By Troy Corman, t2 Real Estate
We live in uncertain times. Pundits argue if we're out of the recession, if the stock market will continue to rise, and if we're looking at another leg down in the economy when the government exhausts it's stimulus programs.
So what's one to do to not only protect, but create wealth? You can store it in the bank in low-yielding money market accounts. But that doesn't produce gains if we get hyper-inflation. You can continue to speculate in the stock market. But the market can produce horrific losses if the doomsdayers are correct and we get a massive decline. You can buy gold, but gold doesn't pay you monthly income, or give you terrific tax deductions, and it is much more volatile than my investment of choice, rental real estate.
Rental real estate makes you money in 5 ways.
1. Cash Flow - renters pay more each month than the home's carrying cost.
2. Principal Pay Down - rent money pays down our mortgage each month.
3. Equity Capture - we buy homes for thousands less than they're worth.
4. Appreciation - we sell homes in a sellers market when prices are rising.
5. Depreciation - rent homes produce about $10K in deductions per $100K home annually.
The formula to add $100K to your net worth is simple. We buy homes that would be worth around $100K once they are repaired. We look for a $20,000 profit margin by subtracting the purchase price and rehab costs from the home's ARV (after repaired value). In other words, we buy a home for $70K, put in $10K in upgrades and repairs, and sell the home for $100K or more. Buy 5 homes using this formula and you've added $100K to your net worth.
In this price range, we're able to rent the homes for around $1,000 a month, which will produce $100-$300 a month positive cash flow. The cash flow helps cover vacancies and any repair work. We never buy homes that don't have positive cash flow because then we've just bought ourselves a liability.
So should we invest in real estate in Dallas/Fort Worth now? Yes. I expect lenders and banks to ramp up the disposition of their bank-owned real estate and foreclosed properties. Many have talked about a shadow inventory of foreclosures that have yet to hit the market. According to the November 9th issue of National Mortgage News, "Bank of America is now saddled with $33 billion worth of nonperforming assets, almost triple what it had a year ago". Wells Fargo comes in with $20 billion in nonperforming assets, double what it had a year ago. Sooner or later, those nonperforming assets, whether they're residential or commercial real estate, have to be off the books.
As a result, I think that 2010 will offer a once-in-a-lifetime gold-mine for investors willing to take action. The economy, government spending and unemployment will freeze many in fear, which means there will be more deals for those that step up to the plate. Despite some dour predictions of a W-shaped recession, the Dallas/Fort Worth real estate market is consistently ranked as one of the top 10 markets in the nation. Out-of-staters continue to migrate to the Lone Star state in droves attracted by our job market, affordable cost of living and lack of a state income tax. So take action. Because as Wayne Gretzky says, "you miss 100% of the shots you don't take".
Check out this video about the future of Texas real estate.