Living off dividends [or how to invest in Real Estate for cashflow]
While surfing onlne, I came across this blog post: Real Estate as an asset class.
Basically this guy wants to be able to live off his dividends at some point and his blog is devoted to that. He’s wondering how real estate fits in. He invests in REITS but isn’t too sure about actual investing in Real Estate.
Well here’s the skinny on investing in Real Estate for cashflow.
You definitely want to buy in an area thats reasonably priced.
- How do you define reasonable? As a rule of thumb, the monthly rents are 1% or higher of the purchase price. for example, if you’re buying a $90,000 house and the rent is $900 per month or more, thats a reasonable price.
- You want to make sure that after paying for property management, utilities, taxes, insurance and maintenance the rent still covers the mortgage. You may need to learn how to do this. I strongly recommend reading What every Investor Needs to Know About Cashflow.
- Make sure you figure out the return on investment, or as I like to call it, the Cash on Cash return. for example, if you put down $5,000 and cashflow $125/mo, thats an annualized return of 30%. These are actual figures.I’ve also done better. It sure beats the stock market!
- Make sure your know how to get the best mortgage for your goals. I recommend this excellent book: How to Save Thousands of Dollars on Your Home Mortgage
Make sure you’re making atleast $125 over your expenses or you’ll be negative on the cashflow. I usually want atleast 16% cash on cash return for properties that are in appreciating states like Utah. If there in states which dont experience much appreciation I shoot for atleast 30% Cash on Cash, which isn’t difficult to get at all.
here’s an example:
I invested 4.5k to purchase a 90k 3/2/2 house in a city in the midwest.(4.5k is 5%. i added in closing costs to price which the seller paid)
monthly rent = $945 (1050 less a 10% vacancy)
mortgage payment = $517.5(1st at 6.5% interest only and second at 8.5% interest only)
taxes = $120
maintence = $50
property mgmt = $110 (i’m generous)
insurance = $40
cashflow = $147.5
annual cashflow = $1,770
Cash on cash return = 44% (thats 1.770/4,500*100)
Note, this is a theoretical cash on cash scenario. Often times, significant vacancies or repairs will trash these numbers. Make sure you don’t over-leverage and have sufficient reserve funds.
A lot of people think dealing with tenants is stressful. It is. Thats why you don’t want to be cheap. Always hire competent property management. You should still cashflow after including this expense.
Need cash in a hurry? Try a payday cash advance. When you get a cash advance, it allows you to have the money you need, when you need it.
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October 5th, 2005 at 7:06 am
I have spoken with a number of real estate investors in the past and many of them have talked about the 1% rule - it seems to be a very good indicator of future profits on the property.
What is idea of a return an investor should expect on a real estate investment, given the risk, dealing with tenants, etc.
The Dividend Guy
P.S. I have added your site to my Blogroll, which is displayed in the right sidebar at my site.
October 6th, 2005 at 5:17 am
Thanks for stopping by and posting a comment on Sitting Pretty
You make a good point about cash flow, but you’re basing your numbers on a 6.5% interest rate. I use a Libor the first year to keep my payments down and then refinance at the 6 month or 1 year mark based on the percentage of appreciation. This might not work in Austin (although I bet it will in the next couple of years), but it has worked for me in places like Vegas or Phoenix because the appreciation has been greater than 10% a year.
December 5th, 2005 at 10:49 pm
The Libor site cited above has an extra “/” in it…either remove it or use this link:
Explaining Libor
http://www.mtgprofessor.com/Tutorials2/Libor_Loan_Tutorial.htm
December 5th, 2005 at 10:54 pm
One more try:
Libor:
Libor
Foob
August 16th, 2006 at 8:01 pm
Hi there. I am a real estate investor up here in Canada and thought I would share some information on the BOOMING Real Estate market in Alberta, Canada. Let me tell you, we are sitting on an absolute Gold Mine…some calling it the Real Estate opportunity of a lifetime.
For example, property values in Calgary, AB increased 54% in the last 12 months. We bought a house for $350K 2 years ago and it was just appraised for $545K…an increase of $195K in two years!!!
Edmonton, AB increased 28% in the last 8 months. A recent real estate article stated values are increasing at a rate of $160 per day!
Heard of the Athabasca Oil Sands in Fort Mcmurray, AB…people are literally renting garages to live in for upwards of $1000 per month because there is no where to live. 2 bedroom condos rent out for $1500-2000 per month and are still relatively afforable selling in the $160-220K range.
If you are interested in more information on Real Estate opportunities in Alberta, Canada…drop me an email at mdobson@sasktel.net
August 17th, 2006 at 4:50 am
The greatest lesson in life is to know that even fools are right sometimes.
search engine ranking
Winston Churchill
August 24th, 2006 at 12:11 pm
great sight
May 7th, 2007 at 4:21 pm
If most of you are interested in cashflow properties you should take a look at Branson Missouri. It is still a modestly priced market with an above average appreciation rate. There are properties available at 1% rent vs purchase price and positive cashflow with 0-10% down payment. As a Broker in the area specializing in investment properties I seem to see this type of scenario quite a bit.
September 10th, 2007 at 4:53 pm
Good read.
March 25th, 2008 at 6:55 am
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