As a self made millionaire who purchased his 1st home at 21 years old & subsequently built my fortune & portfolio of vertically integrated businesses using Real Estate as the primary vehicle I can say for sure that there is no question about it. Real Estate is by far the superior investment to most other investments & in my opinion owning a property in it’s entirety is much more valuable then being involved in a REIT.
There are many things that sets owning your own Real Estate vs being involved in a REIT.
There is always another mutual fund or some other large investment to invest in. They cannot make anymore land.
Liquidity/Control. You & you alone decide when it is or is not time to sell. You cannot do this with a REIT.
You can’t live in your REIT.
Above those 3 points is one I really want to hit as I think it is the single most important factor that separates Real Estate from other less viable investment vehicles. That is the ability to use leverage or aka Other People’s Money (OPM)
You buy a property using someone else's money (the bank) then have somebody else pay off the bank (the tenant) What could be better than that? NOTHING!
For non owner occupied purchases you would need at least 25% down to purchase the property. I am out in the Cleveland, Ohio market. We have tons of rental properties in the $100,000.00 range. The returns are solid as that price point will bring in $1,000.00-$1,500.00 in rent.
However you cannot use it all on single family homes. Trying to do this you will run into the next hurdle. Residential mortgage limits. You are capped at 10 of those puppies. So I recommend buying exactly 10 of them.
Let’s run the numbers on a typical property in a Cleveland, Ohio investment portfolio. The numbers below are based on properties in reasonable neighborhoods. Sometimes investors get greedy and attempt to buy properties in questionable neighborhoods because the rent to purchase price ratio is better. That may work sometimes but more often than that it can lead to disaster. I myself have ran into some issues with low quality properties. I discussed this here on Quora in another post. I recommend anyone thinking of investing in rental properties give that thread a read as well. Important to note for anyone reading this is that you or any other new investor should look at when deciding whether or not they want to take the plunge into rental properties is the true expenses associated with owning a rental property. There are many hidden expenses that can creep up on an investor. I have went ahead and accounted for those unforeseeable issues that will inevitably pop up during the course of ownership. The numbers I have used have come from my experience managing a portfolio of thousands of tenants & rental properties.
123 Main street in Cleveland, Ohio.
Price: $100,000.00
Down Payment: $25,000.00
Loan Amount: $75,000.00
Monthly Breakdown
Monthly Rent: $1,500.00
Monthly Mortgage Payment: $474.00 (Assuming 4% interest, 30 years)
$1,500.00 less your mortgage nets you a profit of $1,026.00 per month, but let’s not get too excited just yet. There are many more fixed and variable costs that we need to account for.
Monthly Operating Costs
Taxes: $168.00
Insurance: $65.00
Utilities: $150.00
Vacancy: $75.00
Repairs, Maintenance & Capital Expenditures: $150.00
Non-Payment of rent: $75.00
After accounting for all the proper expenses that leaves the investor with a net profit of $343.00 per month. If the investor chose to hire a professional property management company that would bring the net profit down to roughly $193.00 per month.
The self managing investor would net roughly $4,116 per year. Since the initial cash investment was only $25,000 that is a return on investment of 16.5% and the investment would pay for itself in a little over 6 years.
If you held onto this home for 30 years you should generate $123,480 in net rental profit over that time period. On top of that the historical home appreciation rate is roughly 3% annually. Using that figure your home should be worth $327,680.43 30 years after you purchased it.
So now your original investment of just $25,000 is worth $451,160.43 which is a profit of $426,160.43. Let’s assume you do this 10 Times as I recommend. Your initial investment of $250,000 is now worth $4,511,601.30. A total profit of $4,261,604.30.
If you are reading this & you are one of those people who thinks this sounds great but doesn’t want to deal with the hassle of managing tenants, toilets & trouble simply hire a Property Management company & be completely hands off.
Let’s run the numbers again only this time we will assume that the investor hired a professional property management company the investor would net about $2,316.00per year which is a return on investment of 9.3%. It would take almost 11 years to recoup the $25,000.
If you held onto this home for 30 years you should generate $69,480 in net rental profit over that time period. On top of that the historical home appreciation rate is roughly 3% annually. Using that figure your home should be worth $327,680.43 30 years after you purchased it.
So now your original investment of just $25,000 is worth $397,160.43 which is a profit of $372,160.43. Let’s assume you do this 10 Times as I recommend. Your initial investment of $250,000 is now worth $3,971,604.30. A total profit of $3,721,604.30.
Now if this all sounds awesome and you are wondering
What does the investor do once they reach 10 residential mortgages?
ANSWER: Move onto multi-family investments.
After the 10 residential rental properties it’s usually time for the investor to move onto investing in multi-family properties. If you purchase a property that has 5 units or more it no longer falls under the residential financing restrictions. These properties use commercial financing and there is no cap to how much capital you can borrow so long as your credit and experience qualify and the loan amount hits the proper debt service coverage ratio.
This is what I did with my portfolio and it worked out very well for me. At this point in my life I rarely look into purchasing anything that has less than 4 units in it. If I do buy a residential property it is usually with cash or some type of owner financing.
Want to learn more about Real Estate?
Follow me on Instagram.
Subscribe to the Holton-Wise YouTube Channel.
