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The three reasons why we need to invest in real estate are:
- Inflation
- Leverage
- Supply vs. Demand
Inflation is defined as the increase in the price of some set of goods and services in a given economy over a period of time. It is measured by the percentage rate of change of a price index. Over time, money inflation reduces the purchasing power. See the table below.
$1,000,000 Under the Influence of Inflation
|
|
2.50%
|
3.00%
|
3.50%
|
4%
|
5%
|
6%
|
8%
|
|
1 Yr
|
975,000
|
970,000
|
965,000
|
960,000
|
950,000
|
940,000
|
920,000
|
|
5 Yrs
|
881,096
|
858,734
|
836,829
|
815,373
|
773,781
|
733,904
|
659,082
|
|
10 Yrs
|
776,330
|
737,424
|
700,282
|
664,833
|
598,737
|
538,615
|
434,388
|
|
15 Yrs
|
684,021
|
633,251
|
586,016
|
542,086
|
463,291
|
395,292
|
286,297
|
|
20 Yrs
|
602,688
|
543,794
|
490,395
|
442,002
|
358,486
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290,106
|
188,693
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Leverage
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Initial Investment
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Monthly Payment*
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Investment Value
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Principal Resident
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$25,000
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$3,352*
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$500,000
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Let’s examine the true costs of purchase a $500,000.00 home with 5% down
|
Purchase Price
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$500,000.00
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Down Payment
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5%
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Loan Amount
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$475,000.00
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|
Years Payment
|
30
|
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Interest Rate
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4.7500%
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Payment
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$2,477.82
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|
Interest Payment
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$1,880.21
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|
Property Tax
|
$520.83
|
|
Insurance
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$50.00
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HOA Due
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$0.00
|
|
PMI
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$297.00
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Total Payment
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$3,345.66
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Payment After Tax Benefit
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$2,748.69
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Inflation
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5.00%
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Rent Payment
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$2,000
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Down Payment
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$25,000.00
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Expected Return Of Investment
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5%
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Current Tax Bracket
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25%
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Extra Payment
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$0
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Net Costs Owner Occupy
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$2,151.08
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Net Costs N O/O
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$2,748.04
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Compare The Results From Real Estate vs. Stocks
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Year
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Investment Return
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Stock @
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Stock @
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$100,000 @ 5%
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$100,000 @ 5%
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$100,000 @ 10%
|
|
|
|
|
|
1
|
$129,471
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$105,116
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$110,471
|
|
2
|
$160,491
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$110,494
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$122,039
|
|
3
|
$193,143
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$116,147
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$134,818
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|
4
|
$227,515
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$122,090
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$148,935
|
|
5
|
$263,697
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$128,336
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$164,531
|
|
6
|
$301,786
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$134,902
|
$181,759
|
|
7
|
$341,885
|
$141,804
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$200,192
|
|
8
|
$384,101
|
$149,059
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$221,818
|
|
9
|
$428,547
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$156,685
|
$245,045
|
|
10
|
$475,342
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$164,701
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$270,704
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|
15
|
$749,227
|
$211,370
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$445,392
|
|
20
|
$1,103,987
|
$271,264
|
$732,807
|
|
25
|
$1,563,959
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$348,129
|
$1,205,695
|
|
30
|
$2,160,971
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$446,774
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$1,983,740
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What Warren Buffett Said to his Shareholders
“I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about double-digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.”
There are no other long term investment vehicles that allow more leverage than real estate.
Supply vs. Demand:
- High Inventory Level in Local Market.
- REO Means Very, Very Motivated Sellers.
- Fear Keeps Buyers Away Creating Pent-Up Demand For Future Boom.
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