For those of you that are considering investing in real estate I will discuss three reasons that I know, based on my experience, make investing in real estate something that you should give serious consideration to.
Reason 1 - Someone (your tenants) will be BUYING YOU A HOUSE! I bought my first rental house October 7, 2005 for $121,500. With closing and settlement costs my initial cash investment was probably around $30,000 - keep that number in mind. Fast forward to the present............the value of the house is now approx $140,000 and the mortgage balance has been reduced to $63,000. If I were to sell the house now (after paying realtor professional fess and settlement costs) I would net approx $70,000. So the initial $30,000 will have grown to $70,000..........not bad, but that's not that exciting. Now if I stay the course for another 6.5 years when the mortgage balance will be paid off and assuming the house appreciates in value 1.5-2% a year......the initial $30,000 investment will have grown to $150,000. Now THAT is pretty exciting!
Reason 2 - FREE CASH FLOW. Free cash flow is what is left over after you collect the monthly rent (A), pay the monthly mortgage note (B), and retain the balance (C)......in other words A - B = C. In my real world example I collect $1,250 per month rent, the monthly note is approx $950, leaving $300 per month free cash flow. REAL WORLD CONFESSION - there will be additional costs that come up from time to time and sometime you may go a month or two without a tenant. So to be very conservative, let's say that 50% of the free cash flow will be put aside for maintenance and vacancy contingency and 50% put into another account. The other account might be a college tuition fund. So again in my case, 50% of $300 ($150) per month is put in a contingency account and $150 is put in a college tuition account. $150 x 12 months = $1,800........that doesn't seem like much - but over 13.5 years it comes to $24,300. If I stay the course another 6.5 years the amount will be $36,000. So after a total of 20 years of someone else paying the mortgage AND providing a modest monthly free cash flow, the initial $30,000 has grown a value of over $180,000! I can't think of a better way to fund a child's future college tuition cost than investing in a quality rental property and finance it with a 15 - 20 year mortgage.
Reason 3 - TAX BENEFITS and DIVERSIFICATION of INVESTMENT ASSETS - ok......that's actually two reasons. I'm not going to go into detail on these factors. I would suggest you consult with your tax advisor and or financial advisor and discuss these additional reasons. The short answer is: there are tax benefits for property depreciation, insurance cost, maintenance cost, etc......additionally investing in real estate can provide stability and security in your overall investment portfolio.
Bill Arey REALTOR
The Pat Wattam Team