Property Investment - Part I To Max your ROI
Three ways to maximise your ROI when purchasing investment property
– Part I
By Joel Teo 2006 All Rights Reserved
Property Investment is one of the oldest forms of wealth accumulation and should always be part of a larger portfolio of investments so as to balance out your risk. However, unlike other paper securities, the financial value of a house or for that matter any other investment property does not vary very much. Granted it may increase slightly over time or drop a little during a property slump, but this is marginal. That is why banks over time created a separate type of loan for real estate as opposed to other forms of movable chattels and this is the mortgage. This article series will highlight for you three ways to make more money and maximise your return on investment (ROI) when purchasing your property.
The first method is for you to increase your ROI by using leverage from the bank. When you purchase with your own money and then use the bank’s money to pay for the rest of a property, the return on investment would be the total cash flow minus the interest paid out to the bank and this would trump purchasing the property merely using your own money. So in other words, your return on investment would increase because you are in effect using less money to make more profit and this is the basis of the concept of financial leverage in real estate investing.
A separate spin on this idea is for you to always divide up your initial capital into several lots and purchase several plots of property at the same time and generate several cash flows from your property investment. Note that while doing this, always have an eye out for which part of the property cycle you are purchasing in. If you purchase a property during the rental boom years, there is a chance that your cash flow calculations might not hold during a downturn in the economy, thus always take a more conservative outlook to your cash flow calculations.
In conclusion, using financial leverage from a mortgage can be used as a way to increase your return on investment. However, mortgages are complex instruments and the best way for you to get the best deal is to find a mortgage broker who can then do the maths and determine the best mortgage for your particular property investment. Remember its not how much you make in gross from your rental property, but how much you get to keep after taxes and interest payment that is key to making money from property investment. This is a three part series and we will continue in the next article on how to buy a property at a bargain and boost your property investment ROI.
Joel Teo is the author of this three part investment property series. You can find Part II of this investment property series at the investment property series article 2. The Property Investment Resource provides more property investment articles at the Property Investment Article Directory
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