Why people invest in real estate

People invest to obtain the financial independence to achieve their goals. Achieving financial success usually takes time, careful planning, and the assistance of professionals. There are a wide variety of real estate investment options, the chosen investment vehicle will vary on the desires and ultimate goals of the investor. Each investment exhibits different risk factors, and the return or yield on an investment should be proportionate with the amount of risk associated with that investment.

Real Estate investments can provide:

• Additional income
• Funds for retirement
• Savings for children's education
• An estate for heirs
• Financial freedom

Types of real estate property investments

• Residential Real Estate
• Single family residence
• Condominium/Townhome
• Multiple units (1-4 units)
• Manufactured / modular homes
• Commercial Properties
• Multiple units (over 4 units)
• Apartment complex
• Office building
• Retail development
• Mixed use projects (residential / retail)

Advantages from investing in real estate:

• Income from cash flow
• Equity from loan pay-down
• Equity from appreciation
• Tax savings

To determine cash flow many real estate professionals use the standard cash flow model. It can be used to analyze properties on a before and after tax basis.

Cash Flow Model

1. Gross Schedule Income

2. - Vacancy & Uncollected Rents

3. = Effective Rental Income

4. + Other Income

5. = Gross Operating Income

6. -- Annual Operating Expenses

7. = Net Operating Income

8. -- Annual Debt Service

9. = Before Tax Cash Flow

Definitions:

Gross Scheduled Income also known as (GSI) is the maximum amount of annual rent you would receive if the property were 100% occupied all year.

Vacancy & Uncollected Rents denotes an estimate of rental income that will be lost due to vacancy. When purchasing a rental property vacancy statistics can be obtained through your Realtor, local property management companies, housing associations, and the internet.

Effective Rental Income is acquired by subtracting vacancies and uncollected rents from gross scheduled income. It represents the actual amount of money collected in rents for the year.

Other Income equates to income from sources other than rents. Additional income sources can have a substantial effect on the cash flow analysis.

• Parking fees
• Pet fees
• Storage fees
• Laundry machines
• Vending machines
• Late fees

Gross Operating Income or (GOI) is garnered by adding other income to effective rental income. GOI is the total income received from operations.

Annual Operating Expenses are the costs involved in the management of the property.

• Utilities
• Property taxes
• Insurance
• Property management
• Services (landscaping, trash, janitorial, pool, etc.)
• Maintenance and repair

Net Operating Income or (NOI) is found by subtracting annual operating expenses from gross operating income.

Annual Debt Service or (ADS) is the total of all monthly full principal and interest loan payments made throughout the year.

Before Tax Cash Flow is obtained by subtracting annual debt service from net operating income.

The cash flow model is just one way to examine a rental property's potential benefits, when buying property you should consult with real estate and tax professionals to ensure the validity of the analysis.