An Investment That Provides Annual Cash Flows Of 9600 Investing in Single Family Rental Houses Compared to Stocks and Bonds

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Investing in Single Family Rental Houses Compared to Stocks and Bonds

After seeing such a significant drop in the stock market and real estate market over the past year, many investors are wondering if it’s a good time to buy stocks or invest in real estate and which would be a better investment.

Consider the following facts about a recent rental home purchase that was purchased a few weeks ago. The home in question was purchased in Port St. Lucie, Florida and was a bank-owned REO property that was purchased directly from the bank.

</p> <p>Purchase Price $47,500 Monthly Rent $800 Annual Rental Income $9,600 Less Annual Insurance $1,045 Less Property Taxes $1,300 Less Vacancy $800 Less Repairs $800 Net Annual Income (NOI% C$59, 59% Cash)

If we assume that the property is vacant 1 out of every 12 months and we spend another 1 month’s rent on repairs, we still get a nice return of 11.9%. Where can you get almost 12% on your money with very little risk? This home previously sold for nearly $200,000 and buying it for less than ¼ of that price significantly reduces the downside risk.

The current market value of this property is about $77,000. So I have the added luxury of knowing that I have about $30,000 worth of equity in this property while this investment is currently yielding 11.9%. And given that most rental properties in Florida sell for about 140 times rent, the fair market value of this property is probably around $112,000. How much can I sell this property for if I rent it to a buyer with an FHA mortgage?

Zillow values ​​the property at $124,000. The insurance company estimates the replacement cost per square foot at $125. The property is 1,176 square feet and is valued at $147,000. I think the property is worth about $77,000. The fact that properties are selling at such a discount compared to replacement cost is a big red flag. This is the builders way of letting you know that you are now buying real estate. Actual replacement cost is about $75 per square foot which would put the property value at $88,200 which is probably fairly accurate. However, this is the value if the house is built new and without land. The lot is valued at $25,000 so a newly constructed home would cost about $113,200 to build. Existing homes must be depreciated because obviously they are worth less than new homes so $77,000 to $88,000 is probably a healthy range for what a home is really worth.

If we’re conservative and assume $77,000, that’s still a solid $30,000 in equity. At a purchase price of $47,000 that represents a 63.82% return on my money when I purchased ($30,000/$47,000). In addition to this $30,000 in instant equity I receive almost 12% annually as mentioned earlier. And all this without using any leverage.

Imagine the return if I borrowed 90% of the purchase price ($42,750) on a 30-year fixed mortgage at 7%. My monthly payment would then be $281.09 for both principal and interest which adds up to a total of $3,373.08 for the year. If I subtract this $3,373.08 from the $5,655 net operating income above, I’m left with a net annual income of $2,281.92. Consider that if you put down 10% ($4,750) that works out to a “cash on cash” return of 48%. Where else can you get such a return?

This is definitely not another investment that can be made.

Investing that same $47,000 in stocks would be a foolish way to invest your retirement money. I must know. I spent fifteen years as a stockbroker and money manager before becoming a distressed real estate investor. And I’m here to share what many other real estate investors and landlords like me know. The best place to invest is in a single family rental property. That’s what I do with my money and I recommend that you do the same.

Unless your name ends with Buffet or Soros, you are better off investing in rental property than investing in the stock market. Investing is all about generating as much cash flow or income as possible without risking your nest egg and doing it in the safest way possible.

Nothing else is an investment. It is predictable. And betting is anyone’s guess. If you are looking for a sure thing, you should go out and find a single family rental home that is below current market value and rent it. If you want to bet, go to Vegas.

Copyright © 2008 Lex Levinrad

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