Here's an investment formula to consider as you close the door on 2008 and ponder what became of your 401k in the last four months of the year.
Take a look at a four bedroom, two bath home in Arvada priced at $165,000 as a bank-owned "REO". Purchase it with 20% down - your cash out of pocket is $33,000 (we can often cover closing costs by negotiating for them with the bank).
With interest rates in the low 5's (let's say 5.5%), your 30-year fixed rate payment on a $132,000 loan is about $750
.00 per month. Throw in $200 per month for taxes, another $100 for insurance, and another $150 for property management (assuming you choose to hire someone to do it for you), and your total payment is $1,200 per month. The taxes, insurance and property management costs are estimated on the high side, but we want to be conservative in our estimates.
Rent the home for $1,400 per month, and your annual cashflow is $2,400. On your original investment of $33,000, that's an annual "cash on cash" return of just over 7%, not counting your possible mortgage interest deduction, depreciation or principal paydown.
After five years, your "cash on cash" return is now 36% ($12,000 of cash flow on a $33,000 investment). Your principal has been paid down to $122,048 and we still haven't factored in the possible mortgage interest deduction or tax benefits of depreciation.
After 10 years, your cash flow (assuming you are a really nice landlord and never raise the rent) is $24,000. Your principal has been paid down to $108,954, giving you another $24,000 equity stake in the property.
Take a look at a four bedroom, two bath home in Arvada priced at $165,000 as a bank-owned "REO". Purchase it with 20% down - your cash out of pocket is $33,000 (we can often cover closing costs by negotiating for them with the bank).
With interest rates in the low 5's (let's say 5.5%), your 30-year fixed rate payment on a $132,000 loan is about $750
.00 per month. Throw in $200 per month for taxes, another $100 for insurance, and another $150 for property management (assuming you choose to hire someone to do it for you), and your total payment is $1,200 per month. The taxes, insurance and property management costs are estimated on the high side, but we want to be conservative in our estimates.Rent the home for $1,400 per month, and your annual cashflow is $2,400. On your original investment of $33,000, that's an annual "cash on cash" return of just over 7%, not counting your possible mortgage interest deduction, depreciation or principal paydown.
After five years, your "cash on cash" return is now 36% ($12,000 of cash flow on a $33,000 investment). Your principal has been paid down to $122,048 and we still haven't factored in the possible mortgage interest deduction or tax benefits of depreciation.
After 10 years, your cash flow (assuming you are a really nice landlord and never raise the rent) is $24,000. Your principal has been paid down to $108,954, giving you another $24,000 equity stake in the property.
Again, these numbers are for illustrative purposes only, but they demonstrate the point - when you can find real estate in good areas with cash flow potential from day one, your success is almost guaranteed.
Of course, with my investors, we aren't just looking for cash flow, we're looking for properties near light rail or mass transit lines or close to universities or near other locations that will always put the land at a premium. We're going to look at areas with high rental demand and stable neighborhoods. We're going to research our comps and strive to buy with equity going in, not hoping that future appreciation bails us out of a mediocre investment.
Seriously, there has not been a better rental market in Denver in at least 20 years. What are you waiting for? At the very least, you owe it to yourself to become educated. Because with a trillion dollar (or more) "Money Bomb" coming in the form of government spending initiatives, you had better have a strategy to keep up with inflation in the years ahead.
We are all entitled to our opinions, but I believe these interest rates in the 5's are an anomoly and temporary. Inflation (and the devaluing of US currency) is the fastest way out of this recession, and that's what I see happening.
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The time to take control of your financial future is now.
