An asset should generate a cash flow. If an asset does not generate income, then we think of it as more of a liability. For instance, a car may be a necessity and useful in everyday life, but it’s not an asset that generates income or gains in value. Most things you own are depreciating on a daily basis. Stocks, bonds, real estate, and precious metals are examples of appreciating assets.
Rental property that streams income month to month and year to year has been shown for centuries to be among the most consistent, reliable and predictable sources ofincome and appreciation. Real estate differs from most other appreciating assets in one major way: the use of leverage. Leverage allows us to control 100% of the asset while investing just a small down payment. However, over leveraging can be fatal. Over estimating income and underestimating expenses is one of the most common mistakes that new investors make.
More and more people are realizing that investing in income property will bring excellent long term capital gains. However, proper management in your real estate investing is truly crucial. It can make all the difference between a good investment and a poor experience. Most people don’t realize just how important investment property management is.
Keeping your investment property in good condition is vital if you wish to see a good return on your investment and wish to retain good tenants. On- going maintenance and upgrading should always be a top priorities.
Our current low interest rate environment tempts some tenants to become homeowners and prompts more developers to build competing properties for the market place.
This is what is taking place right now on the Peninsula. A few thousand residential rental properties are becoming available. Remember, the investment real estate market is cyclical like most markets.
The rental market is still tight, but not as bad as it was 6 to 12 months ago. The new units have offered some relief. Residential real estate has seen unprecedented appreciation over the last couple of years. Rent prices have followed with an average two bedroom one bath unit renting for between $2,500 and $3,500. An average one bedroom apartment is renting for $1,950 to $2,500, and in some cases even more.
Most of us are busy just trying to figure out a way to increase our income. This, of course, is a good idea. But perhaps you should also spend some time working on increasing your appreciating assets. Remember, income is taxed. Appreciating assets are only taxed when they are sold.
This article was published in the San Francisco Examiner.
Articles are written by Eric Ruxton and Larry Aikins, owners of Terrace Realty, Inc. and Terrace Associates, Inc. in Redwood City. Terrace has been in business more than 55 years and in addition to being an independent Brokerage Company, also owns and operates rental properties.