Do you want to get rich owning real estate? There are several ways to do it. You can be a ‘flipper’ and look for properties that can be bought at below market value. This can be fun but it is also a lot of work. There are plenty of investors running around town looking for these types of properties so they can be snapped up quickly. With this whole foreclosure mess that we are going through there are a bunch of investors going to the Sarasota county foreclosure auctions looking for homes that can be purchased at wholesale prices. The word I hear from investors lately is that the foreclosing banks are bidding the home prices up so high that they become unattractive to investors. People need to have access to cash in order to do buy from the courthouse steps. You need enough the day of the auction.
Flipping is attractive to many people because the limited market risk exposure. The idea of only owning a property for a short time is very appealing. The only trouble with flipping is that if it is your main source of income then you have to keep flipping. You have to continue finding houses at wholesale prices. Which is tough. It is a lot of work to find homes that are selling far enough below market value to make any money. You can never really cruise or have your income on auto pilot. Would you rather keep flipping homes for the rest of your life or would you like to own a bunch of paid off houses earning you income every month?
Time Value of Money
If you have ever taken any kind of finance courses you have heard of ‘time value of money’. The time value of money is the value of money figuring in a given amount of earned over a given amount of time. For example, if you invested $5,000 today and earned 8% a year for 10 years then your money would grow to $10,794. If you invested $5,000 today, added $2,000 a year at 8% appreciation after 10 years you would have $39,767.
Now imagine buying a home for $100,000. You put 20% down and obtained an $80,000, 15 year mortgage at 5%. Let’s assume the Sarasota FL real estate market is at the bottom, prices are not falling anymore and home prices start appreciating at 4% a year. After 15 years your $100,000 home would be worth just over $180,000. Below are values based on appreciation rates:
- 1% – $116,096
- 2% – $134,586
- 3% – $155,796
- 4% – $180,094
- 5% – $207,892
- 6% – $239,655
- 7% – $275,903
- 8% – $317,216
8% appreciation every year seems unrealistic but 3-4% might happen. Of course, it is usually not a smooth rate of appreciation. You might get 10%, then 2%, then 6% and so on.
So after 15 years your mortgage is paid off and the home appreciated. Now imagine, if you bought more than 1 of these homes. Imagine buying one home every year for the next five years. After 20 years when all homes were paid off you would have a nice little portfolio earning you rents every single month. Imagine owning 15 paid off homes renting for $1, 300 a month. That is $19,500 a month. Not a bad monthly income and unlike a flipper you don’t have to continue to find properties that can be purchased at whole sale prices. You can become wealthy taking this turtle approach to real estate.
