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.
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Real Estate: No Bottom Yet? John Mauldin is an investment adviser and president of Millennium Wave Investments. He sends out an interesting weekly newsletter, which most recently focusedon the current real estate market. It seems like the bottom isn't in sight yet: Analyst contend that much of the bad news in the subprime-loan and housing...... - Are Stocks A Better Investment Than Real Estate? According to this article in Money Magazine, stocks are a better investment, based on a study taking in account the years 1978 to 2004.While there are some valid points favoring stocks over real estate, I think it was a one sided arguement.Why choose a period where the stock market did......
- Real Estate Forecast 2009 As a member of the school's Real Estate Club, I got a pretty interesting update on the real estate forecast for 2009. This is just the summary. The whole article was signficantly bigger. A lot of it is obvious, but it's still a good comprehensive list. Serious dislocation has resulted......
Related Websites
- Top 50 Reasons To Invest In Real Estate Right Now! Someone said to me the other day, "since we are in a recession, give me one good reason why I should invest in real estate?" It caught me off guard , I couldn't even answer the question because it was just too overwhelming to me . I couldn't see how someone could be......
- Real Estate Stimulus Fail For two years I've preached that artificial means to prop up an inflated real estate market are not permanent solutions. Obama and his economic advisors (who are gradually jumping ship) thought otherwise. Can you guess where this is going? After flooding our economy with billions in home buyer tax credits......
- Rick Santelli Dropping Knowledge Bombs on Real Estate, Deflation, & Government Stimulus Rick Santelli's knowledge bombs are one of the few reasons I watch CNBC. He's one of the few who refuses to hype the pro-confidence, "sell the hope" marching meme that CNBC is promoting these days. If there are any politicians out there reading this blog -- and I know there......
[All content is copyright of Living Off Dividends & Passive Income]
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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