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- Category: Real Estate Info Real Estate Info
- Published: 01 May 2007 01 May 2007
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Ever think of investing in real estate, but thought that you don't have the extra income or means to put into it? This article is not a get rich quick scheme or a zero down real estate program, but it will give you a glimpse of what may be possible when you think about what you have to work with when investing in Idaho Real Estate.
Please pick up a copy of the Canyon County Magazine and share this article with a friend. Whenever you think of buying or selling real estate, please think of me. Thank you!
Got Mattress Money?
When speaking of investments, most often, one looks at R.O.I. or Return On Investment. When looking at your home or other real estate investments, I want to take a moment and talk about R.O.E. or your Return On Equity.
With the recent increases in value that our market has experienced, many property owners have realized substantial gains in the amount of equity. First of all, what is Equity? Equity is the difference between market value and what is owed on the property.
For example, Jenny owns her home that is estimated to be worth $200,000 and her principle amount due on her mortgage is $80,000. In this scenario, Jenny would have approx. $120,000 of equity in her home.
Regardless of the fluctuation in market value or how much the property will sell for, there still may be equity that can be utilized. For most people, this equity sits there like burying a jar of money in their back yard or placing thousands of dollars under their mattress. Access to these funds is what I’d like to bring to your attention first.
Even if you never invest in real estate, but you own your own home with equity, think about this: Let’s say that Gary is a hard working guy with a great job. He’s worked hard to make his monthly house payments for years and even put a substantial amount down on his loan at time of purchase. Unfortunately, Gary has encountered some serious medical issues and is unable to work any longer. Gary’s thought is that he has lots of equity in his house to cover living expenses and maybe pay some medical bills. After living off savings for a few months, Gary decides to go to the bank and ask for a loan against the equity in his house. The banker looks at Gary’s situation and sees the equity, but no means of paying the loan back, because…..Gary has no job. So, unless Gary decides to sell his house, there is no access to this money that he has worked hard for. In the mean time, he has realized 0% return on this equity.
Suggestion #1: Open a Home Equity Line Of Credit on your current home. Even if you never use this line of credit, it will be available should you have a serious financial situation that arises. This is the preventive method or a possible solution to a rainy day.
Let’s take this a step further. Keep in mind, any equity that you have in your real property is achieving (ZERO) 0% return. Let’s now look at how we can put that money to work for you. By borrowing against the equity in your home, you may pay 7% interest on this loan. If you can invest that money to gain more than 7% interest, you are now realizing a Return on Equity! Sounds simple, but this must be done with careful planning and stewardship.
If you could find a fund that would simply pay you 10% on your money, you could borrow the equity at 7%, earn 10% and realize an ROE rate of 3% (for simple numbers). This is where the real estate professional comes in. Let’s say that you can borrow $20,000 against your equity and the payment is $135 per month. With some keen searching and the assistance of a licensed REALTOR®, you can now find a couple of properties that you can put $10,000 down (each) and finance the balance of the purchase price on the merits of their own value.
For example, a $100,000 property may cost you a monthly payment of $600 with 10% down and may bring a monthly rental income of $700. Doing this twice will realize a $200 positive cash flow every month, far offsetting your $135 payment on your line of credit.
Of course, there may be additional expenses and items to consider when analyzing investment properties. It’s always wise to seek the advice of your real estate professional, accountant, financial planner or attorney.
Suggestion #2: Buy real estate! Often times, one who invests in the stock market or other speculations can lose their entire investment over night… Thus creating a situation of L.O.I. or Loss of Investment. It’s a good thing to consider the other R.O.I. or Return OF Investment. When buying real estate, you most always will have the ability to regain at least some of your investment, even in a down market. Very rare is it that real estate values will plummet to ZERO over night. Keep in mind, there can be substantial losses made with improper planning and market shifts, but the real property is always there!
Now, while investing in real estate, why not buy more than one? Once you create additional cash flow, it becomes easier to reinvest that cash flow into other properties. The beauty of real estate lies with the fabulous tax advantages the IRS has made available to us. The value of the rental property can be depreciated over several years, as an expense, and in an up market, the property actually appreciates in value, gaining more equity for YOU! Done properly, one could conceivably be tax free when you think about the write-offs of these depreciating assets while at the same time, building your overall net worth.
For more detailed information about strategic planning on real estate investing, please contact Don Wixom, Realtor of RE/MAX Executives in Nampa and co-author of “How to Make your REALTOR® get you the Best Deal”, Idaho Edition. (208) 880-5039. You can also visit www.sellidaho.com for real estate information and other opportunities!