Tuesday, September 9, 2008

Building Wealth, Passive Income And Financial Freedom.

The following is an example of why I think real estate investing is the premier investment vehicle, hands-down, when done correctly.

Let's take a look.

EQUITY CAPTURE - We buy real estate under market value. Typically, I'm looking at capturing a minimum of $20K in equity in after repaired value (ARV). In other words, we buy the house for $70K. Put in $10K in rehab or repairs. And after we're done, the house would appraise or sell for $100K.

CASH FLOW - We buy rental properties that cash flow each month. Typically, in the $100 to $300 a month range. So, if you're cash-flowing $200 a month, that's $2,400 a year.

On great deals that we buy way under market, we may spend $0 - $5,000 of our own money.

But we'll be a bit more conservative in this example, and use $7,500 as our total out-of-our-pocket investment in the deal.

Next, we'll imagine that our loan payed for most of the major repairs, and replaced any big ticket items in need of repair (AC, furnace, roof, and appliances). Thus, we'll budget for $50 a month on average on repairs, or $600 annually. So taking our $200 a month cash flow ($2,400 annually), and subtracting the estimated ($600) annual repairs, our net profit is $1,800.

So we make $1,800 on an investment of $7,500 - which gives us a return of 24%.

Not too shabby. And we still haven't talked about the huge capital gain awaiting us when we sell the property.

But wait, there's more!

TAX ADVANTAGES - Here comes the real extra bang for your buck. We'll base our numbers on the same $100K property we mentioned previously.

Property Tax Deduction - $2,400
Mortgage Interest Deduction - $4,745
(based on building 80K) - $2,909
Insurance - $800

Grand Total Tax Deduction - $10,854

SUMMARY - On this example, a $7,500 investment produced a 24% cash on cash return.

Yet, if we were to sell the property one year later for $100K, we would realize a $20K capital gain (we'll call it a $15K capital gain with realtor commissions and closing costs taken out).

So by adding the $1,800 in net operating cash flow to the $15,000 capital gain we made when we sold, we've made $16,800 on a $7,500 investment - or a 224% return.

And let's not forget about the $10,854 tax deduction from Uncle Sam.

Just imagine doing that 5 times in a year. You could turn $37,500 into $84,000 - with a $50,270 tax deduction to boot.

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