The IDEAL Investment
Rental real estate is considered to be the IDEAL investment
I – Income – the property generates income during the holding period.
D – Depreciation – this a non-cash deduction that reduces income and therefore saves taxes.
E – Equity Build-up – most mortgages are amortized with some of each payment reducing the principal balance.
A – Appreciation – it is reasonable to expect real estate to go up in value over time.
L – Leverage ¬– leverage is characteristic of borrowed funds that allow the investor to enjoy a profit on the overall increase in value rather than just the cash invested.
- Real estate is an IDEAL investment.
- Invest in single family homes in predominantly owner-occupied neighborhoods at or below average price range.
- Profit starts with purchase; buy below market value.
- Reward is directly proportionate to the risk involved.
- Avoid functional obsolescence unless you have a cure before you buy.
- Good property + good tenant + good investment = great investment
- Problems left unresolved have a tendency to get worse.
The Value Investor recognizes that rental property, when performing normally, generates reliability in cash flows and capital appreciation.
In determining the right price range for rental purchases, the investor needs to research what rents best and what will ultimately sell best. The rent is critical to the income during the holding period, and holding or increasing its value is important for the proceeds at the end of the holding period.
Generally, lower price range properties will rent for a higher percentage of value than higher price properties as shown in the table below. The prudent investor will examine and confirm this theory for their individual market.