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Investing in Income Producing Property, Part 2

January 11th, 2009

Let’s say you want to start very modestly, and have $25,000 or $30,000 to invest. With your credit still intact you can purchase real estate previously valued at $150,000 or more as an investment. It could be a small commercial or rental property with an income stream. There are still lenders, even today, making conventional commercial loans. Let’s use a $100,000 property as an example. You should be able to purchase the property with 20% down plus closing costs of about 5%. Now you control a $100,000 investment for about $25,000. If that $25,000 was in the bank and earning 5% interest, and banks are paying less than that as of this writing, you would earn $1,250 in a year. If that $100,000 real estate property appreciates only 3%, that’s 3% of the $100,000 value you control, you earn $3,000 on your $25,000 investment and that’s 12% return on your investment. That’s the magic of Leverage.

It gets even better, so let’s take a closer look. Now that you have bought the property you have to pay for it, usually by the month, and there are expenses. By choosing your property wisely in the beginning, the monthly income from rentals should pay the payments, taxes, insurance, and maintenance of the property and provide cash flow (additional profit). If it doesn’t, you are paying too much for the property and with the downturn of real estate values it should be easer to negotiate a price that will allow you to meet your goals. If your personal situation permits it you should, with Government programs like VA and FHA, be able to increase your returns far beyond 12%. FHA financing is available for a four unit apartment building if the buyer is planning to live in one of the units. This allows you to leverage up to $280,000 in real estate for less than $10,000 down and allows you to get the seller to pay the closing costs for you up to 6%. It also allows the property to be financed up to 30 years, which gives you lower payments and more cash flow. NOW let’s look at that return on investment. 3% of the $280,000 you control is $8,400 a year and an 84% return on your $10,000 investment.

Of course it’s a little more complicated than this, but not much. Leverage is a wonderful tool to use in investing today. Look into it, it could go a long way toward making up for your losses.