Today, we’re going to talk a little bit about investing in a real estate for gains versus investing in real estate for income.
Now, investing in real estate for gains is probably something that you’re familiar with. It’s a matter of buying low and selling high. You buy for one price and then you sell to somebody else for a higher price later and you keep the difference as you profit. Now, what determines sales price? There’s a couple of factors I’d like to point out to you that affect what the sales price of real estate is.
Number one, mortgage rates, as mortgage rates go upwards then real estate prices come down as a result and when mortgage rates are going down, it pushes real estate prices up. Same thing happens with home owners and insurance premiums, also the flexibility of mortgage lending and/or the availability of mortgage lending highly affects real estate prices.
When there’s the increased flexibilities such as no income verification requirements or no down payment then that is going to put real estate prices upwards because more people can then buy real estate. When mortgage lending programs become less available or more strict then that pushes real estate prices downwards. And of course the emotions of the buyers and sellers in the real estate market are going to affect the prices as well. If people are getting greedy, prices are going up. If people are getting scared, the prices are coming down. The end result is that this factor is you have no control over and so you may not have much control over what price you can resell your property for.
So, essentially the ICF flow in investing and only for gains with real estate and that you buy a property and then after you’d already have the property and you own it then you’re going to try to sell it for more. And you know have a lot of control or predictability always over whether or not you’re going to be able to and how much more you’re going to be able to sell it for.
When you invest in real estate for income as a completely different strategy, you can take a look at the property and before you even buy it you can estimate if it is not operating income. And then you divide that by your minimum return on investment and that’s going to tell you the maximum price that you can pay for that property. And so if you can’t by the property for that maximum price then you need to move on to another property. And you didn’t buy the property, you didn’t—things didn’t turn out with that property but it doesn’t mean that you still own it and you’re not going to be able to sell it or you’re going to take a big loss on it, it just means you tried to buy it for a price favorable and it didn’t work. And then you moved on to another property. You estimate its net operating income, divide that by your minimum return on investment and I’ll tell you the maximum price for that property.
So, investing for gains becomes a matter of getting into a property and just hoping and crossing your fingers that things are going to turn out well and sometimes they do, sometimes they don’t whereas investing for income is a matter of shopping around for a property and not buying it unless you find that it’s going to meet your profit objective.
So, in our future video we will examine investing for income in a little bit more detail. But what I wanted to point out in this video is simply the difference. Most people are familiar with investing and that real estate for gains and not so familiar with investing your real estate for income. People are taking a look at the real estate market today and go, wow! I don’t want to be investing a real estate prices that are falling. In the future video, we’ll be going into more detail but when you’re investing for income, it does not matter what prices are doing. All that matters is that you’re able to purchase property for the—for less than your maximum buying price.
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