Why Real Estate May be Your Ticket to Retirement
By Stacey Edwards
Remember the real estate boom years at the beginning of this century? Everyone touted get-rich-quick schemes where they promised financial independence by putting almost no money down and expending little or no effort. We all know how that came out. Everyday people lost way too much money and the economy almost fell into a great depression. That explains why today almost everyone runs away from real estate investing.
That’s how economic cycles work. An asset, such as real estate, booms and everyone jumps in. After that, the bubble bursts and the same people run for the mountains licking their wounds. The market reaches bottom and a few gutsy souls discover the best time to jump back in.
Although no one can tell when any market has reached the bottom of its business cycle until after the fact, many think the time has arrived to look into investment real estate.
Although the market offers buyers many types of real estate to choose from, most first-time buyers and many other investors select single family homes, because they understand them.
Never Pay Retail
There’s an old saying in real estate which says you make your profit or loss on the purchase, not during the sale, meaning you must get a good price by never paying retail. This rule applies especially to single-family homes and here’s an example to clarify this idea.
Don’t let these numbers faze you. They’re not that complicated and mastering them signals the difference between success and failure in this, as in any other business.
Let’s start by assuming you buy a three-bedroom single-family home for $200,000. You’ll need to put down at least 25 percent or $50,000 and you’ll borrow the rest, which amounts to $150,000. You’ll find your likely expenses in the chart below:
30-year mortgage at 5% $1,013.57
Property Taxes at 1.25% 208.33
Insurance at $1,000
Maintenance at $2,000 166.67
**Conservative investors add 10 percent to their cost estimate to account for unforeseen expenses.
Now, look what happens to the investor who gets a deal on that same 3-bedroom house and buys it for $150,000. You’d make a down payment of $37,500 instead of $50,000 and you’d pay out the following:
30-year mortgage at 5% $ 760.17
Property Taxes at 1.25% 156.25
Insurance at $750
*Maintenance at $1,500 125.00
Investing Intelligently Can Earn You a Prosperous Retirement
If after reading the above, you believe investing in single-family properties entails entirely too much work and expense, think again because doing so successfully may set you up for a very nice retirement.
Let’s say you’re 30 or 35 years old and you put $37,500 down on the house described above. Here’s how much money you might have for retirement. Let’s use national figures even though real estate is always local, because space doesn’t allow for examining all the individual markets.
The National Composite Home Price Index for the United States shows that U.S. housing prices have increased by an average of about 3% per year over the past 25 years, including the massive recent decline, so we will assume that they will do the same over the next 30 years. We will also conjecture that all income and expenses except for mortgage will also increase by the same 3% average per year.
When you’re 60, your $150,000 house would be worth about $365,000, and remember, you now own it free and clear. Since you paid $37,500 down, you now enjoy a paper profit of $325,500. If you received a break-even rent of $1,400 per month when you bought your investment house, in 30 years you’d get about $3,400 in rent each month. Since you would no longer pay mortgage, your expenses would be about $1,100 when factoring in the 3%-per-year inflation, so your net income would be about $2,300.
If you choose to invest in single-family homes, you’ll certainly earn your keep, but with a bit of luck and a lot of skill and hard work, you just may reap bountiful rewards and retire in relative luxury.