Start Investing In Real Estate? Here’s Why
Few investment vehicles today can compare the rate in which one can build wealth through property investments. When compared to one of the most common forms of investment, stocks, and bonds, real estate offers a much lower risk to your investment money.
If you’d rather not get hands-on with repairs and remodeling, then look for turnkey properties that are already tenanted or rent ready. You’ll pay more for turnkeys but can start earning immediately after closing. Whereas, distressed properties will require various levels of repair and time during which the property is not earning any income.
Your IRA isn’t as safe as you’d like to think it is…
Most IRAs are still heavily invested in the stock market. If you were nearing retirement age in 2006/07 you know all too well how quickly your nest egg can instantly evaporate. Since that day, I swore I’d find an alternative to stocks and bonds.
Out of all the different forms of investing to grow through interest and value, the stock market is the riskiest place to be. Historical data seems to indicate that a stock market crash happens every ten years.
What many folks may not realize is just how much they are paying in fees inside of their investment accounts. Once I took a close look at how much I was paying in fees, I nearly choked. If you haven’t done this yet, brace yourself!
Increasing Value & Equity
Unlike most things such as a car, they decrease in value over time. However, real estate can and often does increase in value and equity over time. While other markets go in cycles, real estate has generally grown in appreciation over time. Provided you do your homework and purchase in the right location at the right price, you’ll see your investment
Rental properties are classified as “passive income producers” and a great long-term investment strategy. With rental rates rising, now is the best time to start your rental portfolio as a retirement strategy.
When done right, rental properties will provide you with long term income every month. With every rental property you add to your portfolio, your monthly income doubles, triples, etc., and so does your net worth.
A Physical Asset You Control
Call me old fashioned but there’s a deep sense of comfort knowing that my investment is a physical building that I have full control over. it’s not some abstract stock I have no control over that is constantly fluctuating with the latest headlines.
With every investment property you take on, you’ll quickly enjoy some great tax deductions you were unable to qualify for prior. Deductions include depreciation, holding cost expenses, property taxes, lender interest rates, 1031 exchanges and more.
Most property investors finance their investment properties at least in part. Careful calculation of all expenses and projected mortgage payments lets you determine just how much return on your investment you can expect to receive. Every month that your tenant is covering those expenses builds up the equity for that property and lowers your principle.
A Better Alternative
What I like most about real estate as an investment vehicle is that it’s a physical asset I can see and touch. I have full control what happens to it and I can build it’s value and leverage it in the future over and over again.
The trick to building wealth through real is to buy for cash flow first. Your main goal is to add to your monthly income as quickly as possible.
Buying turnkey property is the fastest way to do this. However, turnkey properties will be higher priced, especially if they are already tenanted.
Nonetheless, provided you’ve done your homework and may have also uncovered some untapped ways to build up the monthly income, all the hard work is basically done for you. More on this later…
For instance, single family home turnkey $100K, $1100 monthly income. Obviously, buying income property for cash places you in the best possible position to be in.
Let’s say your interested in a 900 SF single family home in Lansing, MI. Running costs (taxes & insurance) are about $185/month or $2220/yr. Assuming that tenants pay all utilities, which is something you’ll always want to strive for. That still leaves you with $915 a month.
What could you do with an extra $915 a month or $10,980 a year without having to work overtime hours or getting a second job.
In this scenario, your capitalization rate is as follows:
- Net Operating Income / Value = Cap Rate
- $10980 / $100K = 11%
Not too bad! Try getting an 11% return on your IRA. Now let’s look at a slightly different scenario where you finance the purchase.
- Purchase Price: $100K
- Interest Rate 4.5%
- Down Payment 3%
- Loan Term 30 yrs
- Credit Score: 660-719
The minimum loan monthly payment runs $475 approx, but property taxes and insurance are often rolled up into your mortgage payment which in this case would up your $655 still giving you at least $445 a month or an extra $5340 a year. Add to that the very nice tax write-offs you’ll now enjoy from your investment property.
Obviously, you’ll want to provide as large a downpayment as possible to keep your mortgage payments low and your monthly profits high. Every month that goes by, your tenants are paying down your mortgage and building up your equity.
Padding Your Retirement
Building your rental portfolio (vacation rentals and/or long-term rentals) with the purpose of supplementing your retirement income is the safest way to build your nest egg. Having a comfortable monthly income generated from my rentals gives me many more options and peace of mind when I decide to retire.
Now some people choose to invest in multi-family units and others in commercial real estate. Personally, I chose to stick with single family homes for vacation rentals and long-term rentals. Why? I’m already in my mid 50’s and hope to retire sooner rather than later. As such, I want to have a larger pool of buyers when I decide to start selling off my portfolio. I can do that with single-family homes because they appeal to both investors and homeowners and will be easier to sell.
Leave A Comment
Hey, I sure hope I’ve given you something to seriously consider here. I’ve been investing in properties since 2011 and I’m happy to answer your questions. So go ahead, leave a comment or a question.