Who Wants to be a Millionaire Real Estate Investor?
Posted by Keen Brothers on Saturday, March 29, 2008 at 10:42:56 AM By Keen Brothers / March 29, 2008 Comment
Investing in Atlanta Real Estate?Where should you put your money? Stocks? Bonds? Real Estate? Of course, the answer to that question will vary - depending on your individual resources, your threshold for risk and how many years you might be from your target retirement date. Few traditional models of low risk investment portfolio's mention the benefits of real estate investing - especialy for those of you that still have some gas left in the tank before retirement age.
Investing in the Bottom Line:Over the long run...the Stock Market has always been a fairly "low-risk" investment with a good return. In fact, from 1987 to 2007 the S&P 500 has appreciated at an average rate of almost 10% annually. The NASDAQ, just over 11%. Home prices over that same time period rose at an average rate of 5.6% per year annually.
The numbers don't lie and it's clear why most financial analysis would focus attention on the Stock Market rather than Real Estate. Afterall, $1.00 invested in real estate in 1987 would have made you an additional $1.84 for a total of $2.84 in your bank account.
That same $1.000 would be worth $5.74 or $7.31 were it invested in the S&P 500 or the NASDAQ, respectively.
Clearly the Stock Market is a wiser investment...right?
What About Leverage?It doesn’t make sense to talk about leverage without first talking about risk. You can use leverage to turbo-charge the returns on about any investment, but high risk usually makes leverage prohibitively useless.
Real Estate is different.
With the exception of a handful of regional markets, real estate prices historically increased at a steady 5.6 percent annually. Adding leverage to the equation and that number doubles over to 13%. That's a 13% return on investment with lower risk and less short term volatility to make your stomach turn.
What is leverage?
Leverage is using OPM (other people's money) to decrease risk and increase return. For instance, $5 invested in stocks buys $5 worth of stock. With real estate, however, a typical investor might invest $100,000 (down-payment) to buy $500,000 worth of real estate. Simply put, in real estate you get to control $500,000 (and it's ensuing, compounding appreciation) for a $100,000 initial investment.
That’s 5:1 leverage. $5 from you, and $25 from the bank.
That $5 invested in the housing market in 1987 (instead of stocks) is worth about $71. Assuming that you hadn’t paid down any of the mortgage your $5 investment would be worth more about $51.
Comparatively, your S&P investment would have netted you about $28 your NASDAQ about $38.
What's the upside?
Some things have been simplified for the purpose of explanation...but overall they're minor:
* Dividends and rental cashflow were left out. It can be assumed, with confidence, a property that you’ve owned for twenty years will be cash-flowing at a heafty rate...Corporate Dividends, on the other hand, are a bit thin these days.
Advantage: Real Estate.
* Paying down the mortgage. In the 1980s - interest rates were averaging around 10% (omg, 10%!). At that rate, over the 20 years of ownership you would have paid down your mortgage about 30%. This has not been taken into consideration in the analysis. More leveraging of OPM given it's been cash flowing and that pay down of your asset has not come out of your pocket.
Advantage: Real Estate
So...how can RealSource Brokers help you get on the inside track for investing in Atlanta Real Estate?