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As a long-term real estate investor, you should always be concerned with making a wise investment. Too often, rookie investors find themselves struggling to maintain their portfolios because they are not considering the balance between appreciating properties and their monthly cash flow.
A healthy balance between cash flowing properties and appreciating property values can be the deciding factor in determining your long-term success as a real estate investor.
But before we look at how to find that balance, if you want to learn how to ensure that your mortgage is optimized for the type of profit you want to prioritize, click the link below for a free strategy call with our team at LendCity today.
Understanding Cash Flow and Appreciation
Before we can understand how managing both your cash flow and appreciating real estate assets will help you build wealth effectively, we need to understand both of these key components of real estate investing.
What is Cash Flow?
Cash flow is the profit generated by an investment property. This is calculated by taking the rental income generated each month and subtracting the operating expenses and cash reserves for the property.
As a long-term real estate investor, cash flow is your primary source of investment income. So, if you are planning on buying a property as a buy-and-hold investment, you need to consider the cash flow potential for that property. If that property cannot generate a positive cash flow and is going to cost you money each month to own, it is probably not going to be a good investment.
Overall, a healthy cash flowing property is going to earn enough that you can reliably save money to cover potential vacancies and emergencies on the property, while still generating funds you can use to finance your own lifestyle or future investments.
How do Properties Appreciate?
In the world of real estate, appreciation is term used to describe the increase in a property’s value over time. There are a few ways that properties can appreciate.
If you have renovated your property and made improvements to the home such as updating the kitchen and bathroom, or rewiring some of the electrical elements, that property usually is going to increase in value. As well, as the real estate market experiences periods of growth, your property will often naturally appreciate alongside other properties.
Appreciation is incredibly beneficial because it increases the amount of equity you have in a home that you can potentially use to improve the property, continue investing or indulge in some of life’s finer aspects such as vacations or nice cars. Alternatively, when it comes time to sell the property, you will receive more from the sale than you spent initially purchasing the property.
Finding the Balance
So, how important is it that you find the balance between properties that produce a healthy cash flow and rapidly appreciating properties? It is absolutely crucial.
If you buy a property that produces a high level of cash flow each month but does not appreciate enough to keep up with the rising rate of inflation, you are going to end up in a troubling position. For a while, you will be fine because the month-to-month rent payments are going to be good. However, if you ever decide to sell that property, there will be an issue. Even if a property has appreciated a little, if it has not kept up with the rate of inflation, or fallen into disrepair and lost value, you will effectively lose money on the sale of that property.
On the other hand, if you buy a property with a very high potential to appreciate and it fails to generate enough money in cash flow, you find yourself in another troublesome position. If your property earns very little in cash flow – or worse, the property has a negative cash flow – it may not be feasible or manageable to own the property for very long. This means that even if the property is sure to experience a massive increase in value within a few years, you will likely find yourself forced to sell the property early to cut your losses and miss out on the growth you would have experienced.
Discover How To Anaylze a Properties Cash Flow With This Step By Step Guide
How Can You Tell if Your Property Has a Healthy Balance?
If your property is generating a healthy cashflow and is in good condition, you are usually safe to assume the property is appreciating well at the same time. However, if you are not sure, you can always have your home reappraised in order to keep track of the exact value.
For a rough estimate, you can also compare your property to similar ones in the area. Often the value of your property will roughly fall in line with its neighbours.
Diversifying Your Portfolio to Create Balance
Sometimes, achieving a healthy balance between cash flowing properties and appreciating assets is about more than a single property. As your portfolio grows, you can afford to invest in a wider array of properties. This means that even if a property does not have much room to appreciate, but it generates a strong monthly cash flow, it may still be worthwhile for you to buy if you are also holding properties that are appreciating enough. As the same time, if a property with plenty of room for appreciation is not cash flowing enough at the moment, you may be able to cover the costs with the profits made from other investment properties that you own.
Balance Starts with a Strong Mortgage
In order to build a well-balanced real estate portfolio, you need to make sure you get the best financing available for all of your properties. After all, with a good mortgage you can spend less money each month on mortgage payments and home insurance and increase your monthly cash flow.
As well, if you ever want to pull out equity from your properties to enjoy the benefits of your appreciating real estate, you want a mortgage that can easily be refinanced.
So, in order to make sure you get the best rates and mortgage options available, contact us at LendCity and a member of our team will gladly assist you. We can be reached at 519-960-0370 or you can visit us online at LendCity.ca and apply online today. Alternatively, you can click the link below to book a free strategy call with our team at LendCity today.