I for one have made 100 times as much with rentals as stocks.
It really does come down to leverage. Over time houses increase a little more than inflation. Figure about 4 percent a year. A general rule of thumb is they double in just less then 20 years. Rent follows the price.
My wife and I follow a few simple rules to determine what we buy.
1. Never buy a house we would not live in. That means no run-down crack houses in the hood. Most are three bdrm, 2 bath in nice neighborhoods.
2. The house must pay for itself from the first month.
3. Figure on getting 11 months income per year.
4. Apartments are your competition. Stay on top of their vacancy and rental rates.
We only buy middle class houses people would want to own. All needed repairs; some minor some major.
Real estate is local and relative. In lower cost areas, rent is also lower. In higher cost areas, rent is higher.
Generally speaking, when I buy a house I plan on increasing its value by 15-20% and making at least 8% a year starting the first year.
If I can buy a house for $80,000 and put $5000 in repairs I expect it to be worth at least $100,000 when I'm done. I'll expect to rent the house for $800 - $1000 a month.
In most cases I would have put 20% down or $16,000 in this case leaving $64,000 financed. For a total investment of $21,000 for a $100,000 house. That is nearly 5 to 1 leverage.
Here comes the fun part. That house will be positive cash flow from the start and the value and rent will go up about 4 percent a year.
The increased value of the house from $80,000 to $100,00 = +$20,000
The increase appreciation per year from $100,000 $104,000 = + $4,000
On paper, I have made back my entire investment plus a little profit the first year.
In ten years the house will be worth about $140,000. The rent will be increased to around $1300 a month and by applying the rent to the mortgage, it will be paid off.
In ten years my original $21,000 investment is worth $140,000 and is clearing $8,000 a year. Renters paid the mortgage.
I've done this over and over for +20 years.
You can't leverage stocks at 5 to 1, and even if you could, the margin costs would eat up any gains.
If you find you aren't good as a landlord, you can hire professional property managers to manage the properties. We are looking at doing this now to free up our time to do more pleasant things.
In my opinion, there is no better way for average people to become wealthy than in real estate, but like any business you have to understand the numbers.
At one point we owned 16 houses and 12 apartments. We sold most at the top of the bubble and are beginning to look at buying again.
We knew to sell because the market price of the house far exceeded a reasonable rent return. Now the returns are coming back in line.
It really does come down to leverage. Over time houses increase a little more than inflation. Figure about 4 percent a year. A general rule of thumb is they double in just less then 20 years. Rent follows the price.
My wife and I follow a few simple rules to determine what we buy.
1. Never buy a house we would not live in. That means no run-down crack houses in the hood. Most are three bdrm, 2 bath in nice neighborhoods.
2. The house must pay for itself from the first month.
3. Figure on getting 11 months income per year.
4. Apartments are your competition. Stay on top of their vacancy and rental rates.
We only buy middle class houses people would want to own. All needed repairs; some minor some major.
Real estate is local and relative. In lower cost areas, rent is also lower. In higher cost areas, rent is higher.
Generally speaking, when I buy a house I plan on increasing its value by 15-20% and making at least 8% a year starting the first year.
If I can buy a house for $80,000 and put $5000 in repairs I expect it to be worth at least $100,000 when I'm done. I'll expect to rent the house for $800 - $1000 a month.
In most cases I would have put 20% down or $16,000 in this case leaving $64,000 financed. For a total investment of $21,000 for a $100,000 house. That is nearly 5 to 1 leverage.
Here comes the fun part. That house will be positive cash flow from the start and the value and rent will go up about 4 percent a year.
The increased value of the house from $80,000 to $100,00 = +$20,000
The increase appreciation per year from $100,000 $104,000 = + $4,000
On paper, I have made back my entire investment plus a little profit the first year.
In ten years the house will be worth about $140,000. The rent will be increased to around $1300 a month and by applying the rent to the mortgage, it will be paid off.
In ten years my original $21,000 investment is worth $140,000 and is clearing $8,000 a year. Renters paid the mortgage.
I've done this over and over for +20 years.
You can't leverage stocks at 5 to 1, and even if you could, the margin costs would eat up any gains.
If you find you aren't good as a landlord, you can hire professional property managers to manage the properties. We are looking at doing this now to free up our time to do more pleasant things.
In my opinion, there is no better way for average people to become wealthy than in real estate, but like any business you have to understand the numbers.
At one point we owned 16 houses and 12 apartments. We sold most at the top of the bubble and are beginning to look at buying again.
We knew to sell because the market price of the house far exceeded a reasonable rent return. Now the returns are coming back in line.
