Investing in Real Estate
We are certainly not experts in other areas of investing but we do know the real estate investing world well. There are basically two types of real estate investing just like any other types of investment. Short term and long term.
Short Term: Short term investing is certainly very common in todays market. Commonly called flips, these investors purchase homes either from a trustee sale or a wholesaler, fix them up and resell them for a profit. Sounds easy. There are a large number of investors competing for these properties and an increasingly shrinking supply of homes going into foreclosure or available at significant margins below as-repaired value. This is not to say that a great deal of money can not be made in this fashion but there is significant risk and holding costs that some investors fail to consider when approaching this type of scenario. Many investors also greatly overestimate the savings they will have by "fixing up" the home themselves. In addition, it is difficult to do a "flip" on FHA guaranteed loans eliminating many buyers and the investor usually has to operate completely with cash only transactions. Another variation of this scenario, which is much less risky, involves all of the above steps except for the resale portion. In this scenario, the investor sells the home again and carries the mortgage. This adds three revenue streams to the bottom line. The mark up of the price ABOVE market value, the down payment from the buyer offsets some of the investment, and the ongoing interest payments at 2 to 3% above current market interest rates which far exceeds the available rates in many investments.
Long Term: The person purchases an investment home in move in condition or follows the above steps for a fix-up home. They then rent the home out at market value. This has several major benefits. I will try to estimate the return on this type of investment over a long term.
Purchase Price-$100,000 Down Payment-$20,000
Mortgage Amount-$80,000 Seller pay buyers closing costs
Monthly PITI Payment at 5%- Monthly Payment-$588
Monthly Gross Rent-$950-1000
Vacancy Rate 5% Annual APPRECIATION-4%
If you look at the overall investment of $100,000 maybe this investment does not look like a great one. If there is a gross cash flow of $950-588=$362 x 12months = $4344 Gross.
If I then subtract the vacancy-$4344-$570(5% of the gross rent) equals a net income of $3744. Of course I can also subtract another 5% for maintenance which means $3744-$570 resulting in a net income of $3,204 or 3.2% on a $100,000 investment. Not very good UNLESS you add in a couple other factors. First of all if, I calculate in the depreciation of $2909 and caculate the tax savings in a 25% tax bracket to be $727 and I calculate the appreciation at 4% per year (Historic average) of $4,000 . If I add those up, I have $3,204 Net + $727 Tax Savings + $4,000 Appreciation, the investment nets $7,931 on a $100,000 investment or a return of almost 8%. But wait a minute, that is calculated on an investment of $100,000 but the investors actual cash out of pocket was only $20,000. If I calculate that investment it looks like this. $7,931/$20,000 = an astounding return of 39.67 %. No investment is risk free but while everybody is talking about gold being the safe haven and real estate and interest rates at or near historic lows, this is certainly an investment to consider and a great way to diversify a portfolio.