I have never had much luck with the stock market, although my stockbroker always makes me feel like my retirement plan is doing well. I have averaged 6% to 7% over the last 20 years and that has just recently gone up due to the latest record-breaking years on Wall Street.
My rental properties, however, have blown my mutual funds out of the water. And, when you consider the small amount of money I put down on many of my properties, my cash-on-cash returns have been off the charts.
The one thing I warn people about before investing in real estate is to make sure you look at the investment as a long-term hold. If you do not have the extra annual income to fade unpredictable months then make sure you put down enough money on the front end to create positive cash flow to offset future financial hiccups.
Why rental property is a great investment
LEVERAGE
You only invest a small amount of money (20% of the price) and the bank gives you a loan for the rest. Rental properties allow an investor to buy much larger assets than they could in other investments such as stocks. Then you let the renter pay them off for you.
CURRENT LOW RATES
Interest rates are a critical factor in your monthly cash flow, and remember your rate will typically not change over the life of the loan. When rates are lower, like they are right now, it really gives an investor the advantage in realizing a better return on their investment.
IT REWARDS HARD WORK
If an investor wants to leverage their time towards rehabbing the property they will get a reward. The same goes for managing their property or using their networking skills to find under-valued properties. This is very hard to do in many other investments.
INSIDER TRADING IS LEGAL
You can go to prison if you buy stock with intimate knowledge of a publicly traded company, but that is not the case with real estate. If you learn of a new corporate headquarters coming to your area and you purchase in that area for higher rent values and appreciation it’s totally legal.
IT IS STEADY
People always need a place to live and you can always rent a home, of course, supply and demand can dictate rental rates but you can always rent at some price. It depends on who you talk to but historical data has shown us that real estate appreciates, on average, 4.5% over the last 30 years. If you really want to see the power of investment property over time, go to www.calculator.net and plug in your numbers. It is a fantastic investment property calculator that shows you cap rate, cash on cash return, internal rate of return, and other useful charts to help you quantify an investment in real estate.
