asset class

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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.

  1. 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.
  2. 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.
  3. 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!
  4. 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.