Beware those who love stocks. Beware those who love bonds. Beware those who love gold, oil, futures, and so on.
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.
Those numbers seem suspect in most cases, and most lenders will not left you get a mortgage that small, or they will charge a lot more in closing. And you need to consider vacancy, leasing costs, and maintenance.
12% is a good cash on cash return, but you also forgot to include some other big benefits of real estate:
– principal loan reduction as the renter pays your mortgage down
– appreciation in the property, especially if you are leveraged a 2% increase in value is a net 10% if you put 20% down
– depreciation. This is a huge tax benefit.
Right now is a great time to get property in the US if you can get the loans approved and pick the right area and properties. It is a long term play, but a great way to get a solid cash flow and increase your assets.
I will agreed with Adrian that it is a slower play than a successful business, but is working out well for us.
My partner and I put down $937,500 on strip centers. Our cash flow is $225,000. That puts our cash on cash at an astounding 24%! Suspect? Sorry, but it is a true story. Good terms from a bank.