Homes as Investments

Over the last year or so, we have seen real estate prices fall like we could never have imagined.  Many experts believe that residential real estate is just the beginning, and that commercial will start to go into crisis mode in the near future.

What are we to do now?  I like to think of real estate the same way I think of stocks, though on a different scale.  When prices are high, be cautious.  When prices are low, like they are now, it is a good time to buy.

Like many stocks, real estate pays a dividend (rent) when you put it to work for you.  It is important to only buy real estate for two purposes.  1) You intend to live there or 2) you intend to rent it out.  Real estate investment is a game of cash flows.  If you intend to sit and hold the property until the value goes up, you are either really rich and can afford the payments for years without worrying or you are really stupid.

Here is how to take advantage of real estate cash flows.  Find a property that you can afford and can be realistically rented out very quickly.  Look at rent in the area and figure out if you can charge more for rent, plus a premium for repairs, insurance, any utilities you plan to cover, and a little profit.

For example, if you buy a single family house and have a monthly mortgage payment of $1000 including insurance, you need to charge more than that for rent.  If you plan to cover water and trash collection that cost about $75 per month plus repairs that you anticipate will cost $125 per month, you need to charge $1200 just to break even.  Add in a little extra for your time and profit too.  If you charge $1500, you will make about $300 per month.  Just remember that sometimes big things break and repairs are going to eat into your margin.

You can scale this out also.  Lets say you buy 3 houses in the same neighborhood for the same amount.  You are now making $900 per month.  If you have five houses you make $1500 per month.  That is enough to cover the mortgage on one of the houses if you are having trouble renting all of them.  The more properties you own, the safer you are if one has unexpected costs or you have a few months not rented.  If you keep rolling the profits back in, you can buy more houses and keep growing.

Some people establish an LLC (limited liability corporation) to protect themselves from lawsuits.  If you are really ever going to get into real estate investing, consult with a legal and tax advisor first.

Remember that if the property value goes up, you make even more when you sell.  I am a big fan of getting in for the long haul.  When I am done with school, I plan to buy at least a few houses for extra income.  If you are good enough, you might not need another job at all!