Bobola2005
Member
As I have been pursuing the dream of becoming a Naval Aviator, I have also been actively investing myself into a career that I thoroughly enjoy in case that dream never becomes a reality.
I am involved in residential real estate in the central Texas area. I think real estate can provide an excellent avenue to generate wealth and establish a very good retirement. I am currently a licensed real estate agent and sell real estate to earn an income but my plans for retirement don’t necessarily involve selling real estate for the rest of my life. My plans for retirement involve establishing a solid base of rental properties that will ultimately generate enough income to have a completely independent and free lifestyle within 20-30 years if not sooner.
The reason for this post is so that I can help introduce real estate investing to those who may not be familiar with the topic and help show why it can be an outstanding avenue to create wealth to establish a very comfortable retirement. I don’t claim to be an expert on the topic at all, but it is something I am very interested and active in.
The greatest benefit I see in real estate is the amount of returns you can EXPECT to earn off your investment. I studied Corporate Finance in college and have actively participated in stocks, mutual funds, bonds, and currencies and in my experience, none of those investment vehicles can produce the types of returns that real estate can produce with the level of security real estate provides.
The high returns in real estate are a result of the following:
· Buying the property below market value (Any time you purchase a stock, you are paying market price, unless you are an educated analyst that can recognize when a stock is priced significantly below market value)
It does take time to understand your market but there are a lot less intangibles that affect the value of real property when compared to a stock price. Often times a good buy can result in purchasing the property at 20% or more below market value.
· Tax savings and tax advantages owning real estate can provide
This will vary from state to state but things like depreciation expense and the 1031 exchange help you defer capital gains tax and allow you to compound your earnings much like an IRA or 401K
· Renters who occupy your property and provide you with monthly cash flow also pay down your mortgage and increase your equity position in the property
See next bullet
· Property appreciation
Property appreciation really comes into play when you responsibly leverage yourself into a mortgage. In his book, “The Millionaire Real Estate Investor” Gary Keller and his team of investors recommend a 20% down payment (required for investment property in Texas). For this example I will just assume that you had to pay market price for the home. Take a home with a $100,000 market value. A 20% down payment would have us financing $80,000 after an investment of $20,000. Say the property appreciated at 3.5% over say 5 years (the historic national appreciation is closer to 5%). After five years, the value of the property is roughly $119,000, and your 30 year mortgage has been paid down to about 76,000 at a 7% interest rate(rates on investment properties/non-owner occupied will be higher than normal). Now you have an equity position of roughly $43,000 and an annual return on equity of 16.5%. And remember, this example doesn’t account for the discount you should have purchased the house at or the cost to sell the house. In reality this rate of return on your equity will be a bit higher.
I have included my own person spreadsheet that analyzes all of these factors to see how they combine to bring outstanding long-term returns and immediate cash flows. Loaded in the spreadsheet is an example of a deal I just personally executed. I have got renters in it already and if you notice, my discount was less than 20% but it still ultimately gives me a healthy rate of return and good cash flows. My modified internal rate of return ends up being right at 23% annually if I sell in 5 years assuming a reinvestment rate of 3%. Even if I didn’t reinvest the positive cash flows it would be about 22%. The spreadsheet accounts for all sales expenses as well. (Although I kept them to 7% as I would get paid my commission on the sale.)
I was getting 10% annually in the markets, spending time studying companies and other investment vehicles. I am also not a stock analyst. Either way, I still wouldn’t achieve the types of returns real estate can. Typically it is accepted that there are 3 parts to an investment, Liquidity, Rate of Return, and Risk. In the markets you trade risk for a high rate of return and a high level of liquidity. In real estate you trade liquidity for a high rate of return and low risk. Now I will say that this is nowhere near as liquid as the more traditional investment vehicles but it does provide a very healthy rate of return for those who can afford to have money tied up for the long term. Risk in this case is minimized with time and purchasing below market price.
A couple of things consider when review the spreadsheet:
*You will notice that over time, your ROE goes down and at a certain point; you should either sell in a 1031 exchange or refinance to pull out some equity to reinvest and defer taxes on the capital gains, in order to maximize your returns by keeping yourself properly leveraged.
*Cash on Equity Return at the end of the investment represents how much equity you actually capture from your investment after selling expenses.
*Cash on cash return is the immediate cash return I get on my investment. It doesn't take equity build up into consideration.
I hope someone learns something from this. Throughout college, even studying finance, we didn’t really talk about real estate as an avenue for wealth building and I find that it can be a very good alternative to traditional retirement investing. It does take a little more work than just putting your money in a mutual fund but over time it can pay off big. If you have any questions or criticisms I would be happy to hear them.
I couldn't attatch it like I wanted to so I uploaded it to 2shared file hosting. Here it is if you care to see it. It is the .xlsx version: http://www.2shared.com/file/W_F1M2zP/Rental_Analysis.html
I am involved in residential real estate in the central Texas area. I think real estate can provide an excellent avenue to generate wealth and establish a very good retirement. I am currently a licensed real estate agent and sell real estate to earn an income but my plans for retirement don’t necessarily involve selling real estate for the rest of my life. My plans for retirement involve establishing a solid base of rental properties that will ultimately generate enough income to have a completely independent and free lifestyle within 20-30 years if not sooner.
The reason for this post is so that I can help introduce real estate investing to those who may not be familiar with the topic and help show why it can be an outstanding avenue to create wealth to establish a very comfortable retirement. I don’t claim to be an expert on the topic at all, but it is something I am very interested and active in.
The greatest benefit I see in real estate is the amount of returns you can EXPECT to earn off your investment. I studied Corporate Finance in college and have actively participated in stocks, mutual funds, bonds, and currencies and in my experience, none of those investment vehicles can produce the types of returns that real estate can produce with the level of security real estate provides.
The high returns in real estate are a result of the following:
· Buying the property below market value (Any time you purchase a stock, you are paying market price, unless you are an educated analyst that can recognize when a stock is priced significantly below market value)
It does take time to understand your market but there are a lot less intangibles that affect the value of real property when compared to a stock price. Often times a good buy can result in purchasing the property at 20% or more below market value.
· Tax savings and tax advantages owning real estate can provide
This will vary from state to state but things like depreciation expense and the 1031 exchange help you defer capital gains tax and allow you to compound your earnings much like an IRA or 401K
· Renters who occupy your property and provide you with monthly cash flow also pay down your mortgage and increase your equity position in the property
See next bullet
· Property appreciation
Property appreciation really comes into play when you responsibly leverage yourself into a mortgage. In his book, “The Millionaire Real Estate Investor” Gary Keller and his team of investors recommend a 20% down payment (required for investment property in Texas). For this example I will just assume that you had to pay market price for the home. Take a home with a $100,000 market value. A 20% down payment would have us financing $80,000 after an investment of $20,000. Say the property appreciated at 3.5% over say 5 years (the historic national appreciation is closer to 5%). After five years, the value of the property is roughly $119,000, and your 30 year mortgage has been paid down to about 76,000 at a 7% interest rate(rates on investment properties/non-owner occupied will be higher than normal). Now you have an equity position of roughly $43,000 and an annual return on equity of 16.5%. And remember, this example doesn’t account for the discount you should have purchased the house at or the cost to sell the house. In reality this rate of return on your equity will be a bit higher.
I have included my own person spreadsheet that analyzes all of these factors to see how they combine to bring outstanding long-term returns and immediate cash flows. Loaded in the spreadsheet is an example of a deal I just personally executed. I have got renters in it already and if you notice, my discount was less than 20% but it still ultimately gives me a healthy rate of return and good cash flows. My modified internal rate of return ends up being right at 23% annually if I sell in 5 years assuming a reinvestment rate of 3%. Even if I didn’t reinvest the positive cash flows it would be about 22%. The spreadsheet accounts for all sales expenses as well. (Although I kept them to 7% as I would get paid my commission on the sale.)
I was getting 10% annually in the markets, spending time studying companies and other investment vehicles. I am also not a stock analyst. Either way, I still wouldn’t achieve the types of returns real estate can. Typically it is accepted that there are 3 parts to an investment, Liquidity, Rate of Return, and Risk. In the markets you trade risk for a high rate of return and a high level of liquidity. In real estate you trade liquidity for a high rate of return and low risk. Now I will say that this is nowhere near as liquid as the more traditional investment vehicles but it does provide a very healthy rate of return for those who can afford to have money tied up for the long term. Risk in this case is minimized with time and purchasing below market price.
A couple of things consider when review the spreadsheet:
*You will notice that over time, your ROE goes down and at a certain point; you should either sell in a 1031 exchange or refinance to pull out some equity to reinvest and defer taxes on the capital gains, in order to maximize your returns by keeping yourself properly leveraged.
*Cash on Equity Return at the end of the investment represents how much equity you actually capture from your investment after selling expenses.
*Cash on cash return is the immediate cash return I get on my investment. It doesn't take equity build up into consideration.
I hope someone learns something from this. Throughout college, even studying finance, we didn’t really talk about real estate as an avenue for wealth building and I find that it can be a very good alternative to traditional retirement investing. It does take a little more work than just putting your money in a mutual fund but over time it can pay off big. If you have any questions or criticisms I would be happy to hear them.
I couldn't attatch it like I wanted to so I uploaded it to 2shared file hosting. Here it is if you care to see it. It is the .xlsx version: http://www.2shared.com/file/W_F1M2zP/Rental_Analysis.html
