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Investing In Single Family Rental Houses Compared to Stocks and Bonds

Aug 2, 2012 | No Responses

Copyright © 2012 Lex Levinrad, The Distressed Real Estate Institute™

After seeing the stock market and real estate market decline so significantly many times over the past 10 years, many investors are wondering whether now is a better time to buy stocks or invest in real estate and which would be a better investment.

Consider the following facts about a recent rental house purchase which was purchased recently. The house in question was purchased inPort StLucie,Floridaand was a bank owned REO property which was purchased directly from the bank.

Purchase Price                                $47,500

Monthly Rental                                 $800

Annual Rental Income                   $9,600

Less Annual Insurance                  $1,045

Less Property Taxes                        $1,300

Less Vacancies                                $800

Less Repairs                                     $800

Net Annual Income (NOI)               $5,655

Cash on Cash Return                    $11.9%

If we assume that the property is vacant 1 month out of every twelve and that we spend another 1 months rent on repairs, we would still net a very healthy 11.9% return. Where else can you get almost 12% on your money with very little risk? This house previously sold for almost $200,000 and buying it at less than ¼ of that previously sold price has obviously significantly reduced the downside risk.

The current market value of this property is around $77,000. So while this investment yields a current yield of 11.9% I have the added luxury of knowing that there is around $30,000 worth of equity in this property. And considering that most rental property in Florida sells at around 140 times rent (this number fluctuates), the fair market value for this property is probably somewhere around $112,000. That is how much I would sell this property for if I were to sell it to a rent to own buyer.

Zillow currently estimates that the value of this property is $124,000. The insurance company has the property estimated at $125 per square foot replacement cost. Since the property is 1,176 square feet in total, that puts the valuation for replacement cost at $147,000. I think the property is worth around $77,000. Zillow and the replacement cost method are grossly overstating what the property is worth. However I might be able to sell the property for that much to an unsophisticated buyer with a rent to own lease option.

The fact that properties are selling at such a discount to replacement cost should be a huge signal to you that now is the time to buy. That is the builder’s way of letting you know that you should be buying real estate now. The real replacement cost is around $75 per square foot which would put the properties value at $88,200 which is probably fairly accurate. However this is the value if the house was constructed new and without the land. The lot is worth $25,000 so the house built new would cost around $113,200 to build. Existing homes need to be depreciated since obviously they are worth less than new homes so the $77,000 to $88,000 is probably a healthy range for what the house is really worth. If we are conservative and assume $77,000 that is still a definite $30,000 in equity if this property was purchased for $47,000.

At a purchase price of $47,000 that represents 63.82% return on my money when I purchase ($30,000/$47,000). In addition to this $30,000 in instant equity I also receive almost 12% annually as mentioned previously. And this is all without utilizing any leverage whatsoever (no borrowed money).

Imagine what the return would be if I borrowed 90% of the purchase price ($42,750) at 7% on a 30 year fixed mortgage. My monthly payment would then be $281.09 for both principal and interest which adds up to a total of $3,373.08 for the year.

If I deduct this $3,373.08 from the $5,655 net operating income above then I would be left with a net annual income of $2,281.92. Consider that if you put down 10% ($4,750) that would work out to be a “cash on cash” return of 48%. Where else can you get this kind of return?

There is no other investment that can do this with any certainty.

Investing this same $47,000 into stocks would be an absurd way to invest your retirement money. I should know. I spent 12 years as a stockbroker and money manager before becoming a distressed real estate investor. And I am here to tell you what many other real estate investors and landlords like me already know. The best place to invest your money is in single family rental properties. That is what I do with my money and I highly recommend that you do the same with yours.

Unless your name ends in Buffet or Soros you are much better off investing in rental properties than you are investing in the stock market. Investing is about getting as much cash flow or yield as possible, without risking your nest egg and doing so in the most secure way. And investing in property gives you the property as collateral which is one of the best forms of security that you can get. With stocks and bonds your security is a piece of paper. That didn’t work out too well for Enron, Lehman and a host of other companies that went belly up in the financial crisis. Why would you trust your life savings to a company that gives you a piece of paper (stock or bond) that says they will repay you if they haven’t cooked the books? Investing in single family rental properties offers a decent return, safety, simplicity and most importantly collateral.

Anything else is not investing. It is speculating. And speculating is anyone’s guess. If you are looking for a sure thing then you should go out and find a good single family rental house in a decent neighborhood that is selling for way below current fair market value. You should buy it and then you should rent it out. If you believe in the future of the U.S economy then you know that people from all over the world will continue to immigrate. And that creates a huge demand for housing. That is why investing in rental property is as close to a sure thing as you can get in the investment world. If you want to “play the market” or speculate with your hard earned savings then my suggestion is make a vacation out of it and take the family to Las Vegas.

Author: Lex Levinrad

Lex Levinrad has been a full time distressed real estate investor since 2003. He has been involved in buying, rehabbing, wholesaling, renting, and selling hundreds of houses in South Florida. Lex is the founder and CEO of the Distressed Real Estate Institute, which trains new real estate investors how to wholesale, buy, fix and flip properties often with no money down. Lex specializes in buying foreclosures, short sales and bank owned properties and offers mentoring and coaching programs, bus tours, boot camps and home study courses for real estate investors. Lex is an accomplished national public speaker and has shared the stage with some of the countries best real estate speakers. Lex has authored numerous books about real estate and is also the founder of the Distressed Real Estate Investors Association. Lex is also a licensed realtor with Charles Rutenberg Realty. For more information about Lex Levinrad please visit http://www.lexlevinrad.com or call 800-617-2884.

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