Home Buying in Lido Key>Question Details

Ann, Other/Just Looking in Chicago, IL

Would like to hear your opinion - why some people say re is a great investment?

Asked by Ann, Chicago, IL Thu May 1, 2008

I am calculating and do not see it if there is no 'buuble' time. For instance I took a sale history of one condominium on Lido key. For 1988 to 1998 the sold price was almost the same - 2 to 4 thousand dollars different. Lets assume investor people paid association fee, special assessments, property tax, 2 times closing fee and %% for agents who sold the property. I am getting a loss, even if I assume the property was rented for half a year. The prices now came down a little, but still well above would be normal appreciation. Why would anybody say it is a good investment.
If we take for instance 300000 house, with it's homeowner insurance, 80% mortgage, property tax, closing costs. For how much should I rent it and how long to get appreciation from my investment?

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Ann,
I don't know what Carlton sheets are either, but I am a real estate investor and I have created a very nice living and tremendous wealth from properties. And, I have never put any money into any property that I purchased. Today these properties are worth millions and I owe much less in mortgages.
Compare that to taking your money and buying stocks or mutual funds (which I also do). It is much harder to accumulate wealth in the stock market because with a mortgaged property, you have the bonus of leverage. In other words, say you buy a $300,000 property which you determine is UNDER VALUE and at a good cap rate (I'll explain caps next) and you rent it out to tenants. Maybe you put down $50,000 on the property (remember I never put down anything). If the property increases in value by 3%or $9,000 and your mortgage declines in value $5,000 over the course of a year of tenant payments, your return is actually 28%! That is $14,000 divided by your $50,000 investment. That, Ann, is the power of leverage. What was Andy's return on his properties you ask? Try infinity because I borrowed the whole thing. It is like I made money from nothing.
The biggest problem that investors in property get into is they do not do any financial analysis when they purchase. Judging a property by a Cap Rate is a good tool to use. The Capitalization Rate is the Net Operating Income (NOI) divided by the Total Purchase Price. NOI equals All Rents minus All Expenses EXCEPT the mortgage. All Expenses is insurance, realty taxes, electric, gas, water and anything else you must pay for to operate your property (like advertising or lawn cutting, etc). I buy at cap rates only of 10% and higher. I even bought the resort I own at a higher cap than 10%. And, the higher the cap the better.
So, Ann, if you had bought a property in 1988 at a 10% cap rate and it only appreciated by $4,000, you would have still made a good return because your tenants would have paid the mortgage down quite a bit and you probably paid yourself a management fee out of the income.
That is why Real Estate is a great investment. Do your homework. Buy properly. Hold for 10 years. You'll make money even if the property doesn't go up in value and if it does, you'll make even more.
0 votes Thank Flag Link Thu May 1, 2008
Hello again Ann,

You cannot judge how valuable RE is as an investment by just looking at one property. You have to look at the ROI (Return on investment). If you were to purchase $300,000 worth of gold and its value went up to $330,000 the next year, you would make a profit of $30,000 but your return on investment would only be 10% because you paid 300K to get a return of 30K. Now if you had bought a $300,000 house with 20% down and you sold the house yourself a year later for $330,000, you would also have made $30,000 profit but your return on investment would be much higher because you would have spend only $60,000 (20% down payment) to make $30,000. That's a 50% return on investment. That's why wealthy people are wealthy. They use other people's money to make money.
3 votes Thank Flag Link Tue May 6, 2008
I discourage thinking about a home as an investment, but it's a happy circumstance that it is. It looks as though you did not look at the right factors. The following is how a home figures in as an investment, even when it does not appreciate at a very high rate.

First, it cost something to live anywhere, unless you curl up under a highway overpass. Therefore, the monthly payment should be largely discounted as a cost of the investment.

A lot of that monthly payment, the interest and taxes, are tax deductible too, and arguably are a premium a home owner receives on the investment.

The purchase of a home is typically also a leveraged investment. Home owner buy an appreciating asset by laying out only part of its value, anywhere from 0% to 20%.

Of course, closing costs figure in too, and the longer the home owner holds the property, the higher the return on investment.
1 vote Thank Flag Link Tue May 13, 2008
Hi Ann,

How many wealthy people do you know who do not have investments in Real Estate? You can go all over the world and this is going to be the common denominator. In the long run, RE always appreciate unless they install a power plant right next to you!!! Just talk to elderly people who have lived in their homes for a long time and you will be amazed at what they paid for their homes. The first place I bought in Montreal costs me $82,500. That was in 1980. This place now might be worth $800,000. In many markets, property values double more or less every 10 years. Just check around and you'll be quite surprised.

Michel
1 vote Thank Flag Link Tue May 6, 2008
As in every market there is a time to sell property and a time to rent. I understand what you are saying is that in a 10 year period the price of that particular property didn't change. But was the property rented out, if so what was the ROI, return of investment. If the home was rented out for 10 years with a profit of $350, that is a gross profit of $42K... Though some markets are experiencing great pricing and some aren't it all depends. As an investor you have to determine is it better to hold on and rent a bit more, or go ahead and sell...

Best of Luck:

Christina Solorzano;
CEO & SR Credit Repair Specialist at
Everlasting Credit Repair
Ex-Mortgage Banker of 10 years
http://www.everlastingcredit.com
0 votes Thank Flag Link Fri Apr 26, 2013
I also relocated from Chicago (Cubs Fan). I invested heavily in 2003 here in SW Fl. I was brilliant until the crash, however in hindsight, we should have seen it all coming. The bottom was hit last year and you should have bought then. We cant identify a bottom until it starts to recover. Never the less, It is still it great time to buy, due to the fact that, like Gold, Real Estate has intrinsic value. We will someday see the effect of the Fed's printing press on the US dollar and when inflation ineveitably rears its ugly head, things that have intrinsic value will increase in dollar denominated terms, not that they are getting move valuable, but rather the dollar is loosing its value. so for the long term, Yes buy something that is in limited supply and enjoy its long term rise against Fiat currencies.

I specialize in Cashflow investment properties that return a good ROI now, but offer a huge hedge against inflation in the future. Feel free to call me with any questions

Jules Roman
Broker/ Owner
Tarpon Coast Realty
1693 Main St
Sarasota Fl 34236
941.366.0000 office
800 376-1408 fax
TcrJules@gmail.com
http://www.TarponCoastRealty.com
0 votes Thank Flag Link Fri Apr 26, 2013
As a long term investment you will never lose on Real Estate. The cycle is like a bell curve. It goes up for a period of years and then may drop but it is supported by historical data. You can buy and it will appreciate given time.
0 votes Thank Flag Link Tue May 13, 2008
Real Estate is a great investment, simply because people need a place to live as a necessity, and that never changes. The population goes up, and more buyers are constantly coming into the market. Supply and demand is working at it's best. This is one of the ways a REALTOR can help, with the great knowledge of events and locations that would affect your home purchase. The laws for owning a home benefit you as a home owner, and the deductions mean that you live in house far cheaper than renting, and you have something that you own, without the limitations that sometimes come from rental. My advise is to use Real Estate as an avenue to build your wealth from an early age (18), and it will become a much better investment tool than the stock market or any other investment out there. Real Estate is truly a tool to get you where your are wanting to go in life.
0 votes Thank Flag Link Tue May 13, 2008
Michel identifies one of the best elements of real estate as an investment: the leverage. Yes, there are transaction costs going in and getting out. But you can control a property for virtually no investment (none at all via a lease-option). Even if you put 20% down, you're getting 5-to-1 leverage on any appreciation. And if you hold the property for awhile, say 7-10 years, the transaction costs become minimal.

You've cited an example where prices appeared to be flat. That's unusual during the time period you cited, or actually over any 11 year period. However, there's plenty of money to be made even when prices barely rise at all. Let's play with your example a bit. Say you have a $300,000 house. And let's say, in order for it to cash flow $100 a month, you have to put down a huge 33%--$100,000. And suppose you hold it for 10 years, and the appreciation is only 3% a year.

First, you're leveraging the appreciation 3-1 (you put down 33% of the purchase price). So you're earning 9% on your investment through appreciation. Second, you've got $100 in cash flow. Not much, but that's $1,200 a year. And, you'd probably raise the rent a bit each year. If you didn't, after 10 years you'd have $12,000 in positive cash flow. If you'd raised rents modestly each year, you'd probably have in the range of $25,000. Then there's the growth in the principle--every month your payments are going to principle and interest. After 10 years of payments, your $200,000 owed would drop to about $170,000 (30 year fixed at 6.5%). That's a $30,000 increase in equity, and that occurs regardless of market conditions.

And with 3% appreciation--that's an average over 10 years--the house would be worth $403,000.

So, as they say, let's do the numbers. You've got $103,000 in appreciation. You've got $30,000 in paydown of the principle. You've got $25,000 in positive cash flow. And yes (I'm not an accountant, so this isn't financial advice), while the cash flow is positive, you've been depreciating the house and deducting the taxes you're paying, so not only are you not paying taxes on this income, you're actually saving on your taxes. That's not too shabby. And the numbers get even more attractive if you buy right and can cash flow by putting, say, 20% down, or even less. Or if you go with a 15 year mortgage, after 10 years you'll have paid off most of the principle. Or should I say your tenant has paid off most of your principle? And given you a positive cash flow?

That's what makes real estate a great investment.
0 votes Thank Flag Link Tue May 13, 2008
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
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A single family or a condominium are not always good real estate investments. You've got 1 rental. If you're tenant doesn't pay you or you fail to get it rented, you still owe the entire monthly cost. With a condo, you have little or no control over rising condo fees or special assessments. As we have seen, you can't count on appreciation.

My idea of a good real estate investment is a 3 family home. Let's say you buy one for $485,000; put $48,500 down, 30 year fixed at 6%; yearly taxes $5707; yearly insurance $2000 = a monthly payment of $3259.29. If each apartment is worth $1500 per month, it nearly pays for itself with just 2 rents. Move out after a few years and the third apartment gives you a good positive cash flow. I'm not even taking into account income tax benefits of owning investment real estate.

The only downside is capital gains tax. If the property appreciates and you sell, you can only save capital gains tax on the portion of the home you lived in.
0 votes Thank Flag Link Tue May 13, 2008
Michael, I like your analogy of the 50% ROI. It almost made me want to run out and invest in some property! Except if you bought a property for $300K and sold a year later for $330K you have to figure you paid somewhere between 5-10K in property taxes for that year. After that and your insurance, closing costs, interest, and realtor commissions you will be lucky if the ROI is anything at all. I'm sorry to say.
0 votes Thank Flag Link Tue May 13, 2008
Hi Ann,
History has proven that the right real estate purchases represent the top investment potential. The problem with real estate as an investment is it more difficult to convert to cash when needed.

The short sale and foreclosure activity we are currently seeing do not represent the real estate investment norm and is the exception.

The "Eckler Team"
0 votes Thank Flag Link Tue May 13, 2008
Ann, when your looking at real estate investment and considering rental rates you need to consider several factors:

1. Your annual cost of ownership, including mortgage, taxes, utilities and upkeep

2. The going rental rate for properties in the area where you will be purchasing a home. This is calculated in $/sf/Month, and if you aren't going to see at least three times your principle investment over the life of a 360 installment mortgage then you aren't likely to garner enough income to adequately maintain the property and still realize a profit.

3. In most real estate markets (Excepting NYC, Silicon Valley and other extremely over-valued markets) it gets rather difficult to find tenants when you're charging more than 1.30/sf/mo for long-term middle-class residential property. That 1.30/sf/mo figure is obviously different for luxury properties and vacation rentals. The equation I like states that in a realistic real estate market your purchasing options are typically limited to [1.30/sf/mo x 12mos/yr x 30 yrs] / 3.

The figures I've given you are based on my own estimation of the Bradenton/Sarasota market and any real estate agent you speak to in the area is likely to tell you the market there is still hot and your being ridiculous for sticking to such low numbers. Just remember to stick to your guns, play hardball and don't make your move until you smell blood in the water.
0 votes Thank Flag Link Sun May 4, 2008
Ann,
Real Estate investing is a generic term and it has meanings depending on what your desire is. One thing that you also need to add into the equation if you are thinking of purchasing in the Sarasota-Bradenton area is that for many many years this area was a relative secret. There was no movement to "grow" the area and have it become exposed to the world, thus there was very little value improvement throughout the years, at least until around 2002, 2003. The market started to grow with the increased development east of I-75 mainly the Lakewood Ranch area. Then all of the sudden the value bubble started to blow up and we all know what happens to a balloon with too much air...it popped in the latter part of '06. But, in saying that, it doesn't mean that investing in real estate isn't a good thing, it just means that you need to have a plan based on the type of investing you want to do. There's alot more that could be said, but I'll leave you with this, nothing has ever provided the investment opportunity that real estate has with like results so I'd do more homework and get the right person to help you with your long or short term plan.
Good Luck!
0 votes Thank Flag Link Sun May 4, 2008
Ryan,

Could you explain how to calculate 5.5% for 2 scenarios - If I payed cash for the property and if I took mortgage. Also what is good cap? And finally what is Carlton sheets?

Thank you for your answers

Ann
0 votes Thank Flag Link Thu May 1, 2008
dont invest unless your property cash flows. If you cant get at least a 5.5% return on your money, forget it. Appreciation is an added bonus to investing but must not be the sole purpose.

Look for properties with good cap rates

Buy Way under market value

Sell all of your Carlton Sheets books

and you should be all right!

Ryan
Community Mortgage
0 votes Thank Flag Link Thu May 1, 2008
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