How Do You Increase Your Return on Investing Your Dollars?–Real Estate Investing

The posts in this section deal with various aspects of investing in real estate—basically,  to have people think about how they can grow their investment dollars through real estate.  Besides more immediate savings when you own instead of rent, the argument is made that real estate represents a far better ROI (return on investment) than CDs and the stocks.

1.    Cash Flow and Equity Build-up
2.    Find a Better Return
3.    Indecision Costs
4.    An Exchange Means More to Reinvest
5.    Cut Your Housing Costs in Half

Cash Flow and Equity Build-up

You can look at how Las Vegas hotels have operated for years:  they always have a strong focus on profitability.  And it was with this in mind when they would entice customers with all manner of freebies and discounted rates to come and gamble at their establishments.
In contrast, in real estate investors were willing to tolerate negative cash flow with a view of making their investment pay off when a property was sold and appreciation in the market rewarded them.  Things have changed here as well:  cash flow and build-up in equity have become the focus for investment.

Cash flow is seen when what is collected for rent each month exceeds the expenses for the rental property.  With rents going up and mortgage interest rates at a historic low, the cash flow aspect of investing in rental property has gained attention.
Investors could even disregarded the appreciation of rental property is cash flow is sufficient.

Don’t expect low down payments for your real estate rental properties because it is a characteristic of the past.  You can expect to invest 25-30% in down payment for non-owner occupied mortgages.

Remember that with a mortgage there is an enforced savings because mortgage payments build investors’ equity in the property.

In the first year, you will need to look at the total of what is paid against the mortgage that isn’t interest, .

Isn’t it obvious that the real estate rental investment is worth your consideration?  Single-family rental opportunities can be attractive for your investment dollars.  And where do you find such properties?  Check out an excellent resource here.

Find a Better Return

This article presents an argument, subtly at first, that the best ROI (return on investment) is not a CD or investment in stocks. Rather, it’s real estate because there are four ways in which an investor can get a return on investment. As most investors are aware, a certificate of deposit generates cash based on whatever the prevailing interest is when purchased, and interest rates haven’t been very impressive in recent years. This is the only return to the investor. Unless a stock pay dividends there is no cash flow, and purchasers of stocks would have to sell higher than the purchase to be rewarded with a profit on investment.  Finding the right stocks is a time-consuming effort.

In contrast, with rental real estate investors have four different ways of profiting.

1. There is a cash flow when the monthly rent amount exceeds the amount paid out in expenses.
2. Each monthly mortgage payment adds to the equity building up, reducing what is owed on the mortgage.
3. When you rent your property, you can depreciate and there is a benefit from a preferential long-term capital gains tax rate.
4. And most obviously, any appreciation in the value of the property is a benefit to the investor.

Most real estate investors look for the cash flow generated by a rental for the short-term objective.  Long term, the build-up of equity through the reduction of the mortgage as the years go by is also important.  The tax benefits and the potential for appreciation are other reasons why  investors choose to place their money in real estate .
In these years of rising rents and still low enough mortgage rates, investing in real estate offers an attractive return of investment.

For more information, please check out recommendations for Judy Naimo’s services .

An Exchange Means More to Reinvest

There is a tool that allows real estate investors to move the gain that comes from one property to another called Section 1031 exchange for rental and investment real estate .  The advantage is that there is no immediate consequences in terms of income tax and therefore the proceeds are larger for other investment.

The example provided illustrates how there is 21% more available for investment if the taxes were postpone through exchanging.

A long-term strategy that may be utilized is to keep up these exchanges until the death of investor brings a halt to this process.  However, in that case taxes may be avoided entirely if the heirs worked wisely.  The heirs could receive a different valuation (stepped-up) which is based on the market value of the property at the time of the decedent’s death.

You will need the services of a real estate professional who is familiar with investment property as well as someone to facilitate the exchange.

Consult with your realtor about such professionals

Cut Your Housing Costs in Half

Don’t bargain hunters perk up at seeing a 50% off sale?  I know that I do.

Such a bargain can be seen if you look closely at renting versus owning.

If, for example, a person buys a home at $200K with a 3.5% down payment, using a 4.5% 30 year FHA mortgage.  What they will pay monthly would be about 50% less than their current rent.

In this example, let’s say his rental monthly payment is $1750 which would total over $11K in a year. This total is more than the down payment that would be required ($7K).  And rental payment would be $978 more than to own.

This is one basic reason why people choose to own a home.  In this example, the $7K down payment with an estimated 2% appreciation would grow to $58,837 with normal amortization.

If you want to use a renting vs owning calculator, click here.

For the current renting vs owning answers, please contact Judy Naimo, your real estate professional.


Indecision Costs

When it comes to real estate people are very concerned about timing, and adopt a “wait and see” attitude.  Meanwhile their fear of making a wrong decision results in more money being lost because of their indecision—not moving to invest in housing immediately.

You can understand the point very clearly if you compare how money used for a down payment would fare in a CD, the stock market or in real estate to purchase a home.

Take the amount of  3.5 % down payment on a home that is purchased for $175,000 home– $6,125.00. If this amount were put into a CD at 2%, after 2 years, the value of the CD would be  $6,372.

Now if you invested this amount in a stock or some fund that yielded 7%, the investment would grow to $7,013, assuming a good choice has been made.  Then the earnings would be taxed as long term capital gains; and of course, the stock market can represent serious risk.

If you have a question about how your money should be invested, take a serious look at the comparison above.  Such information will clarify your investment options.

The articles above were published individually and their original content can be found in the archives, with links available on each title.