Did you know that real estate has created more millionaires than any other industry in history? As much as 90% of the world’s millionaires have this status because of real estate. Unless you actively invest in it, though, you may not realize just how lucrative this investment can be. Many investors generate returns of 30% or more annually, whereas the average stock market return sits at just 7- 8%.
Why is Real Estate Investing so Lucrative?
You probably want to know the secrets behind real estate investing. What makes it so special? How are investors able to have such incredible returns each year? It comes down to a few distinct factors:
- Appreciation – The U.S. Bureau of Labor Statistics reports that housing prices increased an average of 4.23% annually from 1967 – 2019. A $100,000 home 10 years ago will likely be worth at least $142,000 today and that’s with no further investment or work on it. That’s natural appreciation.
- Principal reduction – Every mortgage payment you make, you reduce the principal, which increases your equity. The best part about it is that you aren’t paying the mortgage –your tenants pay it.
- Cash flow – This is where the money’s at, literally. After you pay your mortgage, pay the taxes and insurance, and do the repairs, you should have a positive cash flow. For example, if your property brings in $20,000 in gross income annually, and the home costs you $16,000, you have $4,000 in passive income or cash flow and still own the investment.
- Depreciation – We may not love Uncle Sam, but he does offer real estate investors such good deductions. You can depreciate the ‘useful life’ of a home over 27.5 years. Keep in mind, this only pertains to the home’s value, separate from the land. Let’s say you bought a home for $200,000 and its land value is $25,000. You can take depreciation of $175,000/27.5 or $6363.36 per year. This comes right off your taxable income and may save you as much as $950 on your taxes.
- Leverage – You are able to use ‘other people’s money’ to buy an investment property, aka the bank or mortgage lender. Typically, you need at least 15% down on the property, which means 85% of it comes from someone else’s pocket, yet you realize the cash flow and profits.
A Real World Example
According to Dawn Ezold, Realtor at Real Living Associates, the average cost per unit for a 3-bedroom apartment is $80,000 and will rent for $1,200 per month in the Springfield, MA. area. Given these numbers, we’d expect a 3-unit property to cost $240,000 with gross rents of $43,200 per year. After accounting for taxes, insurance, water, sewer, vacancy, and repairs, you’d be left with around $24,000 before the mortgage.
Here’s the breakdown:
- – Purchase price $240,000
- – 15% down payment = $36,000
- – Closing costs = $4,000
- – Total out-of-pocket $40,000
This leaves you with a loan amount of $204,000 and at 4.75% interest, you’d pay $1,064 per month or $12,768 per year.
How’s that work out for you? Check out the calculations:
- – Cash flow = $43,200 (gross rents) – $19,200 (taxes, insurance, and utilities) – $12,768 (mortgage payments) = $11,232
- – Appreciation = $240,000 x 1% (being conservative) = $2,400
- – Principal reduction = $3,400 with an outstanding loan amount of $200,600 at the end of the first year
- – Tax savings = $200,000/27.5 = $7,272 * 15% tax rate = $1,090
Totaling it all up, you get a total return of $18,122. If you compare that to your $40,000 initial investment, you’ve earned a 45% annual rate of return.
Advice From a Professional
I recently interviewed Donnie Weichel from Guaranteed Rate to get a feel for the current investor environment. Here’s a synopsis of our conversation.
What financing is typically available for non-owner occupied investment properties?
We have an endless number of loan programs for investors. Whether you need an adjustable rate to take advantage of the low introductory rates, a 30-year fixed loan, or bank statement loan (for self-employed borrowers), we can help. It’s always best to speak with a mortgage professional to determine your best options.
What are the down payment requirements?
Typically, we require between 15% – 25% down, but it depends on the situation and what you’re trying to achieve.
What are the current interest rates?
Investment properties pose a higher risk than primary residence loans do, so we typically charge 0.5% – 0.75% higher rate than the typical rate. Today, average rates are around 4%, putting investment rates around 4.5% – 4.75%.
For people looking for options, more information, or to get pre-approved, what is the best way to reach you?
You can reach me either via email at Donnie.weichel@rate.com, via phone at 413-726-8070 or by visiting my website at www.rate.com/donnieweichel.
Finding a Great Realtor
Having a responsive Realtor to work with is key. You need someone who will actively seek out the properties that meet your requirements and notify you the minute they become available. The following list of Realtors I have personally worked with and I highly recommend.
- Dawn Ezold – Real Living Professionals (860) 543-3266 – CT and Western Ma
- Kris Cook – Rovithis Realty (413) 244-1143 – Westfield and Southwick areas
- Tracy Cyr – Gallagher Real Estate (413) 204-2971 – Holyoke Area
- Pam McCray – Real Living Realty Professionals (413) 544-1366 – CT and Western Ma
- Carlos Ramos – Kelly & Katzer Real Estate, LLC (413) 204-1506 – West Springfield area
I have been investing in Real Estate since 1998, in that time I have fixed and flipped, built new construction, and bought and sold raw land. I do not claim to be a tax or legal expert, but in my opinion buying, holding, and renting your property can result in 30%-50% annual returns and is an investment that’s hard to beat. Please feel free to ask a question or leave a comment below,
Paul
Leave a Reply