A client of mine has a $100,000 CD (Certificate of Deposit) maturing next month and is looking for a way to invest it and hopefully gain more than the 2.3% he found for another CD, if he’s willing to tie it up for 5 years. He thinking of buying a 1 year CD which is paying a bit above 1.1% which will yield him $1,106.00 next year. His logic is, he's hoping that the rates will go up and he doesn't want to miss the opportunity to buy a higher yeilding CD next year.
Most of us think about investing in the stock market or owning a business. For the most part, people are skeptical to invest and keep putting dollars in low yielding savings accounts or buy low paying CD’s. Why not Real Estate? It’s an appreciating asset and with the exception of a few downturns over last century including this last one. As long as inflation continues to grow and it cost more each year to build a home, naturally, your property value will grow. Even during this last downturn, properties are beginning to rebound if you stayed put until demand exceeds the supply. We’re seeing that now in hot markets which were at an all time low.
Real Estate is income producing once your rental property is leased. Again in a down market, owners of rental property kept right along renting while people lost homes to foreclosures. Not only were they producing income, they were also getting tax deductions on expenses for upkeep and maintenance. Many smart investors actually offset their taxable income they are producing by improving their rental properties for future sale.
Real Estate allows you to use other people’s money or OPM. By borrowing from a bank to have a mortgage, you’re expected to have down payment money which is a fraction of the investment. As your renter pays down your mortgage, you increase your investment in the asset.
Real Estate allows for depreciation. Residential property is depreciated over 27½ years. So if you have a rental property valued at 275,000 ÷ 27½ = a $10,000 annual write off against income. Couple the deduction with any improvement and the savings alone overshadows and big risk in investing. As you plan out your investment, you can earn income now and sell your rental in the future for additional profit.
Back to my friend, I proposed to him to consider buying this 2 bedroom, 2 bath condo listed for $99,900. Water, Gas, and City sewer and trash is paid through the 337.00 month HOA. Electricity is separate. The present owner has been renting the unit for 900.00 a month and the renter pays for the electricity. If he invests his $100,000 CD and pays cash, his return will be a minimum of $563.00 a month or $6756.00 a year. ($900.00-$337.00 = $563.00) He’ll also be able to write off any improvements which will increase the value and increase the rental income potential. Lastly his deprecation should around $3600.00 a year. The total income producing potential is $10,388.72, which is nearly ten times more than buying a one year CD.