Create cash flow and build equity
The main goal of investing a piece of real estate (other than your primary residence or a private vacation home) is to either create positive monthly cash flow, build equity or both.
BUY AND HOLD
One proven method for creating positive cash and building equity at the same time is to buy and hold.
With this strategy you simply buy the property and lease it out. It can work with commercial, residential and raw land property. You own it, but someone else pays you monthly for the right to occupy the property and / or use the space.
In some instances you can purchase the investment property that already has a tenant who have signed a lease agreement with the previous owner. This puts rental income in your pocket on day one.
While you own the property and employ a buy and hold strategy, your investment property is paying you a return in two ways. First, it pays you monthly income while you have a renter or tenant leasing the property. Second, as you hold (own) the property and collect lease income (cash flow), over time you stand the chance of the property increasing in value (build equity), thus allowing you to potentially sell the property at a later date for more than you invested initially.
BUY, IMPROVE & HOLD
A variation of the ‘buy and hold’ strategy is the ‘buy, improve and hold’ strategy. The only difference between the two is that the later might take more capital and work in the beginning but has the potential to earn you more in the future. Let me explain.
A ‘buy, improve and hold’ strategy looks just like the ‘buy and hold’ strategy from above, except in the fact that some improvements can be made or must be made on the front-end of owning the property. With these improvements you must see a return on your investment or else why do it?
With the ‘buy, improve and hold’ strategy you stand a chance of increased rental income than compared with the rental income from the unimproved property. In addition to greater cash flow, the improved property stands the chance of an increased sales price down the road.
Some of the improvements can be physical in nature such as structural repairs, adding additional square footage or adding amenities. Other improvements can be made through use or zoning changes.
REINVEST YOUR INCOME
Regardless of the approach you take with your Fresno area investment property, your goal should be to sell the property in the future for more than you purchased it, thus creating a profit. It is this profit that is a result of increased equity.
You can realize your goal of increased equity in the property, in one of two ways. Market conditions can raise the value of the property over time, thus creating equity in the property while you own it. And second, you can increase your equity by reinvesting the cash flow you receive from your renter back into the property by paying down the loan.
BE A DEMANDING OWNER / INVESTOR
If you are going to invest in Fresno area real estate be demanding in the sense that you will not violate the most important rule: Create positive cash flow and build equity.
Joseph Hollak is a Realtor living in Fresno California and working for Keller Williams Realty Fresno. He blogs and tweets frequently about real estate related topics in the San Joaquin Valley of California.
3 Comments
jimmbo / 10 Mar 2010 / 11:41 PM
VanyK / 13 Mar 2010 / 1:31 PM
Investment property quick formula by Fresno real estate agent, Joseph Hollak / 08 Feb 2011 / 9:06 PM