I sat down with my investment advisor the other day. He was trying to convince me to put more money into my 401K. “After all,” he insisted, “the market returns, on average, 10% a year.”
I will capitulate, for argument’s sake, that the market does return 10% per year. But then inflation, even government stated inflation, takes out at least 3% of that. Now I’m making 7%.
Do you think inflation is 3%? I don’t. I think it’s more like 6%, and if that were true, then my return on investment would be closer to 4%, and then I have to subtract my investment advisor’s fees from that. In the end, I am making a whopping 3% return on my money.
Now let’s look at rental real estate. I have a mortgage on one my rentals that is $500 fixed for thirty years. The current rent is $750. In the next ten years, is that rent more likely to go up or down? Up I would say. Let’s say conservatively the rent goes from $750 to $1,250 in the next ten years.
Did that rent go up because I made the property better? No. It went up because of inflation. In ten years, salaries will be higher than today, so the cost of things will naturally increase in order to capture those dollars. And one of those “things” that will increase is my tenant’s rent.
Now I’m making $1,250 a month and my payment is still $500. More impressively, I put down 10%, the bank took the risk of the other 90%, and my tenant paid the mortgage off for me. Find a 401K that will do that!
Scott Taylor is the principal property manager and co-owner of SCV Leasing in Santa Clarita, California. SCV Leasing serves Valencia, Stevenson Ranch, Newhall, Santa Clarita, Saugus, Canyon Country, Fair Oaks Ranch, Castaic, Sand Canyon, and Westridge with homes for rent, condos for rent, and property management services.
His experience as a rental property owner and as a property manager makes him the best choice for managing your rental. SCV Leasing's unsurpassed marketing plan puts renters in properties fast. Mr. Taylor can be reached at firstname.lastname@example.org.