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Real Estate - Building Wealth: The Slow and Steady Way
| Title : "Building Wealth: The Slow and Steady Way".Real Estate,Investment,Business "The fastest way to get rich quick ... is to not get rich quick" Dave Ramsey Today I wanted to write about a conservative real estate investment strategy that is single handedly responsible for the creation of a large amount of wealth in this country. Chances are you don't hear much about this strategy because it does not make you a millionaire overnight, and as such you will probably not see a spokesperson with a Pepsodent smile taunting it in a late night infomercial as the newest way to hit it big.The investment strategy I am referring to is: The steady and disciplined purchase of rental properties.Now, before you click out of this article because "you have no intention of becoming a landlord", allow me to explain what I mean as this is no ordinary strategy. To illustrate, allow me to present the following example:"Jane Wealthbuilder has a full time career working for a consulting firm and she is considering investing into some rental real estate in the Houston Area. She schedules an appointment with a conservative real estate firm in town and during their appointment they devise a strategy to get started. There is actually an opportunity currently available that Jane is interested in pursuing. The property is a bank foreclosure with an asking price of $80,000 and sold properties in that area put its market value at about $100,000. After her real estate agent negotiates the deal, Jane is able to strike a deal at $75,000 and purchases the home with 10% down and a 30 YR Fixed Mortgage at 7.5%. Subsequent to the closing, on advice from her agent, Jane purchases a home warranty policy for $350 ($50 deductible) to cover mechanical parts of the home like A/C, Furnace, Water Heater, Appliances, Garbage disposal etc. Now when the prospective tenant has an issue (A/C won't work, stove won't turn on) they call the 800 number of the home warranty company and they fix the issue within one business day. That's right, no annoying phone calls! And who pays for the deductible? According to the lease, the tenant does. In addition, Jane sets up a bank account for her rental property and the tenant will be instructed to deposit the rent check at the bank account within the 3rd day of the month. That way, the tenant has a receipt of payment (the deposit slip) and Jane can check her account online to make sure that the payment has been made.The weekend after the closing, Jane visits a wholesale flooring store that her agent recommended where she was able to get a great price on updated flooring throughout the home (carpet and vinyl). In the meantime, her agent scheduled a contractor to give a bid on painting the interior of the home and he comes back with a fair price. Two weeks later the home is ready to be rented and the whole process cost Jane $4500 and a trip to the flooring store. Three weeks later her agent stops by and brings a good credit tenant that wants to lease the home for $1050 on a long term one year lease. The lease is signed and the property is now rented. All before the first mortgage payment arrives. Now let's look at the outcome of this investment for Jane:Rental Income Property BreakdownBecause she purchased the property under market value, Jane was able to get locked in equity of $25,000.The mortgage payment including taxes, insurance and Homeowners Association Dues is $817. That gives Jane a positive monthly cash flow of $233 and annual cash flow of $2,796. Jane also gets her loan repaid at a rate of about $600/yr.Jane will benefit from a mild property appreciation (5%) at a rate of about $5,000/YRTherefore, Jane's Annual Cash Flow + Loan Repayment + Appreciation= $8,396Jane's Investment in the property includes Down Payment + Make Ready + Home Warranty= $12,350That means Jane's return on investment is 67.98%. Not too shabby!!If this investor holds on to the property for 5 years, her dollar value return on this investment would be about $66,980 [captured equity of $25,000 + (5 years x 8,396 annual return)]. And we are talking about a single home. Who would've thunk it? Allow me to take the time to stress an important point. The idea behind this strategy is not to get enough monthly cashflow that you could quit your job and live off the so called "passive" income. This is an investment and a long term one at that. We recommend that investors utilizing this strategy employ a steady and disciplined approach that has them purchase 1-2 homes per year over a long period of time. I once knew a lady that had the foresight to start purchasing rental property investments when she was 25 at a rate of 1-2 homes per year. She would buy them, make them ready, lease them before moving on to the next. Now, some 30 years later, she finds herself owning about 40 homes with significant monthly cash flow and incredible amounts of equity. Retirement is looking pretty good!Wealth is best built slow and steady as opposed to loud and overnight. Think about this for a second: Do you want to be Donald Trump or would you rather be Warren Buffett? The first spends all year talking about all the money that he had while the other quietly but surely has accumulated a fortune 15 times that of Trump.Most real, long lasting wealth in America has been built this way. Get started today! |
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