My friend Peter spent his career as a self-employed entrepreneur. He and his wife owned a business that installed aboveground pools on Long Island. It was hard work. So when Peter turned 52, they were happy to relocate to South Florida.
That was in 2003. The housing boom was just taking off. To earn extra money, Peter bought and sold single-family houses. I was his partner in most of those acquisitions.
Four years later, prices had skyrocketed. I pulled my money out of the market. Peter managed to buy and sell in 2007, just before the market tanked. After that, he wasn’t sure what to do. His part-time property-trading business was behind him. So he spent the next two years managing my Florida properties. The money he earned was okay, but he wanted to get back into the six-figure world he enjoyed during his first five years in Florida.
Three years later, I told him I was ready to invest in real estate again. Home prices were way down in South Florida. Where we live, for example, you can buy a renovated three-bedroom, two-bath house in a working-class neighborhood for $90,000. In 2007, when we got out, that same house would have cost you at least $200,000.
But when I decided to get back into real estate, I decided to do something different this time around. Instead of flipping homes, as we were doing during the bubble, we began buying properties for rental income. It makes no sense to play the buy-and-sell game today, because it is still possible that prices can go down even more than they have.
Buying rental properties is a great opportunity for anyone who has some cash and is interested in turning it into a lucrative, income-producing business. And there are three reasons why now is the best time to buy.
First of all, the kinds of houses we are buying are cheap. The best properties to buy are single-family, three-bedroom, two-bath houses. There is always a big market for them since they are perfect for young families.
In “B” neighborhoods you can buy them and have them spiffed up for about $90,000. That is less than the cost of building the house. In other words, you are buying a house at a discount and getting the property for free. And, according to The Miami Herald and The Palm Beach Post, home prices in South Florida are still falling. They’re down between 5-8% this year.
The second reason why now is the best time to invest, is that mortgage rates are at all-time lows. You can get a 30-year, fixed-term mortgage for less than 4.5%. You can get a 15-year mortgage for less than 3.5%.
Thirdly, because so many people have gotten into financial trouble, the number of people renting homes today is greater than ever. Banks have tightened their lending policies (something they should have never loosened). Many people who earn good incomes can’t get mortgages. So the market is now flush with people looking to rent.
These three factors have created a terrific opportunity for prudent investors. Today, if you took out a 4.5%, mortgage on 80% of a $90,000 house, you’d be paying about $4,400 per year in interest payments. With taxes (at, say, $1,700) and expenses (say another $2,000), your total cost for owning the house would be about $8,100 per year. That translates into about $700 per month.
You could rent out a house like the one I’m describing for between $1,300-2,000 per month. Subtracting $700 (your monthly expenses) from, say, $1,500 (a conservative estimate of the monthly rent you’d be getting) will net you $900 per month. That’s a profit of $9,600 per year.
Considering that your down payment for the house was, say, $20,000 (20% of $90,000 is $18,000 plus about $2,000 to spruce the house up), your rate of return on that $20,000 is an amazing 48%.
But there is another major benefit to owning a rental property. With all the money the Federal Reserve has printed, the decline of the dollar and high inflation are all but inevitable in the years ahead. So the $700 per month you will be paying for interest and expenses toward your home will become easier to pay because your income, through inflation, will almost certainly go up.
In other words, the weakening of the dollar will make your debt less expensive in real terms.
And if that’s not incentive enough, consider this: as inflation increases, so will the market value of your home. It is quite possible that you could see your $90,000 house double in value in 10 years.
And even if that doesn’t happen, it’s almost certain to double, triple, or quadruple by the time you pay off your mortgage. That translates into an extra $180,000-360,000 that you can put towards retirement.
It’s easy to get started. You can begin by searching online and scouting out properties in South Florida. I recommend you focus on Palm Beach County. That is, in my view, the least risky. It also offers the greatest potential returns.
Look for the kinds of houses I’m buying: single-family, three-bedroom, two-bath homes under $100,000. You will find plenty of them, but they tend to go quickly. (Peter and I are not the only two guys who understand the values.) If you can’t fly down to Florida to check them out, then find a real estate property manager or a real estate broker who will do that for you.
If the deal looks good and you buy property in South Florida, then consider hiring them to manage your properties for you. They will take care of everything—upkeep, rentals, bills, etc.—so you won’t have to deal with any of that. You’ll get monthly reports that show you how much money you are making. And you’ll be happy and have peace of mind.
My friend Peter has no ambitions to be a multimillionaire. He plays golf three times per week and volunteers for local community activities. He’s living the life he wants to. But he is also smart enough to know that by spending a few hours per week buying and managing rental real estate in our neighborhood, he can make an extra hundred grand (or more) per year. Plus, he will eventually have a real estate portfolio worth millions.To register, click here.]