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.
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.
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.
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.
Best of Luck:
CEO & SR Credit Repair Specialist at
Everlasting Credit Repair
Ex-Mortgage Banker of 10 years
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
Tarpon Coast Realty
1693 Main St
Sarasota Fl 34236
800 376-1408 fax
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.
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.
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"
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.
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.
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!