Roi For Financed Transactions
Calculating the ROI on financed transactions is more involved.
For example, assume you bought the same $100,000 rental property as above, but instead of paying cash, you took out a mortgage.
- The downpayment needed for the mortgage was 20% of the purchase price, or $20,000 .
- Closing costs were higher, which is typical for a mortgage, totaling $2,500 upfront.
- You paid $9,000 for remodeling.
- Your total out-of-pocket expenses were $31,500 .
There are also ongoing costs with a mortgage:
- Letâs assume you took out a 30-year loan with a fixed 4% interest rate. On the borrowed $80,000, the monthly principal and interest payment would be $381.93.
- Weâll add the same $200 per month to cover water, taxes, and insurance, making your total monthly payment $581.93.
- Rental income of $1,000 per month totals $12,000 for the year.
- Monthly cash flow is $418.07 .
One year later:
- You earned $12,000 in total rental income for the year at $1,000 per month.
- Your annual return was $5,016.84 .
To calculate the propertyâs ROI:
- Divide the annual return by your original out-of-pocket expenses to determine ROI.
- ROI = $5,016.84 Ã· $31,500 = 0.159.
- Your ROI is 15.9%.
Extending The Gains For Longer By Buying Real Estate
One of the wealth tenets Ive followed since the first dotcom crash in 2000 is to always convert funny money into real assets. My definition of funny money is an investment that makes an irrational return in excess of fundamentals. There are obviously various levels of irrationality.
Some friends and colleagues went from huge stock market returns in 1999 only to lose everything and more in 2000. Going on margin was partly to blame. While some stocks like Webvan and Pets.com literally went to zero.
Over time, I noticed those who turned their dotcom fortunes into Manhattan or San Francisco real estate during the early 2000 era were able to extend the value of their fortunes and do quite well. As a result, young Samurai followed suit.
Of course, many homeowners ended up getting slaughtered during the 2008-2009 financial crisis buying too much home, just like stock investors who went on margin in 2000. But those who bought responsibly and were able to refinance and hold on saw their gains return.
The question I have now is whether we should cash out of stocks and buy real estate since the S& P 500 is already up 16% YTD April 2019 and back to an all-time high.
Id like for everybody to thoughtfully pitch in with their opinion. Everybodys circumstance is different, which is why its important to listen to as many different perspectives as possible.
There is no perfect answer.
If You Have A Home And A Mortgage And Invest You Are Already Borrowing Against It To Invest
Homeowners with a mortgage are already borrowing against their homes to invest.
Hows that, you say? Well, youre already using leverage to free up cash to do other things.
A mortgage allows a homeowner to make a big purchase and spread out the payments over time. The price to do this is the interest you pay.
If you borrowed more against your home in addition to the mortgage, its the same thing. The only difference is the bank obligation would increase.
Put another way, lets say someone owns a home with 30% of the homes value in equity, and 70% of value in a mortgage. They bought the home with a 20% down payment, and over time the equity increased through appreciation and principal payments.
If they were to borrow 10% against the present value of the home, the equity would go back to 20%, the same as when they bought the house. At todays rates, its often possible to get a lower rate than the original mortgage.
A second payment increases overall risk, but not substantially so. The homeowner now has more money for profitable investments.
Next, Ill put on my conservative financial pundit hat
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You Get A Regular Monthly Income
Other kinds of investments may pay out less often or income may be less predictable.
As a landlord, you can deduct certain property expenses from your income reducing the taxes you owe. If your expenses exceed your rental income, you may be able to deduct that loss from any other sources of income you have.
Reason #: Rentals Can Expose You To Important Tax Complications The Taxation Of Reits Is More Simple And Efficient
Another common misconception is that rentals are highly tax-efficient, especially when compared to REITs.
Yes, you can depreciate your property to lower your immediate tax burden, but in the process, you also lower your cost basis which will hurt you down the line when you sell the property, and/or lower your flexibility to switch from an asset class to another. In the worse case, you are then stuck with your rentals forever and can never sell them due to the tax hit that it would cause.
Moreover, you will again end up spending a lot of time trying to deduct expenses, depreciate the property, document it all, etc., and all of that time that could have earned you money working your main job. The complexity, in the end, costs you money indirectly, even if you don’t see it.
REITs, on the other hand, are very simple and tax-efficient.
- They pay no corporate income tax.
- They distribute 60%-70% of their cash flow, which means that 30%-40% isn’t taxed at all.
- A portion of the distribution is “return of capital,” which isn’t taxed.
- The portion that’s taxed enjoys a 20% deduction.
- Generally, REITs are more growth-oriented real estate investments, and therefore, more than half of the total return is tax-deferred appreciation.
- Finally, if you want to defer all taxes, you can simply hold them in a tax-deferred account. You still retain the freedom to move from one asset class to another.
Benefits Of Owning Rental Property: 6 Reasons Why You Should Invest
Perhaps you’ve considered venturing into the world of real estate investment yourself, and are drawn to the idea of becoming a rental property owner. With homeownership rates at their lowest levels in 50 years, now might be good time to explore that opportunity.
The national homeownership rate has dropped 9% since 2004. There are several factors that can explain this major shift away from homeownership. Home values have risen faster than incomes and are therefore less affordable for many renters. Additionally, younger Americans appreciate the flexibility that renting offers, and tend to delay life decisions that may precede buying a home, such as marriage or starting a family.
The resulting trend is that millennials are staying in the rental market through their 20s and mid-30s. The number of renters in the baby boomer generation has also increased, by 4.3 million in the past ten years. All of this adds up to the fact that the U.S. rental market is booming. And for many Americans, renting is a more viable option than buying.
With renter households growing at a faster rate than owner households, landlords are at an advantage in the rental market. With the current investment potential of real estate, you may want to take a good look at the benefits.
Here are a few perks to becoming a landlord:
1. Passive income source
2. Greater security
3. Flexibility to sell at the right time
4. Option to move back
5. Property value appreciation
6. Diversification of investments
Reits To Buy: Store Capital
52-week range: $30.02 $37.13Dividend yield: 4.57%
Last up on this list of REITs is Store Capital, a net-lease REIT that invests in single tenant operational real estate. Its portfolio is comprised of over 2,800 property locations stateside.
Store Capital reported Q3 metrics in early November. For the period, revenue of $199.1 million was up nearly 14% from $175.2 million in the prior-year period. Additionally, net income came in at $75.9 million, or 28 cents per diluted share. A year ago, the net income and income per diluted share had been $54.6 million and 21 cents, respectively. Cash and equivalents ended the recent quarter at $37 million. CEO Mary Fedewa noted the following:
Based on our year-to-date performance and outlook, we are reaffirming our net acquisition guidance of $1.0 billion to $1.2 billion and raising our 2021 AFFO per share guidance range to $1.98 to $2.00 as well as introducing our 2022 AFFO per share guidance range of $2.15 to $2.20, representing 9.3% growth based on the midpoints for both years.
STOR stock currently hovers at around $34, up more than 5% for the past one year. Shares are trading at 38.31 times forward earnings and 12.02 trailing sales. Additionally, the P/B ratio stands at 1.79 times. The 12-month median price forecast for Store Capital is $37.50. Interested readers could consider buying this name around $33 per share.
Article printed from InvestorPlace Media, https://investorplace.com/2022/01/7-reits-to-buy-for-january-2022/.
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Leveraging Other Peoples Money
Investors can typically buy rental properties with only 15% to 25% of their own money, and leverage other peoples money to cover the rest of the cost.
You get to buy and keep the asset, but you dont have to pay for it all on your own.
Its a classic case of good debt debt that makes you richer rather than poorer. If you borrow $80,000 to buy a $100,000 rental property, and you still earn $1,500 in average cash flow each year, then you grow wealthier for having borrowed that debt.
Meanwhile, your tenants pay down that debt for you. Eventually they pay it off entirely, and then your cash flow really balloons.
Investing In Real Estate Vs Stocks: Time And Effort
Compared to stocks, real estate takes a lot of hands-on work. You have to deal with the midnight phone calls about water leaks in a bathroom, gas leaks, the possibility of getting sued for a bad plank on the porch, and more. Even if you hire a property manager to take care of your real estate investments, managing your investment will still require occasional meetings and oversight.
When you buy shares of stock, you are buying a piece of a company. If a company has 1,000,000 shares outstanding, and you own 10,000 shares, you own 1% of the company. Unlike running a small business, owning part of a business through shares of stock doesnt require any work on your part, other than researching each company to determine whether it is a sound investment. You benefit from the companys results but dont have to show up to work.
Options To Refinance Or Use A 0% Balance Transfer
If you have the opportunity to refinance at a lower rate or take advantage of a 0% balance transfer promotion, that may impact your decision. Either strategy will reduce your interest rate costs, which reduces your monthly debt payments and allows you to increase your savings rate. This improves your financial world today, as well as in the mid-term and long-term future.
The risky part with this strategy is resisting the temptation to continue spending on the old card that you’re paying off. However, if you’re disciplined, it can allow for a much cheaper servicing of debt. It also allows for earlier and more substantial investment into retirement and non-retirement accounts.
Real Estate Or Stocks During A Pandemic
Given were still in a pandemic, its worth touching upon real estate or stocks during this most unusual time.
Both real estate and stocks have performed extraordinarily well so far. The U.S. national median home price for existing homes is around $390,000 up over 15% in 2H2021. Real estate also didnt decline in 2020.
However, stocks gave us all a fright in March 2020 when the S& P 500 collapsed by ~32%. During this time, real estate continued to chug along and actually pick up steam as mortgage rates collapsed. Today, stocks are doing fantastic. But the ride was much more bumpy.
Therefore, my nod is for real estate as a better investment during a pandemic. Real estate has outperformed stocks in a less volatile way. Further, real estate provides security and comfort, which is most appreciated during times of death and uncertainty.
If you have children, I think the preference towards real estate is even stronger. As a parent, your main priority is to provide for your children.
Every day I wake up thankful I have a house that is providing shelter for my baby daughter and young son. Yet, I dont think about stocks every day. But when I do, I tend to think what else could go wrong that will give stocks a beating.
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How To Get A Mortgage For An Investment Property
A big question for people buying a property, whether its an investment property or a primary residence, is How much house can I afford? Start by looking at a mortgage calculator to get an idea of rates and monthly payments, and then you can get preapproved to see how much money you qualify for. Make sure that you tell your Home Loan Expert that youre interested in buying an investment property, which has different rules than a primary residence.
Real Estate As An Investment Has Much Stronger Return Potential
Real estate values tend to barely outpace inflation. However, there are a few reasons why real estate investing tends to do better.
The first reason is leverage. Unlike investing in stocks, where its irresponsible to invest with borrowed money, you can use significant amounts of financing when investing in real estate without adding a ton of risk.
Unlike investing in stocks, where its irresponsible to invest with borrowed money, you can use significant amounts of financing when investing in real estate without adding a ton of risk.
Lenders typically finance investment properties with down payments of just 2025% of the sale price. When investing in a primary home, the down payment requirements can be significantly lower .
The effect of this leverage is that small returns can be greatly amplified. Consider this simplified mathematical example. Lets say that you buy an asset for $100,000 in cash and its value increases by 3%. You earned a $3,000 return on your investment.
On the other hand, lets say that you buy a $500,000 asset by investing $100,000 of your own money and borrowing the other $400,000. If the value of this asset increases by 3%, youll have a return of $15,000, or 15% of your initial $100,000 investment.
As were about to see, the combination of rental income, leverage, and tax benefits can combine to produce an investment strategy with attractive long-term gains.
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What Is Real Estate Investing
Source: Tiko Aramyan/Shutterstock.com
Put simply, real estate investing is the purchase or sale of land and buildings to earn money. There are a few different categories of real estate:
- Residential real estate includes houses, apartment buildings, vacation properties, and anywhere else people live. This is typically the easiest area of real estate for a beginning investor to enter.
- Commercial real estate involves office spaces, retail storefronts, or any building used for business purposes. Its more expensive than residential real estate, and youll manage more property. The best way for individual investors to get into CRE is to buy shares in a real estate investment trust more on those below.
- Industrial real estate includes warehouses, storage units, and other large special purpose structures like car washes that generate sales.
Real Estate Vs Stock Market In India
There are quite a few differences between real estate and stock market investments.
The salient features of real estate investment are as follows:
- A long term investment that you need to hold till the market price rises to its potential.
- Time consuming as it requires thorough research for making the right choice, followed by legal paperwork to complete the process.
- Exposed to market risks, but holding it till the market prices rise, thereby generating high returns.
- You have to wait for the right market conditions, find the best buyer and sell the property to liquidate your investment.
- No option for diversification.
Salient features of stock investments are:
- It is a long term investment though may not be as long as real estate investment.
- All you need so as to invest in stocks is to find a reliable stock broker, open demat & trading account, link it to your bank account – all of which can be done online.
- Exposed to market volatility, but usually generates higher returns over long term than real estate. However, misleading market trends often make investors take impulsive buying and selling decisions.
- You can exit your stock investments anytime during market hours. You can also liquidate your equity investments partially to meet your needs.
- You can diversify your investments with a nominal amount and also invest in equities and stocks of various companies.
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Understand The Tax Ramifications
Selling stocks could expose you to capital gains tax liability, but there are ways to finesse the situation. Basically, there are two categories of capital gains: long-term and short-term.
If you sell stocks you’ve held for over a year, they’ll be taxed as long-term capital gains. Long-term capital gains are taxed at a much lower tax rate than the rest of your income in fact, if your marginal tax rate is 15% or lower, they won’t be taxed at all.
On the other hand, if you’ve held those stocks for less than a year, that money will be classified as short-term capital gains, and they’ll be taxed at the same rate as the rest of your income. Unless you’ve made an absolute killing on the market over the past year, you’ll want to consider selling some of your older holdings.
But wait! If you haven’t made a killing over the past year, if you’ve, ahem, taken a bit of a bath in the past year , there’s still a way to use this opportunity to your advantage. That’s because the IRS allows you to use investment losses to reduce your capital gains exposure.
So selling off those disappointing investments now can actually lower your tax bill. Your write-off is capped at $3,000 for the year, but anything above that will carry over to next year, so liquidating now can not only help put together that down payment, it can supercharge next year’s tax refund. Win-win!