This is the second part of my personal finance blog, Real Estate. A typical American’s portfolio usually consists of stocks, bonds, real estate and cash in different allocations (sometimes commodities as well), and although real estate is the simplest of all the investments and the one that almost everyone will own or strive to own, there should still be some logic put into your investment. My Real Estate philosophy is mostly from Kiyosaki and some of our local Real Estate brokers from Las Vegas that I had the pleasure to listen to during the peak of the financial crisis.
Robert Kiyosaki is famous for writing “Rich Dad, Poor Dad”. This is a simple book that simply says, buy assets, not liabilities. In general if you want a larger home, pay off one you can afford first and then use the rental income from home #1 to pay off the mortgage on home #2. Same goes for liability products like a car. If you’re going to take out a loan on a vehicle or other liability type purchase (something that will depreciate rather than appreciate after purchase), make sure you have a fixed income investment that can pay for the liability payments, like a rental apartment or a good yielding bond.
Now, how do you find a good deal on a home for investment purposes? That real estate broker from Vegas always said time and time again, get 10%. 10% return on your capital investment that is, even if you’re not going to rent out your first home, imagine if you were to. Could you get 10%? Thus if you pay $100,000 for an apartment, can you get $10,000 a year in income after taxes and insurance? If you can, that home has a bottom under it and you can be fairly sure that the value of that home has upside.
The reason for this is that the long term return on stocks for the S&P 500 is about 9%, when typical equity investors sense a higher return on real estate afoot, they will definitely dip their foot in the pool, step in and start to buy up homes. They usually do this by forming REITS or LLCs that buy up large amounts of real estate at once, so the effect of all real estate hitting that 10% number, as it just about did in 2009-2011, attracts every type of liquid investor into the market. Dry powder doesn’t discriminate on the animal when the heard has been thinned. Don’t fret if you catch a home meeting those criteria.
Your dream home hitting that price/return ratio is probably unrealistic, most important is making sure you get a fair interest rate and paying off that first home to just about cancel out the mortgage on home #2. If you can’t make more money in the stock market than the interest on your loan, then it might be logical to make extra principal payments at that time as well. If you can beat the interest rate (which almost everyone can right now with interest rates at historic lows), put the extra money in a good index fund like VOO (Vanguard S&P 500 ETF).