Since the balloon popped in the mid-to-late 2000s, real estate has hit rock bottom and is slowly making a comeback. Some statistics show appreciation across the metro area rising from six percent to 20 percent over the last two years. There is still plenty of room for growth and that is why now is the time to invest! Whether you’re looking for your next home or have a little entrepreneur in you and want to build wealth through real estate, there has never been a better time to buy since the late 1980s and early 1990s. Interest rates are at an all-time low and in some areas the prices of pre-existing homes are below cost of new construction. These factors have never existed at the same time, which makes buying in today’s market a once-in-a-lifetime opportunity.
An exciting and recent example of this real estate phenomena occurred when my friend Jeremy bought a 3000-square-foot home in Lake St. Louis for $225,000 with an interest rate of 3.25 percent. His payment is $1333.23 with taxes and insurance. There are several reasons this indicates we’re in a buyer’s market. First, this home was valued for more than $300,000 in the late 2000s. In addition to the great deal he got on the purchase, this house could not be built today for less than $275,000. Finally, if something unforeseen happened and Jeremy had to move, the rental rate for that property is $1800-$2000 per month. Giving him a positive cash flow of nearly $500 a month. In most markets buying your home and buying investment property are two different strategies. This is not the case today.
Another awesome example on a larger scale: hedge funds traditionally have invested in mortgage-backed notes. Large funds like Blackstone are currently buying real estate in St. Louis and hundreds of other markets in the U.S. When the mortgage crisis hit, they owned billions of dollars in worthless paper. Soon after this occurred they realized that owning the tangible property was the way to go. Thousands of foreclosed properties have been bought for rentals in St. Louis during the past year and a half by hedge funds.
Most of us can’t buy thousands of properties, but you can build wealth and keep a full time job. History shows that since the 1700s real estate has doubled every 20 years. But even with a small appreciation rate of two percent annually you can build wealth.
It is possible to make one million dollars with only three properties. Assuming the following for each property: a purchase price of $182,600, annual rent of $26,400 and annual expenses (maintenance, taxes, insurance, P&I and vacancy rate consideration) of $17,780.
This case is best illustrated if your plans are to buy three properties over a three-year period amortized over 20 years. You will start by purchasing your first two homes near year one and the last during your third year. Assuming you are purchasing your homes at the current median value and have put 20 percent down, you can expect a steady increase in both equity and rental profits. A nominal appreciation rate of two percent, which is very low especially since we are starting around the bottom of the market, can be expected. Near year ten of your 20-year endeavor you should be at the halfway point in your goal of earning one million dollars. This is how your wealth begins to grow: $255,246 in appreciation, monthly positive cash flow generated from rent that will total $717,986. This means that between appreciation and positive cash flow you generate $973,232, and you still own the properties free and clear.
In the 16 years I’ve been in the real estate business I’ve met several millionaires. All of them made their money in my industry by owning real estate. Most of them bought when the prices were low in the late 1980s and early 1990s. They cash flowed for 15 to 20 years and when the market boomed in the mid 2000s they sold for huge profits. I’ve found this market to be our opportunity to buy low, and since March, 2012, I have purchased 44 of these properties all over the St. Louis market. We are getting fantastic returns and have already realized ten percent appreciation.