Realty World - Investors Realty
     103 W. Tulare Ave.
     Visalia, California                                

KMJ 580 "Real Talk"
Why Invest in Real Estate?

With the stock market tanking, mortgage rates at historical lows and low rates of return in the bank, everyone is talking Real Estate.  San Joaquin Valley real estate is booming and investors from throughout the state are looking at property in Fresno, Kings and Tulare Counties.  Is this a good investment?

The first thing you must decide before you invest is how long do you intend to hold the property.  If you are 62 years old and looking to retire in three to five years, this is probably a high risk investment.  If you are in your 20's, 30's, 40's or 50's and looking for a long term investment, 20 years or more, it can be a very low risk investment.

If you buy in good neighborhoods at reasonable costs you can usually count on your property appreciating at the rate of inflation or greater.  While your property is inflating in value, you can pay your mortgage off using money provided by the renters.  You can also deduct depreciation and other losses from your tax return, for individuals you can take rental loss of up to $25,000 per year, reducing your overall tax payments to the IRS.  

So lets say you purchase a property in Visalia for $125,000.  You put 20% down, plus closing costs, for a total investment of  $30,000.  The first ten years the property just breaks even.  You don't get much cash back from the rents, but, you don't pay much either.  You also get $30,000 in depreciation write off in the first ten years, which saves you approximately $9,000 in taxes.  This is an average rate of return of around 4% for the first ten years, cash on cash.  The property has also increased in value during this time period.  At a 3% inflation rate it would be worth $163,000 in ten years.  Your mortgage balance would have also declined during this time period.  Your original balance was $100,000 and in ten years you would owe $85,800, a return of an additional $14,200 on your investment.  So now your investment has grown by nearly 50% and paid you 4% cash return.

The next 10 years are even better.  You begin to get significant cash flow from your property and your mortgage begins to decline even faster.  Over the first 10 years your debt dropped by $14,200 to $85,800, and over the second ten years it will drop $28,500 more to $57,300.  At the same time inflation will have increased the property value from $125,000 to $219,000 over twenty years assuming a 3% inflation rate.  Your original investment has now grown from $30,000 to $161,700.  The property is also now generating $600 to $800 per month in positive cash flow, which you can spend or use to reduce the mortgage.  The income generated by the property is also being partially offset by depreciation so your taxes are reduced on the cash.

So, if your intention is to buy and hold, and you have the financial capability to put 20% down and have additional cash reserves to make some emergency repairs during the first ten years, real estate can be a wonderful investment towards your retirement.  In the example given above, after the mortgage was paid off, your monthly income in today's dollars would be $750.  In actual 2032 dollars it would be $1,767 assuming a 3% rate of inflation.

Financial example is based upon a 30 year fixed rate mortgage at 7%, with property values, rents, and expenses all increasing at a 3% annual inflation rate.  Tax payer is assumed to be in a 30% overall tax bracket.

We will have an open phone line this Saturday to discuss this as well interest rate trends, development news, and as always we are here to answer your questions regarding real estate.  The numbers to call on Saturday are 490-5858 or 1-800-776-5858.

I welcome your comments and suggestions for this show and future shows
Want to be a guest?  Have a subject you want covered?

To contact Brad call at (559) 732-4444 or email blueeyes@realestate-visalia.com

Link to kmj580.com 

Listen to "Real Talk" Saturdays Noon until One PM on KMJ 580 FM

Archives to Past Shows

5-25-02 Do You Trust Your Realtor?

5-18-02  How will California Balance the Budget?

5-04-02  How much commission should I pay?

4-27-02   Multiple Offers - Is this good?

4-20-02  Mold in Homes - link to Dr. Stephen Carpenter

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