Most of all, beware those who love real-estate!
OK, so I invest in real-estate …
… but, I’m not in love with it.
Take a look at the above infographic [click to enlarge]; a picture (with numbers) tells a thousand words:
This person claims that they (or a client) bought a single-family home for only $35,000 and now clear (fees, insurance, and property taxes) $680 a month in rent.
Since they put in $7k in closing costs and rehab when they bought it, they are really returning $8k a year, which is 19% a year.
The key to real-estate is that you can add value.
To see what I mean, check out the highlighted items in the enlargement, below:
By spending just $5k in rehab, the purchaser immediately increased the value of the property by $18k, from $42k to $60k. Presumably, this similarly increased the rents.
The problem with this type of example is that it is unrealistic: this example assumes that you paid cash for the property.
Instead, I’ve made a ‘more normal’ example from this one, to show you how cash-on-cash returns really work, and why RE really is such a good investment:
[you can download the full spreadsheet here: https://www.dropbox.com/s/ujuqaptgrr8hssv/Simple%20RE%20Analyzer.xls]
This analysis confirms that it is possible to get a 19% Cash-on-Cash Return, but:
1. You need to have a 15 year outlook; the first year produces a loss,
2. The assumed rent is VERY high.
The reality is that most residential real-estate tends to produce negative returns in the early years, and capital gains over the longer term. Whereas commercial real-estate tends to produce higher earlier returns but lower capital growth.
Still, by purchasing well, adding value (e.g. through a clever & economic rehab) it is possible to produce fairly reliable (when compared to the up’s and down’s of the stock market) cash-on-cash returns that blow away most other consumer-grade investments.