NEWS: Real Estate to Create Wealth

Real Estate is perhaps the greatest tool for creating wealth that there is. Ninety-five percent of the rich hold some or most of their wealth in real estate for a good reason. So many homeowners have had their home appreciate far more than what their 401k or other savings have done for them. Doesn’t it then make sense then to have more of your savings invested into a second and then third home instead of in a 401k where it is being drastically outperformed by real estate? Naturally, you rent out the homes to pay all or most of the mortgage and expenses and then hold the homes while they appreciate. Below is a simple, yet informative breakdown of how many successful investors do this while they create or grow their wealth.

Supply vs. Demand

Fundamental to investing in real estate is the understanding of why real estate increases in value. The earth continues to become increasingly populated with no new creation of land save for the rare volcanic eruption creating a new island. With no new creation of land, the supply of land does not increase. Demand increases constantly. In America, not only is the population increasing, but people are building larger homes than before and many own second homes. Over time, the odds of your property increasing in value are very high. Well picked property in the right markets and sub-markets will increase in value at a higher rates during the same amount of time.

Markets That Outperform

Keeping in mind that value in real estate is tied completely to supply vs demand. When investing, we want to pick markets to invest in where we hope growth rates and property appreciation will be as good as possible. It is impossible to tell exactly what will happen, but you can forecast markets that show good trends and will likely perform stronger than others. The markets that I as an investor focus my attention on are the markets in the sun-belt. Because travel is becoming so cheap and moving to a different state is so much less of a deal that it was a generation ago, many of the baby boomers are picking retirement locations with good weather rather than ones just close to family. The relatively low cost of travel allows them to live where the weather is warm and visit family when they want or need to. This has created above average appreciation rates in the sun-belt states and will likely continue to do so over the next twenty years.

High Returns in Real Estate?

Contrary to what many financial planners may say, you can safely get higher than normal returns through real estate 20% - 30% returns. We aren’t talking about abnormal booms like we saw in California, Phoenix, and Vegas. We are looking at the best long-term markets and how they perform on average over time. As you know, even the top real estate markets at most appreciate at an average of 10% per year. So how does that 10% appreciation turn into 20% - 30% return on your money? Only with leverage.

If you were to buy a condo for $100k and put 25% down, let’s look at what your returns would be. You have $25k invested into the condo. With 25% down, you are likely to have a positive cash-flow or to break even on what you are able to rent it for vs what your mortgage payment is. Because the rent cancels out the money you pay out on the mortgage, let’s remove them from the factor of our analysis. Lets imagine the the average appreciation of the market you invested into is 5%. Your first year appreciation on your home would be $5,000 dollars. With the $25,000 you have invested in the condo, that gives you a return rate of 20%. We also used very conservative estimates in doing these calculations. In the markets where average appreciation is higher, there are even better returns.

High Returns Matter

If you are serious about investing, your rates of return are extremely important. If you increase your rate of return from 10% - 20% over a twenty year period, your investment after the twenty years will be nearly six times as large. If you started your investments with $10,000 at the beginning of the twenty years, that $10k becomes $67k after 20 years when invested at 10%. If your average return is 20%, the 10k becomes $383k. If you are able to get your average return up to 30%, than you will have $1.9 million at the end of the 20 years from only that initial $10k investment. As you can see, returns on your money, matter.

Risk vs. Security

The higher the downpayment you put on the home, the lower your returns, but the more secure your investment is. It is a balance that each investor decides for themselves and it also depends on the market where you are investing. If you can break even on the cash-flow with no downpayment, then your risk on that property is lower than if it would cause you to have a large negative cash-flow.

If you would like to read more, please link to the Investment page and read through some of the information I have posted there. If you are looking for someone to talk through your current situation with, give me a call.

Jared Murphy
Associate Broker - Allstar Realty