Banktown Foreclosures

Though this particular case isn't typical for all good potential investment properties, it is possible to find.  This is a 2 bedroom, 1 bath home built in 2001 in the Derita neighborhood / University area.  The home was in great condition and only needed a stove, refrigerator, carpet, and very minor work to be "rent ready" totalling $3,800.

$21,500 purchase price - paid cash - no mortgage (was listed for $29,900)

$800 monthly rent

$64 / month management fees

$87 / month insurance and property taxes

Immediate cash flow monthly of $649.  Not assuming any increase in monthly rent it will take only 33 months, or 2.7 years, to completely regain the initial purchase of $21,500.

Though 401k's, IRA's, and CD's are great ways to save money, build wealth through interest accrual, and plan for retirement, they aren't the only method of doing so.  Owning rental property has long been another method of accruing wealth and planning for the future and retirement.  There are pro's and con's to each and careful consideration should be made before choosing where, and how, to invest your money.  Below we'll take a look at some of these positives and negatives for different types of investing and compare the various elements of each.

Interest earned for stocks, bonds, and many mutual funds vary and most often depend on the market.  Up's and down's are constant and a long term rise in value is sought be investors.  (For the purposes of these comparison's we are not referring to day-trading or constant buying and selling to earn profits).

CD's and other similar investments tend to give far lower potential yields through their interest rates, but are far more stable, consistant, and offer a guaranteed rate of return.

Rental properties bring in a return on investment base on the rents received from tenants less expenses.  The lower the expenses and/or higher the rents the better the return.  Over time this ratio can improve if expenses remain static or are lowered and if rents rise.  Generally even in tough market rents will rise over time.  If your property is mortgaged, and your interest rate is fixed, montly mortgage payments should remain fixed while rents slowly rise - combine this with the pay-down of the amount borrowed (paid for by your tenants) and equity is also gained while earning monthly income.

As many discovered in the past few years, when the stock market tumbles, large losses follow.  Many people found their investment savings and retirement savings dwindling daily.  Sharp drops were felt in all segments of the market and various investments previously felt to be "safe" were proven to not be so secure.  In some cases companies went under leaving their stocks worthless and other companies wiped out retirement accounts that had been set aside for their employees.

While the real estate market is no less volatile and is also subject to up's and down's, if you are looking at your investment long term and are not seeking to sell your property, then these up's and down's primarly effect your equity position and do not affect your cach-flow and/or income significantly.  In other words, if you plan on holding your investment portfolio for 10 - 20 years and your rents continue to come in, a drop in equity isn't really a significant factor in your long term goals.  It actually might just be an indicator that it is time to add to your portfolio while prices are low!

Home purchased for rental in 1998

$45,000 purchase price

$40,000 mortgaged

30 year, 6% interest loan, monthly payment $240

Insurance and taxes add $89 monthly. 

8% management fee ($52/month)

Total monthly expenses $381 - home rents for $650/month.  Net monthly income of $269.

Rents have increased since 1998, and monthly rent is now $750, value of the home at one point reached $80,000 but is now about the same as its' original purchase (but will likely rise again as the recession recedes).  KEY for equity, though, 12 years of payments - made essentially by the tenants - have brought the mortgage amount down to just under $30,000.

Repairs that have been necessary in the amounts of just under $5,000 during that period were easily covered by the monthly "income" produce from the rents - which over 12 years amounted to $38,736.

This is just one case, and all cases and all properties vary, but the essential elements of rental investment are the same - mortgage pay-down over time (or cash investment for cash purchases), montly income covering monthly costs and expenses, long term cash-flow and good potential for equity.