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Wake-Up Money – Part Three

The Benefits of Residential Real Estate Investment

Residential real estate offers five major benefits.  Most other investments offer only one or two.

1. Cash Flow – The rent provides income, i.e. “Wake-Up   Money.”  This is your ultimate goal.  When your property   is “free and clear”, you have the maximum cash flow and   “Wake-Up Money.”

2. Leverage – You can own $100,000 worth of real estate   with only 0% – 20% cash.  You can also borrow cash out   of one property to buy another. Your short-term goal is to   use leverage to acquire a portfolio of real estate.  Your   long-term goal is to pay the loans off and own your
 properties free and clear.

3. Debt Reduction – Real estate is one of the few invest  ments where someone else will make your payments.  In   essence the tenant makes the payments and reduces your   debt.

4. Tax Savings – You are allowed to depreciate the house   and write off your expenses in order to reduce your taxes.

5. Appreciation – Over time the value of houses and condos   have risen.  The average sales price of a home has more   than doubled over the past 15 years.

Free and Clear

These are three magic words for the person who’s committed to creating “Wake-Up Money.”  Many investors consider “free and clear houses” as the ultimate investment for three reasons: 1) The house generates large amounts of cash flow.  2) The house is appreciating in value.  3)  There is very little risk because there is no debt.

Wake-Up Money Example

Here’s an example of how to purchase a “Wake-Up Money” property.  This property was priced at $150,000 and sold at full price.  Here’s how the investment works on this property.

$150,000 Price
$37,500 25% Down Payment
$112,500 Loan @ 7.5%; 30-year; fixed rate
$781.73 Monthly principal and interest payments
$100.00 Monthly taxes and insurance payments
$25.00 Monthly reserve for maintenance and repairs
$925.00 Monthly rental income
$906.73   Total monthly expenses
$18.27 Monthly cash flow

Here are the 5 Major Benefits of owning this “Wake-Up Money” house.

1. Cash Flow – $219.24/year; $219.24/$37,500
 = .6% Return on Investment

2. Leverage – You own $150,000 of real estate for a $37,500   cash investment.

3. Debt Reduction – $1037 in principal reduction the first   year.  In essence the tenant is buying you the house and   giving it to you at the end of the loan. $1037/$37,500
  = 2.7% Return on Investment

4. Tax Savings – About $3300/year in depreciation.  This   means that your  income from this property will not be   subject to tax.

5. Appreciation – If this house goes up 5% in value this   year, it will increase by $7,500.
  $7,500/$37,500
 = 20% Return on Investment.

 (If the house doesn’t go up at all, there is no return from appreciation.)

Total Return on Initial Investment of $37,500:

0.6% from cash flow
2.7% from principal reduction
20.0% from appreciation
23.3% Total Return on Investment

When this property is free and clear, you will have nearly $10,000 a year in “Wake-Up Money.”  Of course by then the rents (and the “Wake-Up Money”) will probably be a lot higher, as will the property’s value.  Home values and rents have more than doubled in the last 15-years.