Investment in residential real estate can be approached in one of two ways: the fix-and-flip objective for a quick profit, or the buy-and-hold objective for cash flow and equity over time. The focus of this blog is the latter, the buy-and-hold objective for recurring income and accruing equity.
The placement of a hard-money loan in Los Angeles will benefit the investor at the time of acquisition, renovation, and securing a qualified tenant.
A portfolio of single-family residential properties can suit investors who want a hands-on approach or prefer professional management. Either approach will award the investor income, tax advantages, and the ability to grow a portfolio with leverage.
Investing in Residential Properties
The investment in single-family homes is sound. However, an investor must understand the process and timing to achieve optimal results. Because of the value-add opportunities in this asset class and the shortage of available housing in the Los Angeles market, the conditions are in place for investors to build wealth and income.
Even with the rising prices and interest rates, the rise in rental rates is a market condition. An investor must know that the rising interest rates will not affect the rates offered by a hardmoney lender in Los Angeles the same as conventional lenders, like banks and credit unions.
Benefits of Residential Properties
Investing in this asset class over the long term will benefit investors looking to build wealth and increase income. This objective takes patience and the proper use of leverage. The investor will come to realize cash flow, appreciation, and tax advantages.
1. Cash Flow
The monthly rent paid by a qualified tenant is the source of cash flow. The goal is for the rent to support the expenses relative to the property and the debt service. The remaining cash paid to the owner is known as passive income. For a property to be self-supporting, the rent must cover the following expenses:
- mortgage payment
- property taxes
- property management
- HOA fees
- vacancy loss
As the portfolio grows, the investor’s exposure to the risk of loss lessens, and the benefit of leverage increases.
2. Property Appreciation, Equity, and Value-Add
This section will explain the difference between appreciation, equity, and the value created by renovation.
Property appreciates over time from market conditions. Appreciation increases when values in the market rise. This type of value requires no action or investment.
Equity in a property increases as the mortgage payments are made and the principal is paid down. Every payment increases equity. The definition of equity is the difference in the property value and the amount owed on the mortgage.
The investor creates value-added equity during renovation. The property is renovated to improve its condition or add living space. A value-add opportunity is an action taken by the investor to increase value in real-time as opposed to a change in the market or paying down a mortgage over time.
These forms of value can be converted to cash when the property is sold or when a loan is refinanced.
3. Tax Advantages
An investor with a residential property portfolio will realize income tax savings. The costs of maintaining and owning a property are often deductible to offset the income generated from the property. These deductions can include the following:
- the operating expenses mentioned in Section 1
- mortgage interest, and
There needs to be a plan of action before these benefits are realized. The investor must be properly positioned to act upon the opportunities.
If you are considering creating a residential portfolio, then it is in your best interest to work with a reputable hardmoney lender in Los Angeles. PB Financial Group is a premier, direct hardmoney and bridge lender that has provided quick funding since 2007 and closed over 2,700 loans. We aim to efficiently satisfy your financing needs on important real estate projects throughout California.
PB Financial NMLS #357614/DRE #01522495