Understanding Your Real Estate Investment Objective

Conceptual paper house on the washing line – 3d render

Real estate investment involves placing your capital in real property with the expectation of generating favorable rates of return along with the amount invested (i.e., you want your investment back with a return to cover the risk). As a result, many investors are very interested in wealth maximization and therefore are always searching for competitive rates of return, and this is why many turn to real estate investing. To maximize yields consistent with acceptable levels of risk.

Okay, but bear in mind that yields from a real estate investment result from a host of sources that include annual after-tax cash flows, equity buildup through appreciation of the property, and cash flow after tax once the rental property is sold or upon some other form of disposition. Fair enough; so let’s move on and discuss some typical investment objectives you should understand.

Leverage, of course, is paramount to any investment decision. It is always an advantage to an investor to use other people’s money to magnify the rate of return on investment equity at the same time being able to control the investment property. This is made possible when you are able to borrow money against the rental property, and in fact, allows you to control a larger investment than would be possible without borrowed resources. So always approach your decision to invest in real estate seeking to leverage the property and use other people’s money to help get you your rate of return.

Your personal investment objectives are also important. You may want to purchase a rental property in a location that will insure low vacancies. Or perhaps you want ownership and control of a property that will give you a pride of ownership. Maybe you just want to acquire a rental property to insure your financial security upon retirement. Your own particular objective for investing in real estate is very important.

Tax shelter advantages might pose another objective you have that would drive you to make a real estate investment. Investors that own rental property can defer tax on income through depreciation, a variety of tax credits, the conversion of qualified into qualified income sources into capital gain tax treatment, and more.

Finally, you might simply want to diversify your portfolio. Perhaps the role in selection of real estate as an investment is your way of spreading risk management over different types of assets.

Okay, but here’s the bottom line. Regardless what objective drives you to real estate investing, you must not neglect doing your homework and running the numbers on any rental property you consider purchasing. Like the proverbial saying, “measure twice and cut once.” That’s how the most prudent and successful investors do it.