Investing in Single-Family Rental Homes vs. Stocks and Bonds
After seeing how the stock market and real estate market declined so significantly in the past year, many investors wonder if now is a better time to buy stocks or invest in real estate and what would be a better investment.
Consider the following facts about a recent purchase of a rental home that was purchased a few weeks ago. The home in question was purchased in Port St. Lucie, Florida and was a bank-owned REO property that was purchased directly from the bank.
If we assume the property is vacant 1 month out of 12 and we spend another 1 month’s rent on repairs, we would still get a very healthy return of 11.9%. Where else can you get almost 12% of your money with very little risk? This home previously sold for almost $200,000 and buying it for less than ¼ of that price obviously reduced the downside risk significantly.
The current market value of this property is around $77,000. So while this investment produces a current return of 11.9%, I have the added luxury of knowing that there is about $30,000 of equity in this property. And considering that most rental properties in Florida sell for around 140 times the rent, the fair market value of this property is probably around $112,000. That is the price you would sell this property for if you were to sell it to a rent-to-own buyer with an FHA mortgage.
Zillow estimates the value of the property at $124,000. The insurance company has the property estimated at $125 per square foot of replacement cost. Since the property is 1,176 square feet, the valuation is $147,000. I think the property is worth around $77,000. The fact that properties are selling at such a deep discount to replacement cost should be a big red flag. That’s the builders way of letting you know to buy real estate now. Actual replacement cost is around $75 per square foot, which would put the properties value at $88,200, which is probably pretty accurate. However, this is the value if the house was built new and without the land. The lot is valued at $25,000, so the new home would cost around $113,200 to build. Existing homes need to be depreciated as they are obviously worth less than new homes, so $77,000 to $88,000 is probably a healthy range for actual home value.
If we’re conservative and assume $77,000, that’s still a definite value of $30,000 in equity. At a purchase price of $47,000 which is a 63.82% return on my money when I buy ($30,000/$47,000). In addition to this $30,000 in instant capital, I also receive almost 12% per annum as mentioned above. And all this without using any kind of leverage.
Imagine what the return would be if you borrowed 90% of the purchase price ($42,750) at 7% on a 30-year fixed mortgage. So my monthly payment would be $281.09 for both principal and interest, for a total of $3,373.08 for the year. If I deduct this $3,373.08 from the net operating income of $5,655 above, I would be left with a net annual income of $2,281.92. Consider that if you make a 10% down payment ($4,750), that would result in a 48% “cash-on-cash” return. Where else can you get this kind of return?
There is no other investment that can do this with certainty.
Investing this same $47,000 in stocks would be a foolish way to invest your retirement money. I should know. I spent fifteen years as a stockbroker and money manager before becoming a struggling real estate investor. And I’m here to tell you what many other real estate investors and homeowners like me already know. The best place to invest is in single-family rental properties. That’s what I do with my money and I recommend you do the same with yours.
Unless your name ends in Buffet or Soros, you are much better off investing in rental properties than in the stock market. Investing is about getting the most cash flow or return possible, without risking your savings and doing it in the safest way.
Anything else is not investing. is to speculate And to speculate is an unknown. If you are looking for a sure thing, you should go out and find a single family rental home that is well below current market value and rent it out. If you want to speculate, you should go to Las Vegas.
Copyright © 2008 Lex Levinrad