Question Of The Day: Is It OK To Break Even In Real Estate Investing?

It needs no mentioning that the crux of real estate investing is to make money and build wealth long term.

Just like any business, to make money, you must have enough capital to kickstart your real estate business in the right direction. Taking out a mortgage loan with a 20% down payment is a popular option amongst most real estate investors. Some opt for hard money loans, or pursuing individual investors will do the trick. Regardless of which financing option you choose, the great thing about real estate investing is that you don’t need your own money to start investing, or to put it in better terms, you can invest in real estate with little capital.

Real estate investing is all about conducting the right real estate market analysis to guarantee positive cash flow properties and/or gain a surplus of cash returns to outweigh operating and total expenses. From analyzing real estate comps, cash flow analysis to comparative market analysis is key to a profitable real estate portfolio and long-term wealth.

Related: Investment Property Search: Dos and Don’ts

Mashvisor’s rental calculator saves investors time in deciphering whether an investment property will deem profit down the line. You can forget about manual calculations, all you have to do is plug in your numbers and let the calculator do all the work for you.

What is Breaking Even In Real Estate Investing?

In economic terms, the break-even point (BEP) is ‘the point at which total cost and total revenue are equal.’ To apply the BEP in real estate, it simply means the money put into buying and managing the rental property is equivalent to the total revenue the property generates. Long story short, breaking even in real estate investing is a zero-sum game; no win and no loss.

The break-even point in real estate investing involves the following factors:

1. Rental income
2. Operating expenses: property taxes, insurance, maintenance, and repair, etc.
3. Mortgage payments

Your rental income will cover the total costs of your real estate investment, without reaping a surplus.

The BEP: The inflow of cash = the outflow

Related: How to Become a Smart Real Estate Investor

Is it Okay to Break Even in Real Estate Investing?

YES! But, only in the short run. Real estate investing is all about making passive income and growing your ROI. If your rental property is not earning you a positive cash flow return in less than a year’s time, your investment property is not deemed profitable and it will only burn a hole in your pocket and not to mention, hinder your credit score if you cannot commit to paying off the loan.

To mitigate this risk, Mashvisor’s investment property calculator estimates the ROI to guarantee positive cash flow properties before real estate investors close in on a deal.

The interactive tool fine tunes your costs and allows real estate investors to enter their own numbers to arrive at the newly calculated returns, respective to their own budget and expenses. The investment property calculator also allows real estate investors to enter/amend:

1. One-time start-up costs
2. Recurring expenses
3. Mortgage payments

What is a Break-Even Ratio in Real Estate Investing?

In a nutshell, the break-even ratio is a quick measurement to help real estate investors decide whether or not a rental property is deemed profitable. Using the simple formula below, you are able to calculate the occupancy rate required to break-even on the rental property in question.

Break-even ratio = (Total operating expenses + Total debt service)/Gross operating income

Let’s assume the following:

Total operating expenses = $6,000

Total debt service = 12 x $1,600 = $19,200

Gross operating income = 12 x $2,500 = $30,000

Break-even ratio = ($6,000 + $19,200)/$30,000 = 84%

This becomes your benchmark; if you expect an occupancy rate less than 84%, you will incur a cost on your real estate investment. If the occupancy rate is equal to or higher than the benchmark, your rental property will reap you financial rewards down the line. To make things easier for real estate investors, Mashvisor provides estimates on the occupancy rates for both traditional and Airbnb rental properties.

How to Move Away from the Break-Even Point (BEP) in Real Estate Investing?

To increase your occupancy rate and move away from the BEP threshold, landlords/real estate investors must consider the following strategies to generate profit:

1. Appreciation

Real estate is a sound investment strategy because of the appreciation of rental properties over time, and investors can reap a big fat profit margin when they sell real estate. Location is the first criterion to capitalize on profitable real estate investments. And not to mention, positive economic indicators and a good neighborhood also reap long-term appreciation in real estate investing. As the value of rental property increases, real estate investors will be able to sell it for a big profit in a couple of decades. So even if you break even at the beginning, you can count on appreciation to increase your ROI.

2. Maximize Your Rental Income

In tandem with the previous point, there will always be demand for real estate because people will always need a place to live. With this in mind, the majority of real estate investments appreciate in value over time, respective to economic and market conditions. With appreciation, rental income also increases over time while your mortgage payments and operating costs remain relatively the same. In other words, your rental income outgrows your expenses with time. So even if your rental property is initially at the break-even point, you should expect an increase in rent down the line to move away from the threshold and make a profit in real estate investing.

Related:  Here is Why You Should Be Investing in Income Properties at the Beginning of 2018 If You Want to Make Money

Conclusion

Real estate investing is a profitable business reaping long-term financial rewards and wealth for many. Do not be discouraged if you break even in the early stages, so long you are rest assured your rental income and appreciation will make it profitable. Long story short, it is A-okay to break-even in real estate investing.

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