When people wonder how to build wealth and how or where to start, our statement worth repeating “Real Estate is a Key Asset for Building Wealth!”
How is Real Estate can Build Wealth?
In a typical rental property case, the owner buys the property and leases it to the tenants. The tenant pays the investor or the landlord an agreed amount of rent, normally on a monthly basis.
In this way, there are 3 ways investors can win and build wealth with real estate. There are many investment opportunities out there but mostly invest in real estate because of these three pillars:
1. Cash Flow
Cash flow is the amount of money left over from your rental income, after subtracting all expenses, to maintain the property in rentable condition.
Formula: Cash Flow = Income – Expenses
The investor definitely made positive cash flow if there is money left over at the end of the month after all expenses and mortgage payments have been made. Keep in mind that, when I say expenses, it’s not just debt services, property taxes, strata fees (if any), and insurance. Expenses are everything that is costing you each month to maintain the property. You always want to make sure that you obtain a positive cash flow after expenses.
It is called a negative cash flow when the property is not able to produce enough income that covers all of the expenses including mortgage payments. Thus, investors shall aim to buy positive cash-flowing properties or properties where cash flow can be increased in the coming term.
Many investors benefit from owning a property with positive cash flow, able to spend the money any way she chooses. In order to build more wealth, these investors re-invest the extra money back into topping up their reserve funds to acquire more properties. It is important to take notice of when home prices experience a downturn. There should buffer of cash flow that is still coming to spare the life of the investment.
2. Principal Recapture
Principal Recapture is the equity that you gain as you pay down your loan. The drawback of becoming a real estate investor is that the rental income earned by the tenant is used to pay the mortgage, including the interest, month after month and year after year. Yes, you own the house, and your tenant pays all of the mortgages. It is important to establish relationships with tenants and treat them as clients while watching our net worth grow over time.
There are two types of appreciation in the real estate investing world.
The first is called market appreciation. This happens when property values increase their value over a period of time, based on market forces. Housing prices will continue to appreciate as land gets scarcer and the population continues to grow. Of course, there are times when property prices drop, and property investors need to be aware when this happens. Hence, most people see property investment as a good hedge against inflation.
The second type is called forced appreciation and it happens when improvements have been made to the property. For example, updating a 1990’s Kampong Baru to today’s styles. Unfortunately, in Malaysia, turning an ugly duckling into a golden goose may not significantly affect the market value. However, it can attract potential buyers or potential tenants easier.
For beginner real estate investors, it is very important to minimize risk. Real estate investment can be cash-heavy. Thus, you need to be risk-calculative. Therefore, do your research and proceed carefully! SubSaleSister will be of assistance if you need advice regarding your real estate investment in Malaysia.