Its very important to be cautious when buying any investment. With real estate I think you also need to decide if you have the personality to work with people of all types. http://www.fool.com/news/commentary/2004/commentary040205SM.htm?source=mppromoBut that aside, let me prove to you that real estate if done right can be much better than stocks. Imagine you find a property for $150K and determine the cumulative rents would be $2500/month.Ok, most mortgage programs will allow 10% downpayment or $15K down but a few will allow 5% or $7500. Lets asume you can get the seller to pay your closing costs and you finance $135000, with 10% down. You take a 30yr note at 6.25%. The P&I is $831.22, lets assume taxes of $3600/yr or $300/month. Insurance on rental property is high so I'm going to be conservative and assume $1200/year or $100/ month. You'll have PMI insurance to pay, that'll run say $85/month. You will also need to pay utilities, repairs, cleaning, management fees (if you don't want to deal with this your self.) On another post I read where someone paid 10% of rents toward a mgmt. fee so thats $250. For repairs, utilities, and cleaning it might run another $200/month.Lets add this up: 2500/month in rentLess: 832 P&I 300 Taxes 100 Insurance 85 PMI Insurance 250 Mgmt Fee 200 cleaning/repairs/utilities--------- 1767 total expensesTake 2500 gross rents and subtract 1767 expenses and you come up with 733 free cash flow.How much did you make?Well your investment is $15K not $150K, remember your using your good credit to leverage yourself to make money on the banks money. So take 733*12= $8796. Year 1 you make $8796 or 59% cash on cash. Yes you read that right 59%.But we're not done. The property you bought happens to be in a good neighborhood and it appreciates 3%. Thats reasonable, right. So at the end of the year the property is worth $154500. WOW, you made another $4500.So 8796 cash + 4500 equity =13296 /15K you've earned 89% on your initial cash outlay.But, we're not done....There's more. Because you've made the payments ontime you've paid down the principle on the loan, with your tenants money, by 1581.95. Wow, you made another 1581.So add 8796, 4500 and 1581 =14877 /15000 and you get a 99% return by the end of the first year.Once again, we're not done. The building has a tax value of 70K, vs land value of 80K. The IRS, will allow you to depreciate the value of the building only, over a period of 22.5 years. (Consult your tax advisor). So, 70K / 22.5 = 3111. You've just lowered your income (for tax purposes) by 3111. Not bad. Now, when you sell, the IRS will recover the depreciation against the sales price. Again, consult a tax advisor. This part isn't exactly my specialty.Some other points, if you're lucky year two you can raise the rent. The 4500 and 1581 is equity, you can't get to it unless you re-finance or sell. But hold the property for 5 or more years...well you see what could happen. The property appreciates 2-4% per year and you're paying down the principle with rent money. This is not a get rich quick scheme, there's hard work involved. Real Estate is not like buying stock, you cannot buy a property and forget about it for 10 years. But with proper analysis you CAN predict, with reasonable accuracy, the results of your investment. Disclosure: This is a real investment. I own this property. I estimated some expenses on the high side. The only differences are that I manage it myself, saving the $250/month and I bought it with 5% down.Lastly, refering back to the beginning, this is hard work, you must be able to deal with all kinds of situations and the single hardest thing is finding a property where the numbers work. I am constantly looking, I mean every day. And I see maybe 5-6 a year where the numbers make sense. And when I find them someone else is also probably looking. In 6 years I've bought 5 properties. But they all make money and I have flipped 2(most not as good as this one). But whats it matter, 50%,60%, 70%. Does it really matter?
I'll take REI any day over Stocks, but I'll still do both. There is no sure way to make money in this world, but I know they are not making anymore land.David
<<Imagine you find a property for $150K and determine the cumulative rents would be $2500/month.>>Yes, I can imagine and it makes me smile. But where the heck can you find property costing 150k and paying 2.5k per month? I'm happy to get 1% of purchase price per month (e.g. 1.5k per month on 150k purchase).Darren
Yes, I can imagine and it makes me smile. But where the heck can you find property costing 150k and paying 2.5k per month? I'm happy to get 1% of purchase price per month (e.g. 1.5k per month on 150k purchase).--------------------------I never did the math, but that is a nice round figure to work with.cat
There in lies the trick.In my area 3 bed 2 bath houses list from 100K up to 160K, most I see about 129K, they rent for about 900-1000 a month.Round figures are nice, but they should be REALISTIC round numbers.Mike
How do you manage $2500/mnth on a $150K house? In some neighborhoods around KC a $150k house will barely get you a three bedroom with 1 bath.Buffy (who cannot understand these numbers...)
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