Always on a quest to increase your income? You’ve probably wondered whether owning a rental property is a good way to get it. After all, the yield on fixed-income investments is at an all-time low and stock dividends aren’t much better. Adding a residential income property
or two could provide a reliable boost to your cash flow.
The only real hurdle one must overcome these days is the high real estate prices relative to rents. But conservative real estate investors know it is still possible to find the kind of properties that will generate steady income without taking on too much risk.
Traditionally, real estate investors looked for a combination of income and price appreciation. But condo flippers are making it tough for real estate investors who just want reliable income. Recent market prices reflect the fact that many investors are willing to accept little cash flow in lieu of strong capital gains. Strong price growth in the last decade has driven investors to seek out opportunities that will enable them to realize quick price appreciation.
There are properties that will generate the opportunity to realize a double-digit “cash-on-cash return”. That’s the net annual cash flow from the property as a percentage of your down payment.
In my experience, the traditional approach of purchasing real estate for the purpose of generating income and waiting for market value to appreciate is a successful formula to boost your cash flow and increase your wealth.
In 2000, a client purchased a single family home in Vancouver for $380,000.00 with a down payment of approximately 1/3 of the purchase price ($100,000.00) and they now stand to gain not only from the capital appreciation on the property but they have also benefited from the monthly rental income. At purchase, before expenses, the investor realized a gross annual return on their investment of 16.8%, and as rent prices continued to rise, their return on their cash investment increased.
In today’s market, the opportunities still abound. A client recently purchased a condominium in Burnaby for $210,000.00. The property was purchased with a down payment of $63,000.00 or 30% of the purchase price and the unit was subsequently rented for a gross annual rent of $13,200.00 per year, which is a gross return on their cash investment of 20.9%.
Finding properties that will help you realize opportunities is the first step in an effective strategy. Often you’ll need the services of a Realtor who works closely with a property manager to help identify and realize real estate investment opportunities.
An investor then has to work diligently towards paying down their mortgage on the investment property as quickly as possible. It’s ideal to target repayment between 10 to 15 years. If you do this, you will end up with a mortgage free asset that produces lots of income and the asset is yours for life.
There are a number of ways to reach your goal of increasing your income as well as your wealth through investment in real estate. You’ll need to find a strategy that fits with your personality and needs.
Plan a conservative strategy, manage your risks and do all your homework carefully because the rewards can be great.