How you profit from real estate depends on you. When you buy stocks & shares, you never know what the returns will be, the only way you can make money is if the stocks & shares appreciate in value, then you must sell them at the right time for a profit. Your real estate investment will be a result of your own efforts and it can make you money in many ways;
This is the main source of profit investors are going for when buying a property to rent out out also know as a buy-to-let, the rental income is what the tenant pays you. This will hopefully grow over time too. In addition to the all important income, you will also need to budget for a number of necessary costs. This is especially important as ultimately you are responsible for these costs whether the property is occupied or not.
When a property increases in value over time, it is known as ‘capital growth’. Capital growth, also known as capital appreciation, has been strong in recent times, but the value of property does go up as well as down, and of course the local conditions surrounding your property may have a big effect.
This can be achieved by the higher cash deposit you make or via mortgage payments. Each mortgage payment that a homeowner makes includes a portion of the principal of the loan and interest that accrues each month. The principal portion goes toward building home equity, and with each passing month the homeowner has slightly more equity. Making double payments can speed up the process and lead to more equity faster. Homeowners who have an interest-only mortgage lose the chance to build equity, since they temporarily only pay interest in order to keep payments at an affordable level.
Leverage increases returns
If you put 20% down on a property, you will still receive rental income based on 100% of the property value, making it a great return for your 20%. Say your property is worth £100,000 and you charge £750 in rent with £500 in mortgage, taxes and fees. You have a £250 profit on £20,000 down. That is £3,000 a year, or a 15% return on your deposit.
Leverage makes you profit on the full selling price
If that same £100,000 property you bought with £20,000 down sells for £120,000 a few years later, you get your £20,000 plus principal payments back, and a £20,000 profit. It is only a 20% profit over the full value of the property, but thanks to your leverage, you are making a profit of 100%, minus principal payments to the £80,000 mortgage. The bigger the leverage, the greater the return.
Businesses are a different type of tenure and rents are generally higher. They are also safer if you choose a well known business to rent too.
Profit from a lump sum on a refinance
If you bought your property for £100,000 and added £10,000 worth of improvements, that the tenants paid back with rental income. The value of the property has now increased, you can refinance to get the surplus cash and to put down a deposit on your next property venture.
Profit from extra cash flow on a refinance
If you are able to refinance the property to lower your mortgage payments while the rent stays the same, you are generating more cash flow every month. You can build a cushion for maintenance, save up for a deposit on a new buy-to-let, or have more passive income.
There are many more ways to make money from your property investment and we would love to hear how it has worked for you. Please feel free to use the below comments to share your ideas on real estate investment and how it is or can be successful for you.
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