What Are Income Producing Properties & Why You Should Invest in Them

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Let’s face it, most people invest in real estate because of the ludicrous Return on Investment (ROI) it offers. While it is not wrong, but one needs to wait for at least a couple of years for the property to appreciate to the desired level.

For those individuals who cannot wait that long, Income Producing Properties, or simply Income Property is a good alternative as it offers easy money quickly. This is why many real estate gurus consider these properties the holy grail of the real estate world.

  What exactly is an Income Property?

This type of property is bought or developed for only one purpose – to function as a source of income by putting it up for rent or leasing. It can be either Commercial or a Residential estate.

 

It is a good option for the people with limited knowledge about the intricacies of the real estate world. They can easily generate good revenue in the long-run without taking any risks. If done right, it allows people to build a passive income stream which keeps on increasing.

  Why invest in it?

Here is a quick question for you. What business do you think McDonald’s is really into? If your answer is fast food chains, then unfortunately, you are wrong, just like most other people. It is actually the real estate business which rings in a considerable part of the firm’s total revenue.

 

Most of us do not realize the fact that McDonald’s is not actually a ‘burger-flipping’ food chain. Well, it sort of does that too, but only on the surface. As a matter of fact, McDonald’s former CFO, Harry J. Sonneborn was even quoted saying, “We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”

 

Here is the strategy which Sonneborn devised, and McDonald’s continues to use till the present day. Instead of selling supplies to their franchisees or demanding enormous royalties to make money, McDonald’s Corp. became landlord to its franchisees.

 

They bought properties and then leased them out with big margins. They also took a percentage of each shop’s gross sales along with the rent. This way, they used income producing properties to become a corporate entity with a net worth of over $100 billion!

  A few words of wisdom.

Now that you’ve got the idea that investing in income property is worth a shot and has the potential to turn the tides, how will you enter this highly-rewarding game? Is it really meant for you? Continue reading to find out!

 

If you want the maximum Returns on Investment (ROI), then you will be better off making a high leveraged investment. Leverage, in simple terms, means you put in a relatively small portion of your own funds and borrow the rest from a lender.

 

Take a look at the following example to understand how leverages can multiply your potential earnings: Let us suppose that you have $10,000 which you want to invest in a property. You can use leverage to borrow $90,000 from a lender. This leaves you with a sum of $100,000 with which you buy a house worth the same amount.

 

Let’s assume that the price appreciates at the rate of 5% per annum. This is how the numbers are going to look on yearly basis:-

Year 0 – $100,000 Year 1 – $105,000 Year 2 – $110,250

… And by the 10^th year, it will become $162,889, which means an appreciation of almost $63,000 on your initial investment of $10,000. That is a massive return of over 600%!

  The key to success.

Purchase a plot or property, make the necessary changes with minimal expenditure, and then cash in by putting it up for rent at a fee higher than the set mortgages. This is the methodology adopted by many people who have the resources but cannot afford to wait for many years to get the desired returns.

 

Let’s take another example. This time, you ventured into the territory of income producing properties and bought a small office and gave it to a tenant firm. You charge the occupant $1,100 a month as rent and your PITI payment is (Principal, Interest, Taxes, and Insurance) amount to $700. This leaves you with $400 which goes straight into your pocket!

 

Even if you assume a loss of 10% on the rental income ($1,100) due to maintenance and vacancy costs, you will still be left with a $290 profit every month.

 

This was a little insight into income properties and how you can benefit from them. To maximize your income, invest in a region that is short on rental estates. This will ensure that your property doesn’t vacant for long and you can enjoy a sustained income. To learn more about income producing properties in CA, contact us today!

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