Should I buy an Investment Property?

Real estate does not excite now-a-days as much as it used to do a few years ago. We are hearing about so many under-water mortgages, foreclosures, sub-prime mortgages, etc that they is a huge fear among all of us to even talk about real-estate let alone buy it for an investment.

Mr. Buffet once quoted, 'Be fearful when others are greedy and be greedy when others are fearful'. The more I think about this line, the more I appreciate it. In-fact, I feel it is true in all investment vehicles and at all times. 

Let us dig more closely into it.Real-estate always goes through up-down cycle.  It simply means when everyone in the office, friends, family, news channel starts talking positive about something, it excites people into it. This creates such an artificial demand that prices start going through the roof. Still, there will be number of people who will profit from such a upswing in a very short amount of time yet no one can predict where we are in the cycle. On the other hand, when everyone in the office, friends, family, news channel starts talking negative about something, it spreads fear among us. Everyone wants to get out of that investment whether that is any stock, or real-estate. This drives down rates much faster. Fear and Greed overpower our thinking process in such times. 

If you are thinking about investing your hard-earned money into real-estate but you are fearful, sit back, relax your mind and just think logically. Plan your investment as to when you would need your money. If you are disciplined enough and can wait out the greed or fear cycle, you would definitely get a very good return on your investment. In today's real-estate market, there are tons of properties that you can buy and rent them out for no out-of-pocket expenses. I, myself, am doing that. I bought a foreclosed condo in 2009 and have since been renting it. I am earning close to $800/month(almost $10,000/year) after deducting all my expenses like real-estate tax, condo fees, Landlord insurance, and other expenses. After renting it out for just 1.5 years, I recovered all of my total investment from the rental income itself. If I sell it after say 5 years at the same price that I bought it for, I would have made a handsome return of  20% annually. Keep in mind that my initial investment was only $10,000 to buy this condo plus another $5000 towards closing and fixing some minor things in the house. There is every chance that in the next 5 years, real-estate prices will not only stabilize, but it would start going up. 

In a nutshell, when you want to invest any money, don't let fear or greed drive your thinking. Plan your investment strategy well, and stick to it. Learn to profit from others' fears. 

Would you like to share your investment experience? I would be happy to post your story on my blog for others to learn from it. 

Real Estate! What's not to like?

Afraid of buying a house in this economy? Think you will get stuck in a downward spiral?

• Historically low Interest rates
• Abundant of properties to choose from
• Affordable prices
• Ever increasing rents

So, Think Again.

Let's run some numbers. 
Let's say you are buying a house for $200K with a 20%($40K ) down-payment.Your annual real estate tax may be around 1.5%($3000) and lets keep another $300/month for HOA fee.
Let us look at your monthly expenses now

• Mortgage expense: 160000@5%(current rate) = $860/month
• Monthly Property tax payment: 3000/12 = $265/moth
• HOA fees = $300/month

Put together, you will be spending $1425/month for a place of your own.

If you are presently renting, you can easily expect to pay $1200-$1500/month for a similar house/condo/apartment depending on the location and amenities.

Now let us go one step further and say you are going to live in same city for 5 years.
Can you even imagine how much rent you would have paid in those five years?
Let's do the numbers again.
Monthly rent(Avg rent from 1200-1500)*no. of months*no. of years
$1350*12*5=$81000 (whopping 81 thousand dollars going down the drain)

Had you owned your place for 5 years, you would have spent

$1425*12*5=$85,500 (Wow! this is more than renting)
NOT AT ALL. LET US SEE HOW!
Out of the $85,500 you spent, $51,600 went to your lender for your mortgage.
Further, out of $51,600, your interest payment was $38460.85 that is subject Federal Tax credit on Mortgage Interest. So, you are sure to get something back from $38460.85
This is the PROUD PART, In those 5 years, you build yourself a NICE EQUITY of $13074.03

Out of remaining $33,900(85,500-51,600), You paid $15,000 in your property taxes that is again subject to Federal Tax credit.

So, all in all you paid a lot less to OWN than to RENT

With the economy recovering, you will certainly do fine. With all the EQUITY you would have built by then, your down-payment on your next house would be ready.

This was the WORST-CASE scenario. On the brighter side, the REAL ESTATE is bound to recover sooner or later. You can't rent forever or can't live in your parents house forever simply because you will outgrow the space and would need some space of your own.

Who knows if you let this opportunity go by and wait for a few more years, what would be interest rate or real estate prices.

One piece of advise is that your total housing expense(whether owning or renting) should not be more than 30%-35% of own take home pay. Look for rental property and something to buy in that range and you will do just fine.

If you want to discuss or have a specific question, please leave a comment and I would glad to answer to the best of my ability.