Real estate in Dawson Creek is a fascinating investment vehicle these days. The question is, is investing in Dawson Creek real estate right for you at this time? Part one of this series will discuss real estate as an investment vehicle in general terms. Next week I will discuss the current state of the Dawson Creek rental market in particular. The week after that, I will discuss the risks and benefits of investing in Dawson Creek real estate right now. Each of these columns is designed to help you to decide if Dawson Creek real estate is the right investment for you at this point in time.
There are three different ways that you make money off of a real estate investment. 1. Positive cash flow is the amount of money going into your jeans every month after paying all of your expenses. 2. Mortgage pay-down is the amount of principal that you pay off of your mortgage every month when you make your payment. 3. Price appreciation is how much the value of your property rises (or falls, as in the case of price depreciation) over time.
When measuring cash flow there are a few considerations. You want to first establish what you can rent your property for in today’s market (gross revenue). Then you need to consider your expenses. Expenses include your monthly mortgage payment, taxes, insurance and any utilities that you are including in the rent (expenses). Your gross revenue minus your expenses is your net revenue. That is your cash flow. If that number is negative, or could consistently become negative in the future, the investment is very risky. Be conservative in your estimate of revenue and generous in your estimate of expenses in order to be safe.
The second form of income from a real estate investment is mortgage pay down. When you own a property and you have tenants they are paying down a portion of your mortgage every month. Keep in mind that in the first 5 years of having a mortgage most of the monthly payment is interest so this number is not as exciting as it seems at first. However, having someone else pay for an asset that you own is awesome.
The last form of income from a rental property is price appreciation. Price appreciation is the amount that your property increases in value over time. This number can fluctuate wildly due to an infinite number of factors. Prices can also depreciate over time. In a smaller community like Dawson Creek, price appreciation is a risky thing to bet on. However, so long as someone else (your tenant) is covering the expenses on your real estate any price appreciation is an added bonus on top of the other two methods of income that we have already discussed.
An important note about real estate as an investment is the value of leverage. Leverage is essentially the opportunity to make money off of an asset through borrowed money. It can be very risky (over-leverage is one of the beasts that destroyed the global financial system leading to the crash of 2008), but when used properly it can be very rewarding. If you buy $20,000 worth of shares on the stock market and the value of those shares goes up by 5% your shares are worth $21,000. You have made $1000, or 5%, cash on cash. If you use $20,000 of your cash to purchase a $100,000 property and the value of that property goes up by 5%, your property is worth $105,000. You have made $5000, or 20%, cash on cash.
These are some of the basic principals of investing in real estate. Dawson Creek offers a very enticing market in which to invest right now. With any investment there are rewards and there are risks. Watch this column over the next 3 weeks for specific information on why now is a good time to invest in our community and what you should watch out for as you decide to make your move.