First of all, it’s relatively simple. You can diversify your investment portfolio and make money without having to be a day trader.
2 Reasons Why You Should Invest in Real Estate
- RETIREMENT. Rental properties offer the opportunity to generate extra cash in post-work life. If you purchase at least 15 years before you retire and you put down 20%, you collect income while your tenant pays off your mortgage. Once you retire, all of the income that comes from that property is yours, sans expenses.
- COLLEGE EDUCATION FUND. I have one client who buys a rental every time they have a child. They pay off the house (with rental income) by the time the child graduates from high school. The income that comes from that rental after that funds that child’s college education OR, they sell the house and the child uses the profit to pay for college.
How It Works
- CASH FLOW. It generates monthly income. It’s an ideal way to supplement your income. You can easily produce an extra $200 to $1,000 per month after expenses until it’s paid off. By expenses, I mean mortgage, taxes, insurance maintenance and property manager (if you don’t want to manage it yourself). Rental rates increase over time as will your cash flow.
- DEPRECIATION. Depreciation is a tax write-off. The IRS lets you depreciate the building portion of your property (minus the land) over 27.5 years, which means much of your cash flow will be tax-deferred. You'll have to recapture that depreciation when you sell, but if you never sell it and you own the property when you die, all that depreciation goes away. Your heirs won’t be responsible for it.
- APPRECIATION. Over the course of time, analysts predict a 3%-5% increase. I always calculate 2% when I’m crunching numbers, just to be safe. Even if it goes down, you still have appreciation over time. Real estate is a long term, or hold strategy, investment.
2 Simple Rules
- Put a minimum of 20% down.
- Always make sure you’re going to break even or realize a positive cash flow.
I can help you crunch the numbers. Here’s an example:
|$43,000||Initial investment (includes closing costs and initial renovation costs)|
|$164,000||Loan @4.5% 30-year, fixed rate (I get 30-year loans for mine and then pay additional principal each month)|
|($830.96)|| Monthly principal and interest payments|
|($243.25)||Monthly taxes and insurance payments|
|($70.00)||Monthly HOA fees (if any)|
|($50.00)||Monthly maintenance, repairs, prop mgmt., utilities|
|$1,400.00||Monthly rental income (minus vacancy rate which is SUPER LOW right now)|
|($1,194.21)||Total monthly expenses|
|$205.79||Monthly cash flow|
Here are the 5 Major Benefits of Owning this Sample Property
- Cash Flow: $2,469.43/year
- Leverage: You own real estate worth $205,000 with a cash investment of $43,000.
- Debt Reduction: $2,645.69 in principal reduction the first year. In essence, the tenant is buying you the property and giving it to you at the end of the loan. Return on Investment: $2,645.69/$43,000.00 = 6.15%
- Tax Savings: $6,453.70 approximate depreciation per year (assume 85% depreciable and 27-year straight line depreciation). This means that your income from this property may not be subect to tax.
- Appreciation: If your property goes up 2.0% in value this year, it will increase $4100.00. Return on Investment: $4,100.00 / $43,000.00 = 9.53%
Possible Total Return on Initial Investment (after first year):
- 5.74% From Cash Flow
- 6.15% From Principal Reduction
- 9.53% From Appreciation
All of the above equals a 21.43% Total Return on Investment JUST IN THE FIRST YEAR! We’re hard pressed to find those kinds of returns on other investments in the financial environment right now.
When this property is free and clear, you will realize nearly $16,800 a year. Of course, by then the rents will probably be a lot higher, as will the property’s value…so will your annual return on investment.
I can do calculations for you that will show you how these numbers grow from year-to-year so that you can see it in black and white. What are you waiting for?! Call me.