Income Properties: 4 ways to make tons of money
So you want to make money with income properties? Here’s 4 ways to do it.
So you want to start investing in income properties now? Great choice! Just like investing in the markets, income properties are all about one thing; time in the market. The best time for you to buy is now and the best time for you to sell is a long time away.
Real estate is similar to many investments in the fact that you cannot time the market. Analysts and the general public often get this wrong. Usually when someone does get it right, it was by pure luck and they’ll never be able to duplicate that performance again. In Canada, for example people have been talking about the bubble bursting in Vancouver and Toronto for as long as I can remember but from January 2015 to January 2016 they’ve still increased by 30.9% and 14.2% respectively.
It’s been any day now for those bubbles to burst for over a decade and they’re still booming. This brings me to the first way to make money with income properties.
1. Passive Appreciation
Passive appreciation is also known as market appreciation. It’s probably the most obvious way of making money with income properties. You buy a property, whether it be land, commercial or residential real estate and you hold on to it. Over time the value of the land goes up (After all they’re not making any more of it!) and on paper you’re net worth increases due to the increased equity in the property. It’s called passive appreciation because it just happens, you cannot control the market surrounding your property.
Passive Appreciation isn’t the only way your property will appreciate, you can also force appreciation.
2. Forced Appreciation
Forced appreciation is also known as active appreciation. Some investors have also used the term value plays for this type of appreciation. Basically it’s spotting value that can be unlocked in a property, which is a very broad situation but here are a few things you can look out for:
- Buying a property for cheap due to bad management or burnt out landlords (Bank foreclosures fall into this category as well)
- Turning around an income property that has suffered from high vacancies when compared to others in the area.
- Reducing high expenses. This can be through many avenues such as renovations to reduce utilities or making the tenants responsible for utilities, or eliminating a high fee management company or many other reductions.
- Renovations to bring the property to a higher standard.
Basically, active appreciation is anything you can control that will increase the value of your property. My first property was a good example of active appreciation. The house was full of hideous color choices that left it on the market for much longer than any of the units surrounding it.
3. Principle Recapture
Now in my opinion these next two are where the real money gets made. Principle recapture is the act of increasing your equity by having your tenants pay down the principle on the mortgage via their rent. Basically, the mortgage portion that isn’t interest increases your net worth every payment cycle. It’s pretty simple and fantastic when you see the equity increase in your income properties.
4. Cash Flow
Here’s the cream of the crop. Cash flow is by far the most important and best way to make money with income properties. Cash flow is basically the rent you take in each month that exceeds your monthly expenses. If you take in $1000 each month in rent and your mortgage, taxes, insurance, etc all equal $800 then your monthly cash flow is $200.
Cash flow of course can be negative, but if your cash flow is negative you don’t want to own that property because it will cost you money each month and there are no guarantees that the appreciation will cover these losses once you sell.
A positive cash flow will also help build a down payment for your next income properties, which will help you earn tons of money in your future.
Do you agree that Cash Flow is the most important way to make money with an income property? Let me know your thoughts in the comments below!