers market out there, and the prices are on the lower end; so act fast!
This strategy is for people who are in it for long term. This is not an easy business and takes lot of time, effort and some starter money to get set up. Keep in mind, you will not become a millionaire overnight (only lottery tickets can get you there!), and probably never become a millionaire at all (as claimed by the real estate “gurus”). But, if you stick on and invest wisely, and you can plan an early retirement, and buy your dream vacation home in the Caribbean! Personally, my goal is to have enough money to retire early, afford the best education for my children without having to cut corners, and do what I really want to do in life--travel.
Just as an FYI, there are lots of people who claim to be real estate “gurus”, and ‘offer’ advice and workshops at ridiculous prices. Please be very wary of such hoax, because after a while, their bread and butter comes from these workshops, training, and book writing, not real estate! There are several free sources out there, please do plenty research before you decide to spend thousands of dollars, attending such workshops. Yes, advice helps, but real estate investing is a lot of research and common sense.
So, what does investment in real estate mean?
Investing in real estate does not refer only to buying investment properties, like houses, condos, town homes and renting them out. It also refers to buying and renting out commercial property, like a store in a strip mall, or buying land, farms or ranches, or easier still investing in real-estate investment trusts (REIT) or buying shares in home builders and other housing-related businesses. I will explain all of them in detail in my later posts and pros & cons of each. Also, please remember, timeshares are not an investment- they are merely an expense that you incur for your entertainment.
The biggest roadblock in buying real estate is financing. Yes, it is a toughie, but not impossible. I will go into more details of financing and options available in later posts. In short, if you’re on the edge about buying real estate, the time is now. It is still a buyers market out there, and the prices are on the lower end; so act fast!
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