Thursday, May 22, 2014

Real Estate As An Investment




Many people wonder if real estate investments yield a return. While many scenarios occur in which real estate may be purchased, a featured Durango Herald article highlights utilizing an IRA (Individual Retirement Account). 
As an overview, the general rule of thumb for residential real estate investments is to put 25% of the home price down, and to obtain a mortgage for the remaining 75%. For example, a Crimson Cliff home is currently listed at $369,900. In this scenario, a person would put down $92,475, and mortgage the remaining $277,425. A 30 year mortgage for this amount, at 4.5% interest, results in a $1,400.42 monthly payment on the principal and interest. This home would likely rent for $1,700 per month. At the beginning of the investment, a person may break even (when taxes, HOA fees, and insurance are factored into the equation). However, as time goes on, the mortgage is paid down and the gross rent becomes a profit. In other situations, a cash purchase in this scenario would result in a 4.5% return on investment through the rental income.
In terms of appreciation, the below chart outlines historic trends in home appreciation for residential in-town Durango homes. The median price averages a 4.43% growth, and the average sales price has increased 5.45% annually. Although real estate will fluctuate over time, the overall trends projects up.
When we look at the potential return from rental income (estimate 4.5%) along with the average appreciation (estimate 5.5%) in Durango, we see an approximate 10% return on investment! This is a substantial amount. 

As referenced earlier, the Durango Herald article describes utilizing an IRA for real estate investment; see below for further information. Please let us know if we are able to assist with understanding real estate investments. 

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