When compared to other investments, why is real estate one of the best investments a person can make? It’s tangible, it offers immediate returns if rented, you have local knowledge of the market, and best of all it can be leveraged with a mortgage. Let’s walk through the steps and see what the upside potential for your real estate investment would be:
- You’re buying locally and have a great real estate agent (or you are one). You tell them you’re looking for a short-sale or foreclosure for a steal in a good neighborhood with low crime rates and good schools. (Sound familiar?)
- They find several possibilities, all short-sales where the fair market value of the house is around $100,000, but you can purchase it for a little less.
- Recognizing that short-sales can take months, you submit $90,000 offers on multiple properties, with the option to rescind the remaining offers once one is accepted.
- You purchase a house for $90,000 with a down payment of 20% or $18,000, plus $2,000 in closing costs. Total cash invested = $20,000
- Because you live locally, you don’t need a rental management company. You run an ad yourself, and find a good tenant that’s willing to rent for $750 a month. (The same amount as your monthly PITI Payments). On average you only have to do this once every 4-5 years, as that’s the national average for house tenants.
- Your rental income offsets expenses for PITI and begins about the same time as your first monthly mortgage payment.
- You’re able to depreciate the property for tax savings and each year the rental rate increases 3%, the national average, which you write into the lease agreement.
- You take the refund from tax savings and the profit from the annual increase in rent and set it aside to pay for future repairs and maintenance.
- You’re total investment is still only the $20,000 you paid when you purchased the home.
- The home appreciates at 5% per year, which is considered to be average.
After thirty years, the home is now worth $432,194.24 and you’ve used your tenants’ money to pay off the mortgage. Congratulations you now have $432,000 in assets to use for retirement! It could be even more based on the fact that appreciation could be in the double-digits for the first few years as we recapture lost appreciation from the real estate market overcorrection. If you didn’t have a 401k or other money set aside for retirement, you can just buy a second rental home and voila! You now have nearly $1 million dollars to use for retirement.
What other $20,000 investment will pay out at that kind of rate? Why is real estate such a good investment? Because your purchase can be leveraged. The huge questions that still remain:
- Why haven’t you purchased rental property yourself?
- Why haven’t you helped your children and relatives purchase rental property??
- Why haven’t you recommended every past client, advocate and everyone else in your sphere of influence purchase rental property???