This post was guest blogged by Steve at The Property Pundit.
What would you do with $23,448.59?
You really have two options. You can spend it on something that won’t make you money, but may bring you some kind of happiness, like a new car or a HDTV LCD Television. Or, you can use that money to make more money. Much more.
If you would have bought $23,448.59 worth of Warren Buffett’s Berkshire Hathaway stock ten years ago, you would have $70,218.16 right now. You would have made an even higher percentage return by buying Google stock last year. But, after being slapped by Google, I don’t think John would condone that.
Putting your money into something that will make you more money is always a good idea, but what type of investment is the best? We may be at the end of a real estate boom, but my vote is still on real estate. Why? A little bit of knowledge can make you exponential returns.
Let me provide a short hypothetical for you. It’s 1997. You have the same amount that John made last month to invest. Someone approaches you with the opportunity to be a partner with him and another investor on a 12 unit apartment building in, say, Washington DC. You each will put $23,376 in as a down payment and, since real estate offers you a great leverage opportunity, you’re able to buy a building worth $351,729 (20% down payment, 80% loan from the bank).
Over the past ten years the Washington DC market has seen appreciation of 285%. So, in 2007 your building that you bought for $351,729 is now worth $1,002,427.
Since this is a commercial property, you have a professional management company handle it. Your job is simply to make sure that the management company is doing its job. You have to take into account the income you’ve gotten from the tenants. Let’s say the average rent in each unit ten years ago was $500 a month and it has gone to $650 a month today. This makes your average income over the course of the year $78,660 by applying a 95% occupancy level. The best part? That income pays your loan.
But, you don’t owe taxes on very much of this thanks to the great tax savings that apply to real estate. You will write off the interest on your loan, property taxes, management expenses and anything else that is an expense for the property. It’s basically a small business, so that trip to DC you make to visit friends can now be written off as long as you check out the property. Don’t forget to go to a nice restaurant too, and definitely don’t forget to post pictures on your blog.
Okay, this is all fine, but now it’s 2007 and you want to sell out. How much have you actually made on your investment? Hold your breath…. $284,081!
You put in $23,376 and you made $284,081 for a total return of 1,215%. Your partners that split the down payment with you three ways made the same amount. Think about it. If you would have had enough for the entire down payment, you would have made $852,243. Of the money you did make, you made an average of $10,933 each year in net income (money made after all expenses including the loan) and $174,751 of capital gains when you sold. This takes into account all yearly expenses like loan interest payment, property taxes, management expenses, and expected capital expenses (like replacing a roof).
This is why real estate can make you a ton of money: leverage, appreciation, income, and tax savings. Of course if you buy a house to live in you can have even more leverage (5% or less down) and even more tax savings (no capital gains tax).
The real estate market is cyclical and now is a great time to buy a long-term investment in an area that isn’t overbuilt. If you’d like to learn more, check out The Property Pundit. I tell you about my investments and what I’m looking to buy. There may even be an investment opportunity for you in the future. Friends, this isn’t a get rich quick scheme, but if you have ten years to wait and some money to invest, you’ll make an incredible return.
Now all you have to do is find a way to make $23,376…