While many people consider real estate investment something that only ‘rich people’ or ‘real estate’ people do, investing in real estate can be a wise financial option for anyone. The Grand Rapids property management experts at S&G properties know firsthand that many real estate investors are average people who have recognized the many potential financial benefits of owning property.
Below are some examples of how real estate investing can be a smart move, for even the smallest investor.
Let’s say you purchase a $100,000.00 property with $20,000.00 cash. Tenants pay the bills including the loan on the house. The house should rent for $1100.00 per month with a 10% vacancy rate. The annual income should be $11,880.00
The annual cost should be:
- Loan P & I 429.60 Based on an 80,000 loan 5% for 30 years
- Property tax: 50,000 times .05 = $2500 (will vary depending on the area)
- Insurance: $650.00
- Maintenance: $2,000.00
Total rent = $13,200.00
- less 10 % vacancy = $1320.00
- less property tax $2500.00 – est
- Insurance $650.00 – est
- less maintenance $2,000.00
- Payment P&I $429.6 x 12 = $5,155.2
Cash Flow – $1574.80
If the property goes up 4% per year (a very reasonable number), in year one:
- You earn $1,500.00 in positive cash flow
- You earn just over $1,000.00 in reduced principle
- You earn $4,000.00 in appreciation
Total return year one on a $20,000.00 investment = $6500.00 or 32%
Put the same $20,000 in the stock market at a 15% return (aggressive number) you earn $3,000.00 on the same investment.
Assume one retires with $2,000,000.00 in the stock market and age 65 and gets a 7% return.
The person would get $140,000.00 pre tax to live on. Fast forward 20 years. Inflation has doubled but the retiree still has to live off the same $140,000.00 per year and his/her total investment is still only $2,000,000.00. When the person dies he/she will be able to leave $2,000,000.00 to loved ones charity etc assuming he/she never touched the principle.
Now assume one retires with $2,000,000.000 in real estate and gets a 6% return on the investment. In the first year he gets $120,000.00. Fast forward 20 years and the investment would be worth (Conservative estimate) $4,000,000.00 and 6% is $240,000.00 keeping up with inflation. When he dies he will leave loved ones or charity the value of his real estate, which has kept up with inflation.