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Source: makingsenseofcents.com
Today, I have a great article to share with you from Kyle Kroeger on how to invest in real estate. He has a goal of reaching $5,000,000 in rental property value, and is sharing his plan today.
The prospect of retiring early on real estate is highly intriguing to me. It should be for a number of people and I’ll highlight a bit more below.
For millennials, like me, we don’t have it easy. Despite the mainstream media’s thoughts, millennials have faced a Great Recession, massive student loans and a global pandemic already at a young age.
We’ve seen a lot but that can be used to our advantage for financial planning and life goals.
That’s okay if things are a bit harder for millennials financially. It’s a bit more fun when things are hard.
Here I’m ready to show you why real estate investing can be a great asset class.
Related content:
I’m the prototype millennial that loves buying expensive coffee, avocado toast, iPhone apps, blah blah.
So what? Life is short, so enjoy what you love.
I went to a large public university for undergrad and come from a very much middle of the road family in the Midwest. I knew I wanted to study finance in undergrad as I had more of an analytical mindset and liked numbers.
When I graduated from college, I had a decent amount of student loans. The total amount was somewhere over $60,000 worth of student loans. While I was at school, I really didn’t realize how much student debt I had and how that would impact my financial future.
My family has always had a hardworking mentality, so I worked part-time while attending undergrad (each year).
The problem was that money went to keeping the lights on and paying bills. Not tuition.
Upon graduating, I landed a job in investment banking in Chicago. It was tough to crack into, but the pay was intriguing and the opportunity to get some great experience was invaluable. Even if it meant dealing with unique personalities and long hours.
If I could slug it out for 3 years, I knew I could focus on working, saving and paying off my student loans. I followed a disciplined approach of prepaying my loans as much as possible.
After 5 years of working in finance, I was able to successfully extinguish my $60,000 of student loans. Following my student loan repayment, I quickly saved to purchase my first house. That became my first foray into my comforts of using real estate to build wealth.
Working long hours and being chained to my desk made me realize quickly that there is so much more to life than work and making a ton of money. After my first house purchase, I realized that investing in real estate is very straightforward and manageable.
I believe the minor fixes, capital costs for repairs, etc. are generally overblown.
If you do it right, you can manage through those costs and use low cost of capital (mortgages) to build wealth over the long-term. The key thought here is long-term.
Real estate investing is a marathon, not a sprint. Multi-generational wealth can be built through real estate. There are plenty of case studies to back it up. The fact that real estate is illiquid actually works to your benefit.
If a macroeconomic event occurs, you simply can’t panic sell. You’ll have to stick it out and work through the issues firsthand. The best part is you are in control, so you can control your destiny in a way.
When you invest in index funds or stocks, you have no control. You can analyze and make decisions that may improve your odds of generating an attractive return, but you are not making the day to day decisions.
To me, the pros outweigh the cons on whether or not you should invest in real estate.
Here are some pros of real estate investing:
Here are some cons of real estate investing:
Finally, there is no one-size-fits all approach to real estate investing. In fact, there are plenty of strategies out there that can tailor to your risk tolerance.
Related content: Renting or Buying? What’s the better decision?
Here are some general investment strategies to help you understand the risk profile (in order of least risky to most risky). Generally, higher risk can lead to higher expected returns.
Think of core real estate as purchasing a property for cash flow. The property is in great shape, needs limited repairs and is fully leased. This is one of the most common forms of passive real estate investing. Core investing will end up being the least risky and lower returns.
Core plus has a little more risk. Think of core real estate as a base, but it requires you to provide some additional value to the property. For example, you are looking at a property that has 50% of the units in a 4-plex that are renovated. The other units need to be renovated and leased out at higher rates.
You can come in and provide additional value by renovating and finding new tenants. This is the in-between on the risk scale. There is an opportunity for improvement albeit at not too much risk.
For simplicity, I’ll group opportunistic and distressed together. This is usually the higher risk and higher return investing within real estate. You’ll likely need some significant expertise in real estate and some sort of angle. A common example is a fix and flip strategy. You seek out properties that are dormant and attractively priced. You already know plenty of contractors and resources to fix the property for an eventual sale.
There are plenty of other strategies and subsets of these but the above should give you a general feel for high-level strategies.
For me, I like core plus because it’s straightforward enough and offers attractive risk/reward. You don’t need to know how to fix a water heater or know every nut and bolt of a house. You simply look for cash flow improvement opportunities in high-demand markets.
The main goal with direct real estate investing is to make cash flow passive while still maintaining as much control as possible. You can do things like real estate crowdfunding or invest in REITs, but you’ll lose control and have less flexibility if you are trying to create generational wealth for your family.
If you own a ton of stock and want to pass it down to your family, what’s stopping them from selling? If you do real estate investing right, you can pass a full-fledged business down to your family that also provides consistent cash flow.
$5 million isn’t a hard number but rather a goal. This number also seems like a lot on it’s face and it is. But this is a total aggregate value of property. Not equity.
It doesn’t happen over the course of a year or two. It’s a multi-year process that takes time and patience. This amount of property value presents a great opportunity for income and scale without too much hassle.
You can remain a “small business” in the real estate space and not overload your life with stress.
The math to why $5 million in rental property value is pretty straightforward. I’d like a six-figure ($100,000) income into perpetuity as a baseline. This would allow me to live comfortably from real estate only while also holding a substantial equity position.
So, the math is as follows:
Targeted Income divided by Cash Yield = Equity Value in Real Estate
Targeted Income = $100,000
Cash Yield = 8%
Cash yield represents the annual cash flow from rental properties relative to your equity position. For example, a rental property earning $8,000 per year of income to you on a $100,000 downpayment would equity to a cash yield of 8%.
This would equate to an equity value of $1.25 million in a real estate portfolio ($100,000/8%). So, if you can meet that bogey of a cash yield you are in good shape. If you exceed it (8+%), you can potentially reach your income goal faster.
So how do I get from $1,250,000 of equity in real estate to $5,000,000?
Well, for investment properties you should have a downpayment of 25% to purchase the property. So, $1.25 million of equity implies $5 million of real estate value ($1.25M/25%).
I built a rental property spreadsheet to help me stay accountable when pricing out real estate transactions. The model serves a number of purposes. Most importantly, I use it to:
I walk through how I use the rental property spreadsheet here while walking you through an exact case study.
I hope you find the complete walkthrough helpful.
$1.25 million of equity is a lot of money. Absolutely, but you can get there over time. People do it everyday with their 401(k) and Roth IRA contributions.
It will absolutely take time.
Like your retirement contributions, you should have a full roadmap of how you plan to get there. I have 3 real estate properties right now so I’ve already gotten started on the plan.
With much more work to go, however.
Here is a plan for 8 years to get to the desired income goals and a $5 million rental property value. The assumptions include:
Financial Wolves’s Retire on Rental Income Plan:
These are not my exact income and checking account balances but they are a somewhat close representation.
So, as a 31 year old millennial it should take me about 8 years of hard work to eventually retire on real estate. That would put me in a position to earn a steady living from real estate before I’m 40 years old.
There are a few interesting things that stand out from this plan:
Once you achieve scale, you’ll have a ton of financial flexibility. Plus, the above assumes no amortization on the loans so your equity balance will likely be compounding along the way. This will give you extraordinary residual value to work with.
Here are some tips for getting started with real estate investing.
One of the best pieces of advice I received was from a savvy real estate investor. They said you simply just need to give it a go. It’s true.
If all goes wrong or you don’t like it, at least you can cross it off your bucket list… Hey, I was a real estate investor once.
Not only should you just start. You should start by trying to manage your real estate properties without an asset management firm helping you. This will help you understand your properties. You’ll get used to the ins and outs of repairs, requests and leasing.
With technology now, you should be able to efficiently manage everything. As you scale, start thinking about how an asset management firm can help you. Yeah, back to the reduce time without sacrificing too much income point.
Technology continues to be a very underrated component of real estate investing. Back in the day people would have to manually account for everything.
Some old-time real estate investors still think that you need to take 2 am calls about a leaky pipe… Or, you need to manually collect checks from tenants to bring them to your bank. Reduce your time by using resources like Landlord Studio to do all the required bookkeeping.
Or, a tool like Cozy to manage rent payment with multiple tenants in one unit. You’ll get paid instantly and Cozy even sends out rent payment reminders. What’s not to love?
If you struggle with your property and it requires capital contributions from you right away, that’s okay. Let’s be honest. No one invests to lose money. A property can require a ton of work one year but then nothing for the next 5 years.
Just because something bad happens in the short-term doesn’t mean you completely messed up the long-term. At the end of the day, things can get resolved. When I sold my first property, I realized that anxieties and the stress that I had about the property at the onset were definitely not worth it.
At the end of the day, real estate is not for everyone. However, you can use this as a baseline for whatever asset class you are interested in. To me, real estate provides the optimal solution for building long-term wealth that requires limited time.
You can build a fully operating business out of your real estate holdings that will give you the flexibility to do the things that you enjoy in life. Here are a few tips that I will try to follow along the my real estate investing journey:
It’s not that simple and will take a ton of work to get there, but my early estimations is that it will be totally worth it. Between blogging income and a small real estate business, I should be able to work where I want and when I want.
Have you or will you try real estate investing? Let me know in the comments below. I’d love to answer any questions.
Author Bio: Kyle Kroeger is the owner of FinancialWolves.com. Financial Wolves is a blog focused on helping you make more money to achieve financial freedom. After repaying student loans, I’ve shifted my focus to make more money from side hustles, real estate, freelancing, and the online economy. Follow us on Pinterest, YouTube, Twitter, and Facebook.
The post A 31 Year Old’s Journey to $5,000,000 in Rental Property Value appeared first on Making Sense Of Cents.
Source: makingsenseofcents.com
Posted on November 4th, 2020
Mortgage rates keep on marching lower and lower, with new records broken seemingly every week.
But with all the fervor surrounding mortgage rates, some lenders are playing the “how low can we appear to go” game.
For example, mortgage lenders may be talking about their lowest rates (with multiple points required), as opposed to offering their par rates, the latter coming at no extra cost to the consumer.
So instead of being presented with a mortgage rate of say 2.75% on a 30-year fixed, you may see a rate as low as 1.99%. Or even a 15-year fixed at 1.75%!
Here’s the problem; with mortgage rates breaking record lows time and time again, 10+ times so far in 2020, many homeowners are finding the need to refinance the mortgage twice. Or even three times.
And those who chose to pay points at closing, only to refinance within months or a year, essentially left money on the table.
Or they decide not to refinance to an even lower rate, knowing they’ll lose that upfront cost that’s already been paid, which is also a tough situation.
Guess what? That absurdly low mortgage rate you saw advertised isn’t really as low as it seems.
Typically, when you see a rate that’s beating the pants off the national average, and all other lenders, mortgage points must be paid.
And when the rate is really, really low, it usually means multiple mortgage points must be paid.
In other words, you wind up paying a substantial amount of money, known as prepaid interest, to secure an ultra low, below-market interest rate.
Assuming your loan amount is $200,000, two points to obtain a rate of 1.99% on a 30-year fixed would set you back $4,000.
If the loan amount were $400,000, we’re talking $8,000 upfront to secure that super awesome low rate.
Tip: Watch out for lenders and mortgage brokers who quote you a low mortgage rate, but neglect to tell you that you must pay a point (or two) upfront to obtain it.
Often, this tactic is employed to snag your business, and once you’re committed, the truth comes out, which is why mortgage APR is so important.
Here’s the thing. Mortgage rates are already so low that paying mortgage discount points to go even lower isn’t all that attractive.
There’s a great chance mortgage rates will surge higher in the future as inflation finally rears its ugly head. And at that point, you’ll already have an insanely low interest rate.
On top of that, you’ll be able to invest your liquid assets in other high-yielding accounts, likely something pretty darn safe with a rate of return that will beat your low mortgage rate.
So why keep going lower and lower if you’re already paying next to nothing on your home loan?
Additionally, you won’t want to spread yourself too thin, especially if you’re buying a new house.
There are a ton of costs associated with a new home purchase, so committing all your liquidity to an even lower rate could mean that you won’t have money for relocation costs, furnishings, necessary repairs, or an upgrade.
And as mentioned, mortgage rates do have the potential to move even lower than current levels, meaning it could make sense to refinance again, favoring those who didn’t pay much to anything at closing.
Or better yet, just went with a no cost refinance to avoid paying anything to the bank or lender.
As always, do the math to see what makes sense for you. If you’re super serious about paying off your mortgage early, then buying down your rate could be the right move.
It will certainly vary based on your unique financial situation, the loan amount, the cost to buy down the rate, and how long you plan to stay with the loan/home.
Certainly take the time to compare mortgage rates with and without points, but don’t just chase a low rate below an emotional threshold, like 2%.
And determine how long it’ll take to pay back any points at closing with regular monthly mortgage payments.
Personally, locking in a 30-year fixed rate below 3% seems like a tremendous bargain.
Investing the money elsewhere, such as in stocks or bonds or wherever else, could end up being a lot more rewarding than paying prepaid interest at closing.
Perhaps more importantly, you’ll have access to that money if and when necessary for more pressing matters.
Lastly, you can always pay extra each month if and when you choose to reduce your principal balance and total interest paid. So that’s always an option regardless of the rate you wind up with.
Read more: Are mortgage points worth the cost?
Source: thetruthaboutmortgage.com
We’re all looking for an angle, especially if it’ll save us some money.
Whether it’s a stock market trend, a home price trend, or a mortgage rate trend, someone always claims to have unlocked the code.
Unfortunately, it’s usually all nonsense, or predicated on the belief that what happened in the past will occur again in the future.
Sometimes history repeats itself, sometimes it doesn’t. We probably only hear about the times when it does because it makes the individual behind it sound like a genius.
In reality, it’s very difficult to predict anything, even the weather, so when it comes to complex stuff like mortgage interest rates, success rates probably move a lot lower.
That being said, I set out to see if there were any mortgage rate trends we could glean from available data, using Freddie Mac’s historical mortgage rates that go back to 1971.
Using 50 years of data, you would think some trends would appear, right?
Were mortgage rates lower in certain months, higher during others, or is it all just random? Let’s find out.
I looked at monthly averages for the 30-year fixed-rate mortgage over the past three decades to determine if there’s a winning month out there.
It turns out there is a month when mortgage rates are lowest, and as you might expect, it’s at a time when most folks wouldn’t even be thinking about purchasing a home or refinancing an existing mortgage.
Yes, it’s December. You know, when individuals are more concerned with holiday shopping and traveling to see family then calling up a mortgage lender.
This could explain why mortgage rates are lowest in December. If you recall, lenders pass on bigger discounts to consumers when things are slow.
As alluded to, December is always going to be a slow month for mortgage lenders, which probably has something to do with the discount seen over the past 30 years.
Similar to any other company out there selling goods, there are “sales” at certain times throughout the year, and also times when prices are marked up.
As you might expect, if a company is trying to move product, in this case home loans, what do they do? They lower the price to drive business.
Mortgage lenders able to lower the price, or rate, because they’ve got a margin built in to their market rate.
This margin acts as their profit, minus operational costs. Sure,they may not make as much per loan if they lower rates for consumers, but they could make up for it on volume.
Instead of closing one higher-priced loan, they might be happy to close three loans and earn more on aggregate. So they have wiggle room to play with rates a bit.
They can adjust them lower when business is crawling, and simply maintain or raise them when their phone won’t stop ringing.
Okay, so we know rates vary throughout the year, and even a small difference in rate can be very meaningful. But how much can you really save?
While not massive by any stretch, you might be able to get a rate .25% lower in December versus April. Same goes for October and November compared to spring.
If we’re talking about a $300,000 loan amount, a rate of 2.75% vs. 3% is the difference of roughly $40 per month, or nearly $500 per year.
Keep your mortgage for a decade and you’ll pay nearly $5,000 more over that period.
Now speaking of April, that month tends to be prime time for home buying historically, which explains the lack of a discount.
The same goes for buying a home during April – it’s a lot less common to see a price reduction during spring than it is during fall or winter.
It all begs the question; should we buy homes when prices, competition, and interest rates are lowest? Probably.
Just one problem – there tends to be less available inventory in the fall and winter months as well. But if you do come across something you like, it could be a great time to snag a deal.
In other words, you should always be looking, even if it’s not the ideal time to move.
If you’re refinancing a mortgage, there are less obstacles in December since you’ve already got a house.
To sweeten the deal, lenders probably aren’t busy, so you’ll breeze through underwriting a lot quicker. And you could receive a little more attention from your loan officer.
In short, probably not. While December had the lowest mortgage rates on average over the past 30 years, there were plenty of years when rates were higher in December compared to other months.
Take 2018, where the 30-year fixed averaged 4.03% in January and 4.64% in December.
Same goes for 2015 and 2016, when rates were markedly higher in December versus the beginning of the year.
However, in 2020 the 30-year fixed averaged 3.31% in April and 2.68% in December, which is a difference of 0.63%. That can equate to thousands of dollars in savings.
All in all, you’re probably better off paying attention to what’s going on in economy if you want to predict the direction of mortgage rates.
The trend (moving up or down over a period of time) might be more important than the month of year.
Simply put, bad economic news generally leads to lower mortgage rates, whereas positive news tends to propel interest rates higher.
Time of year aside, you might be able to save even more on your mortgage simply by gathering quotes from more than one lender.
Ultimately, timing doesn’t seem to be the biggest driver of rates, nor is it something most of us can control anyway.
(photo: Marco Verch)
Source: thetruthaboutmortgage.com