Investing in real estate is a huge topic. I'll walk through the reasons that my wife and I decided to start this process. Clearly there is much more to discuss but here are the top 4 reasons that swayed our opinions:
There are two main ideas to making money in residential real estate. You can flip homes or buy and hold. Flipping homes involves buying an under-valued house (typically a fixer-upper), remodeling and trying to sell it again in short order without living in the home. Given that the market isn't going up, it will be difficult to flip a home unless you can grab a spectacular deal. Candice and I are going down the buy and hold path. This choice is purchasing homes and holding them, letting the home itself appreciate. In addition, as you acquire homes, you can rent them for added cash flow. The goal here is selling the home in 10 or 20 years hopefully for more than you paid! But even if you sold it for exactly what you paid, its likely you will make money anyway by renting.
Reason One: Leverage
Our realtor shared with us a story that got him started in investing real estate: Imagine you had $10,000 to invest. Typical safe investing choices include CDs or bonds but neither of them will give you much of a return. How about the stock market or mutual funds? Can be risky, especially in today's economy, but lets say you find an awesome mutual fund that returns 10% annually. After one year your $10,000 will earn you a whopping $1000 ending up with a total of $11,000! Not bad eh! Now, lets say you use your $10,000 to purchase a $100,000 home and the value of your home goes up 10%. That nets you with $10,000 in earnings, a total of $110,000! The leverage that home values have are huge! Now imagine you used your $10,000 to purchase a $200,000 home? The numbers just keep going up. Here's another example.
Reason Two: Timing
The key to investing wisely is to buy when the price is down and sell when the price is high. Well, right now, the housing market across the nation is down down down down! As these charts show, the prices have peaked around 2006 and fallen steeply during the recession. Now is a terrific time to buy if you have the means to do so! Candice and I have visited homes that are currently listed at the price they sold for 5, 10, even 20 years ago!!! We found one home that was listed at $86k, the same price it sold for in 1995...Just consider the inflation in the price of materials and you will make a profit! Now that particular house was in poor condition so we passed on it quickly. While the market may not come back next year or the year after...you can bet in 5 to 10 years home prices will be up again. If you still arn't convinced, check this out.
Reason Three: Interest Rates
Borrowing money right now is cheap! More graphs show that the average prices for interest rates are under what they were 50 years ago! You can get rates under 4%. What else can I say? That is much better than 9 or 10%.
Reason Four: Cash Flow
All of the above reasons combine to create this one. I can't speak precisely to your area, but in Colorado Springs the rental market is hopping! More apartment buildings are going up all the time and more people are renting now than ever before. The housing crash has unfortunately forced many short-sales and foreclosures when people bought houses they couldn't afford during the housing bubble. Especially in a military town like Colorado Springs there is a huge rental market! For example, consider purchasing a $100,000 home. Your mortgage payment will likely be $500-$700 for a 30 year fixed loan. Lets say its a 3 bedroom, 2 bath in good condition (this is the type of house we are currently in the market for). A house in good condition will rent for $1200! This means, assuming you can find renters, you will be cash flowing $500-$700 (profit) a month AND have somebody else paying your mortgage!! Find out rental prices in your area easily using rentals.com.
Cons
1) Debt - Clearly you will be taking out a large loan and you need to make sure you can pay it! If you cannot make the monthly payments on your house then don't even consider buying! If you are looking at rentals, you must be prepared to pay the mortgage on the rental as well as your own house if you cannot find renters...Always be prepared.
2) Maintenance - This is a blessing and a curse. All of the maintenance and upkeep is all up to you! When you rent, you can call your landlord and have him fix everything for you! Now YOU are the landlord! Plus things like lawn care, garbage collection fees, home owners-association fees etc. are often overlooked.
3) Closing Costs - It costs much more than your down payment to close on a house. Typically you can expect at least $3000-4000 extra in setting up your escrow accounts, fees etc. Not to mention attorney fees or inspectors fees and the like.
For Candice and I, the pros far outweigh the cons. We are approaching investment real estate as our way to wealth and retirement plans. That being said we are not forsaking other retirement planning such as 401k's through employers and Roth IRAs. Don't put all your eggs in one basket!
There are two main ideas to making money in residential real estate. You can flip homes or buy and hold. Flipping homes involves buying an under-valued house (typically a fixer-upper), remodeling and trying to sell it again in short order without living in the home. Given that the market isn't going up, it will be difficult to flip a home unless you can grab a spectacular deal. Candice and I are going down the buy and hold path. This choice is purchasing homes and holding them, letting the home itself appreciate. In addition, as you acquire homes, you can rent them for added cash flow. The goal here is selling the home in 10 or 20 years hopefully for more than you paid! But even if you sold it for exactly what you paid, its likely you will make money anyway by renting.
Reason One: Leverage
Our realtor shared with us a story that got him started in investing real estate: Imagine you had $10,000 to invest. Typical safe investing choices include CDs or bonds but neither of them will give you much of a return. How about the stock market or mutual funds? Can be risky, especially in today's economy, but lets say you find an awesome mutual fund that returns 10% annually. After one year your $10,000 will earn you a whopping $1000 ending up with a total of $11,000! Not bad eh! Now, lets say you use your $10,000 to purchase a $100,000 home and the value of your home goes up 10%. That nets you with $10,000 in earnings, a total of $110,000! The leverage that home values have are huge! Now imagine you used your $10,000 to purchase a $200,000 home? The numbers just keep going up. Here's another example.
Reason Two: Timing
The key to investing wisely is to buy when the price is down and sell when the price is high. Well, right now, the housing market across the nation is down down down down! As these charts show, the prices have peaked around 2006 and fallen steeply during the recession. Now is a terrific time to buy if you have the means to do so! Candice and I have visited homes that are currently listed at the price they sold for 5, 10, even 20 years ago!!! We found one home that was listed at $86k, the same price it sold for in 1995...Just consider the inflation in the price of materials and you will make a profit! Now that particular house was in poor condition so we passed on it quickly. While the market may not come back next year or the year after...you can bet in 5 to 10 years home prices will be up again. If you still arn't convinced, check this out.
Reason Three: Interest Rates
Borrowing money right now is cheap! More graphs show that the average prices for interest rates are under what they were 50 years ago! You can get rates under 4%. What else can I say? That is much better than 9 or 10%.
Reason Four: Cash Flow
All of the above reasons combine to create this one. I can't speak precisely to your area, but in Colorado Springs the rental market is hopping! More apartment buildings are going up all the time and more people are renting now than ever before. The housing crash has unfortunately forced many short-sales and foreclosures when people bought houses they couldn't afford during the housing bubble. Especially in a military town like Colorado Springs there is a huge rental market! For example, consider purchasing a $100,000 home. Your mortgage payment will likely be $500-$700 for a 30 year fixed loan. Lets say its a 3 bedroom, 2 bath in good condition (this is the type of house we are currently in the market for). A house in good condition will rent for $1200! This means, assuming you can find renters, you will be cash flowing $500-$700 (profit) a month AND have somebody else paying your mortgage!! Find out rental prices in your area easily using rentals.com.
Cons
1) Debt - Clearly you will be taking out a large loan and you need to make sure you can pay it! If you cannot make the monthly payments on your house then don't even consider buying! If you are looking at rentals, you must be prepared to pay the mortgage on the rental as well as your own house if you cannot find renters...Always be prepared.
2) Maintenance - This is a blessing and a curse. All of the maintenance and upkeep is all up to you! When you rent, you can call your landlord and have him fix everything for you! Now YOU are the landlord! Plus things like lawn care, garbage collection fees, home owners-association fees etc. are often overlooked.
3) Closing Costs - It costs much more than your down payment to close on a house. Typically you can expect at least $3000-4000 extra in setting up your escrow accounts, fees etc. Not to mention attorney fees or inspectors fees and the like.
For Candice and I, the pros far outweigh the cons. We are approaching investment real estate as our way to wealth and retirement plans. That being said we are not forsaking other retirement planning such as 401k's through employers and Roth IRAs. Don't put all your eggs in one basket!
