Investing in South Bay real estate does promise attractive profit potential, but in order to be successful, you’ll need to do your homework before you go purchasing investment property. South Bay real estate is a unique asset compared to bonds, stocks and mutual funds because it has four distinct components of investment return: appreciation in value, cash flows, income tax benefits and mortgage principal pay down. However, it is important to keep in mind that just because there are several different components of returns, it doesn’t mean you will necessarily earn money on your own South Bay real estate investments. The primary reason people lose money on their investments is because of insufficient research and analysis prior to their decision making, which can lead to unmitigated risk issues, among many other things. Before you dive into investing in South Bay real estate, understand what each one of your expected returns actually means.
Appreciation in Value
The majority of investors make the mistake of thinking that simply buying a property and holding it for a period of time means that when they turn around and sell it, it will realize a significant profit for them because it will have appreciated in value. If the last decade has taught South Bay real estate investors anything, it is that real estate doesn’t necessarily go up in value; in fact, in can go down quite a bit. In order to realize profits from value appreciation, you should plan on holding onto a property for at least 15-20 years.
To clarify, successful South Bay real estate investments have positive cash flows, while unsuccessful real estate investments – meaning ones you not only lose money on when you go to sell, but actively lose money on throughout ownership – have negative cash flows. Most seasoned investors pencil out their deals, which in essence are simply cash flow projections, in order to see how profitable each one is. The best way to ensure an investment will add to your wealth is if it has true positive cash flow.
Income Tax Benefits
Owning rental properties does have a number of potential income tax benefits, which means you pay less tax than you would have if you didn’t own the property. The unfortunate reality is not many investors know how these tax benefits work. Before you bank on tax benefits, it is worth consulting with a tax professional to see if you stand to gain.
Mortgage Principal Pay Down
If you use a mortgage to purchase your property, odds are it is an amortizing mortgage, which means you may realize some return. Each monthly payment you make pays your accrued interest plus some of the outstanding principal loan balance. The principal payment is pure investment return; however, it does not provide positive cash flows, so you aren’t going to realize cash you may need to pay your utility expenses each month.
While the wealth involved in South Bay real estate investing is largely based on long-term gains, rental properties offer a cash flow component that can help you realize profit immediately. Your investment should at least generate enough income so that you break even in terms of your mortgage payments, utility expenses and other costs to keep up your home.