It's been such a long time since I wrote blog about real estate. Moreover, I wrote about risk of real estate in my last blog. However, as I said in last blog, real estate is local and there are great area and worst area to invest in real estate right now. Personally, it is such a great time to invest in real estate if you understand what you are doing. So, I would like to share my recent real estate investment deal in the first part of blog and would also like to discuss why I am currently investing in real estate in last half of my blog.
I closed my 7th investment property recently. I heard from my property manager that we got tenant yesterday. Thanks to my property manager that he already got tenant almost right after closing the deal. Anyway, I am very happy with the return of this investment and I would like to share the breakdown of this deal.
Out of pocket expense：Approx $2,000 (Earnest money deposit and inspection etc)
Monthly payment：$205 (30 year loan, rate 5.7%)
Gross Income: $495
Cashflow: Around $250 - $300 (Maintenance and other expense)
Cash on Cash return: 150% - 180%
Practically, I can get all my money back within 8 - 10 month. After this, my return becomes infinity. If you think about average return of stock market with crazy volatility (7 - 9% if you are lucky), real estate investment (Cash flow) is very predictable and give me an great return.
Currently it is the best time to invest in real estate in my opinion. Currently, all main stream media are screaming that economy is really bad shape, such as housing price came down and high unemployment. However, to me, this is the best time to get ahead financially. The secret is that bad time is actually best time to invest or buy assets. Instead, people are hiding during great bargain sale when it comes to the investing. The reasons why I am investing in real estate are followings:
1. Cheap debt
Fed Chairman Ben Bernanke announced that Fed will keep the 0 - 0.25% rate until mid 2013 and implemented operation twist (If interested in learning what operation twist is, Today's Stock Market, Effect of Fed Action and Future Prospect). This means that long term interest rate, such as mortgage will further decline. In other words, we can borrow debt much cheaper in this coming time. I often hear the words from the people like Suze Orman or Dave Ramsey saying that "Save money" and "Get out of Debt". It is absolute insanity to pay off all the debt and save money in current economic time. If I can get the debt like 4 - 5%, I will gladly take all the debt that I can possibly get.
2. My strategy: Inflation
While I am investing in real estate with cheap debt, I am also investing in precious metal. The reason for investing in precious metal is very simple. As cost of debt becomes cheaper and cheaper due to massive inflation, price of gold and silver will go up significantly for the same reason. Specifically, while price of everything else will go up, cost of the mortgage stays the same because I lock in the rate for 30 years. Even hyperinflationary situation, my debt stays the same. What does this mean? This means that I can pay off my debt much cheaply with inflated currency and that's exact strategy I will use in this coming time. I simply trade or sell gold and silver to exchange as many cashflow generating assets as possibly can.
3. Tax benefit
In this coming time, I expect that tax will increase due to current fiscal condition of the government. In fact, President Obama tries to proceed "Tax the Rich". However, in reality, he is talking about higher middle class people. Due to nature of the IRS Tax code, the higher taxes government impose, the richer real estate investors or owners (Rich people) become. If this happens, riches simply create losses via depreciation or other expenses. No matter how government tries to impose higher taxes, riches are mostly not affected because they always have ways to get around it and end up higher middle class and middle class people will pick up the tab. I am using same strategy to reduce taxes by using this method.
Those are the reasons why I am investing in real estate. Personally, middle of 2013 is the time limit of this opportunity and I fully expect that rate will go up after mid 2013 because of current fiscal condition of US government (So far, Fed is the only one that buys US government debt and what will happen if Fed stops buying it). Until then, I will borrow as much debt as possibly can and invest in real estate.
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Published: 05 October 2011