BootsnAll Travel Community

Well, here's some basic information for you. Let's say you want to buy a condo in Scottsdale, Arizona and rent it out.

Price: 250000
Percent down: 10%
Closing costs: 2500
PMI: 0.6%
Number of year loan: 30
Interest rate: 6%
Property tax: 1.3%
Insurance (monthly): 80
Maintenance (monthly): 100
Number of years until you sale the place: 5 years
Housing market increase (yearly): 4%
Stock market increase (yearly): 8%
Rental income (monthly): 1550
Vacancy rate: 10%
sales commission: 6%

After 5 years (rounding actual values for my convenience):

House is worth: 304000
closing costs: -27500
principle remaining: -209000
principle paid: -15500
mortgage interest paid: -65500
property tax paid: -15000
insurance, maintenance: -10800
rental income: 83,700
sales commission: -18,000

Net gain: 19.5K

Now had you invested the money in the market instead:

return of investment on down payment and closing cost: 13000
return of investment on passive loss (difference between what your paying out and getting in): 6000

Net gain: 19.5K

So, in this example capital gains are equal. Based on these numbers the question I would ask, is can you get more than $1550/month for this place.

What if you were able to pull in $1700/month rental:

Rental: 27.4K
Market: 17.8K

What if you put 20% down instead of 10% to eliminate paying PMI:

Rental: 33.3K
Market: 27.8K

What if there is an 8% annual return in the housing market instead:

Rental: 78.7K
Market: 19.5K

What if the housing market only returns 2% and the stock market returns 15%

Rental: -7.0K
Market: 42.0K

What if you hold onto it for 10 years instead of 5:

Rental: 72.5K
Market: 63.0K

I didn't include things like management fees and homeowners dues, but you get the gist Obviously, in addition to a mathematic, financial analysis there are a lot of other considerations that will go into rental properties (location, bad tenants, etc, etc.) that can make it go wrong and you'll need the cash influx to handle these situations. But, the numbers above should give you a hint as to whether it is even worth considering investing in your market place and how much risk versus return you are willing to accept.

Well those numbers are interesting enough. I am not familiar with the market or trends in the States. I also dont know the tax breaks or downpayments requirements.

But I can say that here in Canada, we get major tax breaks (all the interest is a tax write off, and so are so many of the other costs involved). As well, our banks have introduced 35-40 year mortgages now.

I didn't realize the real estate market in the United States was so grim. Perhaps you should think about investing in your government programs instead.

nice job halfnine -- your calculations are very good - but they are so many more issues to touch on -- such as depreciation, which leads to a future tax on passive loss recapture (25%) and tax on the capital gain in the house (15%, unless you make a 1031 exchange) -- i'm just piggybacking on halfnine's point that this stuff is rather complicated and there are myriad variables that can swing the numbers. If getting rich buying real estate were easy and automatic, every 30 year old would be retired. I am NOT knocking Carmilla's success at all with that statement, but much like different automobiles, your mileage may vary. The biggest variable to your outcome is how the markets move where you have invested your money. Some areas of the USA have seen phenomenal gains in housing, while others, like my unfortunate friend in Michigan, have seen steep losses. Invest carefully.

Here's an interesting article on How To Become as Rich as Bill Gates.

Lesson 1: Choose Your Grandparents Carefully
Sequoia National Park, California

"There are three ways to make money. You can inherit it. You can marry it. You can steal it."
-- conventional wisdom in Italy

William Henry Gates III made his best decision on October 28, 1955, the night he was born. He chose J.W. Maxwell as his great-grandfather. Maxwell founded Seattle's National City Bank in 1906. His son, James Willard Maxwell was also a banker and established a million-dollar trust fund for William (Bill) Henry Gates III.

Lesson 2: Choose Your Parents Carefully
Redwood. King's Canyon National Park, California.

"A young man asked an old rich man how he made his money. The old guy fingered his worsted wool vest and said, "Well, son, it was 1932. The depth of the Great Depression. I was down to my last nickel. I invested that nickel in an apple. I spent the entire day polishing the apple and, at the end of the day, I sold the apple for ten cents. The next morning, I invested those ten cents in two apples. I spent the entire day polishing them and sold them at 5 pm for 20 cents. I continued this system for a month, by the end of which I'd accumulated a fortune of $1.37. Then my wife's father died and left us two million dollars."

According to the numbers I saw in Money magazine, most millionaires did not inherit their money:

32% job earnings
26& business ownership
16% inherited money
15% stock options
10% investments

quote:

your calculations are very good - but they are so many more issues to touch on -- such as depreciation, which leads to a future tax on passive loss recapture (25%) and tax on the capital gain in the house

Depreciation is my bad. I blame it on the fact that depreciation is not included in doing calcs for Australia which is what I had been running numbers for most recently. New numbers with depreciation and after capital gains tax:

Fed income tax rate: 25%
Fed capital gains tax rate: 15%
Fed depreciation recapture tax rate: 25%
State income tax (estimating for Arizona): 4%
State capital gain tax (estimating for Arizona): 4%

First example is now:

Rental: 12.5K
Market: 13.5K

What if you were able to pull in $1700/month rental:

Rental: 20.5K
Market: 12K

What if there is an 8% annual return in the housing market instead:

Rental: 60.5K
Market: 13.5K

What if the housing market only returns 2% and the stock market returns 15%

Rental: -9K
Market: 29K

quote:

The biggest variable to your outcome is how the markets move where you have invested your money

Bingo.

What. If.

quote:

What. If.

Very. Good.

do you make any money from that "support my travels" thing on travelpod, whereshegoes?

I personally haven't but I have known many members who have.

Arizona property is a pretty good bet. I own two income properties there - and invested in the market there for about 30 years. It paid me well - certainly more overall than my wages. But I have been traveling the world on those profits and just teaching English in a variety of countries and will semi-retire at age 55 on Phuket.

Not too bad. Could have done better but beats the rat race "back home".

Bringing this back up - Since we are about to enter some of the lowest prices we have seen in a while is there anyone out there who is itching to invest in RE now while the getting is good?

Real estate is cyclical and holding on a for a few years should produce some excellent results, esp. on the coasts.

Has anyone been researching or working on this? I'm trying to figure out exactly how much I can take from the travel fund to start investing and still have enough to take a trip. I'd hate to spend it all and come back to nothing just and miss a great buying period.

I also own several rental properties that are part of the funding for my living and traveling overseas fund. But, I bought my properties during the late 90’s and early 2K’s when the market was good. Unfortunately the investment property market isn’t doing that great these days and I have had a pretty unsuccessful time finding suitable and reasonably priced properties that I could rent out.

I would wait out the current “bad hump” is over or consider buying investment property overseas instead
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I'd probably wait if I were you as well. Housing isn't going to rebound until at least 2009 so you've got time to wait as things continue to crash.

It is just starting to come down, I would wait, real estate has a looong way to go down.

quote:

....I'm trying to figure out exactly how much I can take from the travel fund to start investing and still have enough to take a trip. I'd hate to spend it all and come back to nothing just and miss a great buying period.

Setting aside some of your money to make a down payment on a home in San Diego when you get back from the RTW isn't a bad plan. The timing will probably work out nicely. However, not making income while you are traveling isn't going to help you qualify for a loan.

Unfortunately, buying a house and then renting it out while your gone probably isn't a very viable option for a couple of years, either. Not until the rents start catching up with the likely mortgage payments.