The Lazy Way to Invest in Real Estate: Here's Why
As the market continues to rise, it is becoming much more difficult for an investor to find a good deal. As such, many investors are turning away from traditional investing and instead turning towards something much simpler: rental properties.Â
The Lazy Way to Invest in Real Estate – Here’s Why is a blog post that discusses why you should invest in real estate through rentals and not by flipping or buying a property outright.
What Is the Lazy Way to Invest in Real Estate?
When you buy an investment property, you are making a huge financial commitment. First, there is the down payment (which can be anywhere from 5-20 percent) and then there is the closing costs which may include title insurance, survey fees, appraisal fees, recording fees…the list goes on.
Let’s say that your closing costs are $5,000 and the down payment is $10,000 for a total of $15,000. That amount will come straight off of whatever profit you may have realized when you sell the home in the future. This means that even in the best case scenario where real estate prices continue to rise (perhaps you bought the property for $100,000 and sell it 8 years later for $125,000), you would only make $10,000 (ignoring taxes).
Alternatively, let’s take a look at what that money could get if it were invested in rentals. Assuming that your rental property brings in rent of $1,250/month (it is an apartment complex), after 5 years, the initial investment would be worth nearly $252,000. The total profit over the course of five years would be about $128,000 when compared to purchasing a home which would yield just under $30,500 in profits.
How Do I Invest in Real Estate With Rentals?
You have decided to go ahead and buy a rental property. Where do you even start? First, make sure that the property is in good condition because there will be no way for you to get any of your money back if it is not. If you cannot afford to fix it up on your own, then look into companies that offer financing for these kinds of projects such as Ditech Financial.
You can also ask a local bank or credit union how they feel about lending money for home repairs before going out and making an application with a third party company. In addition to actually securing the loan, keep in mind that this may mean spending even more money on appraisal fees and title insurance…but at least this way you know exactly what kind of investment you are getting yourself into.
Go on tours of the neighborhoods that you are thinking of buying in and see how much homes are going for. If you can convince a homeowner to sell their house to you, then all the better! In some cases, people will be willing to sell their houses through a lease option which means that they will still have use of the house while giving you full control over it. For real estate company it will take time to manage it.
This is not a license to steal someone’s home from them but if an elderly person needs money and there is no other way for them to get it, this could be something worth considering. Whatever you do though, just make sure that they understand what they are signing up for and get everything down in writing so that there is no confusion afterwards.
You should also make sure that the laws of your city allow rentals. Some cities have very strict laws about rental properties, so you may need to purchase at least two or three homes before you find one that works for you. You should also see if there are any local rental companies in your area because they could potentially be useful partners when selling your properties later on.
As far as how to actually go ahead and buy these homes, this is ultimately up to you. If you happen to know someone who knows someone who has a connection with a nicely discounted property, then ask them for help! Otherwise, check out Ditech Financial which offers some great mortgage options . It is also wise to look into real estate investment associations such as ZIA to see if they offer any services to their members.
The important part is to start and not let fear get in the way of your financial future!
So we’ll want to compare owning a rental property vs. having a 401k or other investment accounts so that it can be decided which is better for our bottom line. In order to do this, I will be assuming buying a house at $100,000 and being able to rent it out for $1,250/mo with 0% vacancy rate over five years.
At the end of five years I would sell it for an average price of $125,000 giving me a total profit of just under $30,500 after subtracting my down payment and closing costs from my original price of $100,000.
Let’s assume that you are starting out with the goal of having a million bucks by the time you retire at 65 years old (35 years). For argument's sake let's say that for one year, your investment account averaged 10% growth. Your earnings would be $11,500 after tax benefits bringing your total to just under $1.2 million dollars in 35 years.
If you invested this money into purchasing 5 homes over the next 30-35 years then you could end up with an estimated net worth of around 3-4 million dollars . This is based on estimates from Zillow which state that each home holds an average value of about 209k bringing our total value to about 726k for 5 homes.
While this does seem like a hefty sum, remember that this is after including mortgage payments to the equation. Now imagine if you had just bought 1 home and invested the remaining balance (after taxes and purchasing fees).
If we assume a marginal tax rate of 29% and an average growth rate of 10% then your account would be worth $3,912,500 over these 30-35 years . This would put you at around 4 million dollars which is about 1/2 million dollars more than actually owning 5 rentals ever could!
This may seem like common sense to some people but not everyone realizes that borrowing money from yourself can be far more profitable than letting others borrow it . The key word here is “borrow” because this means that you are simply letting your money make more money while it is left in the bank. There really isn’t too much to it other than opening up a savings account and putting your money into that every month like clockwork.
There are several benefits to this approach but one of the biggest ones is liquidity . This basically means that if for whatever reason, you need some cash right away then you can usually get it (depending on which company or bank it is tied with though).
If you invest in real estate in Nashville though, there may be certain stipulations about whether or not you have access to the funds at any given time so they would have to be dealt with accordingly.
If my calculations hold true, then buying a home and investing the rest can yield a good bit more money than just owning rental properties. The only caveat here is that it does require a larger initial investment which may not be feasible for some people to have to pay upfront. This doesn’t mean though, that you still can’t find ways of getting into this market as there are many lenders that allow you to borrow money from them regardless of whether or not you meet their income requirements.
As always, I urge anyone who wishes to pursue real estate as an investment option but doesn't know where to start, please feel free to contact me and I will do my best to help.
The key to investing in real estate is not being scared of the risks. It's about having a plan, taking calculated steps, and doing your research so that you can reap all the benefits possible from this investment opportunity. If any of these points sound like they may be too much for you, reach out to an expert who will help guide you through it step-by-step. We're happy to offer our services as part of either buying or selling properties - just contact us today!
