The TV game show “Who wants to be a Millionaire?” offers contestants the opportunity to win cash based on chance. There is a more certain way – create your own millions. Owning income producing real estate as an asset class is a proven means of wealth creation.
To net one million dollars after taxes actually requires an investor in the United States initially between $1.25 to $1.5 million. Let’s assume that an investor can expect to earn on average 6% annual rate of return earn on stocks, mutual funds and other such investments, before fees and taxes. That is an annual income of $60,000 which translates into $5,000 per month cash flow. Thus if one owns an asset that cash flows $5,000 per month, then it correlates that that investor is in possession of a $1m asset.
A residential real estate investor typically can purchase a single-family home with 20% down. That means the investor owns 100% of the asset with only 20% actual cash outlay. This leverage is unique in that to own 100% of a stock or mutual fund portfolio requires 100% funds. One can buy equity investments on margin but that just allows for the future purchase, not ownership. Real estate invest property leverages the payment of the mortgage by the tenant, in effect the 80% balance borrowed.
As the tenant pays down the mortgage, in most cases positive cash flow increases. At the juncture that the cash flow is $5,000/month, then the investor owns a million dollar asset. There are some rules of thumb that are best to follow and the values will vary depending on the market area. The best returns typically peak at a $500,000 asset which earns rental income of $2,500 plus/minus per month. The rental income earned ratio to the asset tends to go down as the price of the property increases. The reason being is that a larger tenant pool exists in the lower month rental amount.
It was truly an epiphany moment the day I realized that there are many ways to become a millionaire. One is to earn one million after tax dollars which then could be invested for cash flow. Another is to own assets that earn annual cash flow equivalent to one million dollars. Once one becomes a millionaire, it is natural to want to share the secrets to customers and clients who want to be millionaires, too.
There may be additional tax benefits unique to owning investment real, please be certain to consult your tax advisor.
Karen Briscoe with HBC Group at Keller Williams is an active and experienced Realtor® in the Northern Virginia market place. She works with investors, sellers, and buyers in all price ranges. www.HBCGroupKW.com, 703-734-0192, Karen@HBCGroupKW.com.