Quote:
Originally Posted by 6793026
it's definitely very very tough at this interest rate.
In the next year, he'll lose 8k a yr give or take.
He'll lose less in the next 2 years as interest rate dips a little.
Real estate is never a 5 yr game.
In 15 years, the property would have increased 50% - 80%.
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I am a nerd so I did some math.
Assumptions:
Purchase price = $700,000
Financing = 65% (therefore you require $245,000 down)
Interest rate = 5% annually for the whole 15 years, 25 year amortization
Annual cash loss = $8,000
Sale price in 15 years =$1,260,000 ($700,000 x 180%)
Result is that you will have achieved an approximately
8.2% annualized rate of return on your $245,000 up front investment + annual top up of $8,000 loss per year. This result does not include realty costs to sell it at the end, special assessments, anything not included in the $8k/year. It's not terrible, but it's a highly illiquid investment, tenants are a pain, you are exposed to liability, and so on. At the end of 15 years, you will have $1,009,222 in your bank account after paying back the remaining mortgage on the place.
Alternatively, with 0 skill at all, you could plow your $245,000 and $8,000 annually thereafter into an investment account that owned just a low-cost ETF of the entire US S&P and very likely achieve 10% annually, net of costs. After the same 15 years, the same amount of your money invested results in $1,367,524 in your account, over 35% more.
FWIW, my own portfolio has done a bit more like 13% annually after costs which would result in $2,070,548 in the account.
Real estate is good, but the real value is in the forced savings mechanism. If you put a few hundred thousand away for 15 years, and don't do anything except add a few thousand more a year, all results will be good...
-Mark