As an investor you will run into all kinds of expenses when buying, selling, and renting property. There are expenses you know you will have, then there are those unexpected expenses that you do not see coming and you do not plan for…it happens all the time.
Some expenses are the normal expenses you have when you have an investment property. Property taxes, insurance, and the like are expenses that you know you will have, and are usually not a problem for you to fit into your budget. The great thing, for the most part, is that the amounts will stay the same from month to month. If the amounts do change, it will not be often.
encountered
You will have other expenses that will change often. Paying the water bills, replacing carpeting, repairing things on the property, all of these things have variable costs, so it is harder to budget for them. You will also have to think about painting, replacing appliances, or flooring which can eat up your budget, but they don’t happen as often, maybe once a year or two.
That’s why I estimate my expense % to be higher than it probably should be, to plan for the unexpected moments. That way it won’t be a big deal because the money has been built in already.
There are factors such as the age of your investment that can impact the dollar amount of your expenses. So keep that in mind when you are getting ready to make a real estate investment.
Making Loan payments
When you begin buying investment property, you won’t have much equity in the properties. The down payment for the most part will be the extent of your equity, which won’t be much. If you are a buy and hold real estate investor, what some people call a value investor, the longer you own the property the higher your equity becomes. Anyone that has a mortgage will tell you that the first few years of paying a mortgage are strictly paying for the interest. As the years go on more of your payment will go toward the principal of the loan, which increases your equity.
I like to try and make an extra payment or two per year to try and pay down that principal faster so that I have more equity faster. This should only be done if you have enough cash flow to do so.
Equity growth via appreciation
One great way you are going to make money investing in real estate is through appreciation. I have said many times before that real estate values very rarely, if ever, go down. In time the value of your property increases. This is doubly true if you own real estate in popular areas. People are willing to pay higher prices or rents in high demand areas, which can significantly increase the amount of money you will be bringing in.
The key for you over the years is to maintain the property. You don’t want any potential profits to be left on the table just because you didn’t keep the house in good shape.
Tax benefits
Real estate investors love the tax benefits that investment property brings. Every year you will have deductions available to you. You have a depreciation deduction which is basically money given to you to repair the property as it wears down. This deduction is very important to all business owners, not just real estate investors.
There are simple calculations you can make to find out your depreciation. You can use your tax bills, or appraisals, there are a few ways you can do this. I will visit that later on.
It might also be a good idea to look into software programs to help you with your records, this will be beneficial when you start to deal with the government and paying taxes.
If you want an accurate idea of the amount of return you have on your properties, the taxes and deductions will have to be included. This will give you a true return on your investment.
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