To illustrate the benefits of real estate investing, I want to tell you a quick story.
It all starts about 22 years ago when we were living in a subdivision in Mountain Park Ranch (my “office” was the front of my house). One day a neighbor visited us and said she’d been saving money for three or four years so she could buy a boat for her family. She had between $45,000 and $50,000 in the bank, and she was ready to pull the trigger.
That’s when she asked, “Should I pay cash for this boat?” We took a second to think about it and said no. Then we told her what we’d do instead—and what we recommended she should do.
We told her to take that $50,000 and use it to buy two rental properties (3 bedrooms, 2 bathrooms, a 2-car garage, 1,600 square feet, etc.) worth roughly $200,000 at 10% down. Financing was about 6% to 7% at the time, which made the mortgage payments about $1,000 to $1,100 per month. If you were to rent these properties at $1,300 to $1,500, that would mean a cash flow of $300 per month for each.
Then, if she were to use financing to purchase the boat for, say, $40,000 at an amortization timeline of 80 months, that would cost $400 per month. With the $600 in cash flow, she’d be able to cover the boat payment with $200 to spare for gas, repairs, etc.
By doing this, her tenants would be paying for both of the mortgages on her properties and the boat. What’s more, those properties would each be worth about $400,000 today. That would give her $800,000 in real estate assets, and they would more or less be paid off at this time. Not to mention all the tax benefits she could take advantage of.
We spent about an hour laying out this scenario to her. Sure enough, the next day we watched as she came home and backed her new boat into her driveway. That’s right—she used the cash to buy the boat.
Granted, not everyone has the stomach to be a landlord, and we’re still dear friends with this neighbor. We’ve even been on her boat a few times. To her credit, she’s used it a lot over the years, which is what you should do with assets that depreciate over time.
If you’d like to talk more about investing in residential real estate and how it could benefit you, don’t hesitate to reach out to us. We’d love to hear from you.