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Making Money Buying Real Estate

By Mark Karten on February 14, 2010

Happy Valentine's Day and I hope you have tomorrow off for President's Day, too!

As I wrote a few weeks ago, Las Vegas is the most undervalued market in the US. Our prices are 41.4% lower than fair market value, according to CNNMoney.com. This makes us a magnet for investors from around the world. So it's natural to ask the question, is it better to buy real estate now or keep my money elsewhere (in the bank, stock market or under the bed?)

According to January's statistics, of the 3,237 homes that recorded last month, 45% paid cash and 21% took a conventional mortgage. Click HERE to see the detailed report, courtesy of Equity Title.

Since most owner-occupied buyers are using FHA financing (27% of purchases), we can reasonably conclude that over 60% of buyers are investors. Some investors like to put down just 20%, so they can maximize their buying power - others want a free and clear property to enhance their cash flow.

Today, I'd like to show you just what the return on investment (ROI) can be, using very conservative numbers. (Your actual results may vary.)

Let's start with a condo purchase. Condos are almost always purchased for cash, due to lending guidelines, occupancy ratios and HOA delinquency rates. You can easily purchase a one bedroom condo for $40,000.

Scenario #1
$40,000 purchase price - condominium

Gross monthly rental income - $600
(less property management fee - $60)
(less HOA fee - $131)
(less property taxes - $50)
(less insurance - $20)
NET monthly income - $339
x 10 months = $3,390

On a $40,000 investment, you have an 8.5% return on investment - which is tremendous. Why 10 months income? To be conservative and allow for vacancy while you secure a tenant. You could achieve higher results by managing the property yourself, but I don't recommend it.

Scenario #2
$100,000 purchase price - single family home
20% downpayment = $20,000 cash
$80,000 mortgage @ 6% interest

Gross monthly rental income - $1,100
(less mortgage payment - $480)
(less property management fee - $110)
(less property taxes - $116)
(less insurance - $50)
NET monthly income - $344
x 10 months = $3,440

On a $20,000 investment, you have a 17% return on investment!

Now if you took the same $40,000 you invested in a cash condo purchase, you could buy two single family homes. I think the numbers speak for themselves.

But wait, there's more. We haven't even thought about appreciation. It's a safe bet that we won't see any increase in values for another 3 years or so. After that, barring anything totally unseen, let's assume we return to our historic 3% yearly increase in values. Single family homes will achieve this rate faster than condos.

Single family homes are also easier to rent than condos, as they are larger (for living and storage space), appeal to more potential renters including families with multiple cars, pets, etc.

You also have tax benefits when you own rental properties - click HERE to read the top ten tax deductions.

I think it's clear to see why Las Vegas is so appealing and why homes are moving so quickly. If you have been on the sidelines, unsure of what buying a rental property can do for you - I hope this makes financial sense to you. Ready to get started? We're waiting to hear from you.

Have a great week!

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