Consider the goal of funding a child’s college education in the future. If “other people’s money” in the form of a scholarship is not a possibility, there still may be another way to use some “other people’s money.”
A $25,000 investment into a mutual fund paying 5% would earn $1,250 in the first year. Alternatively, the $25,000 as a 20% down payment to purchase a $125,000 rental home appreciating 3% a year would have gone up by $3,750 or three times that of the mutual fund in the first year.
The mutual fund’s growth depends on the value of the money invested. Rental real estate benefits because a 20% down payment controls a much larger asset because you’re using “other people’s money.” Leverage allows the investor to profit not only from the amount of cash invested but from the value of the investment.
With a 20% down payment and current interest rates, a typical rental would have a positive cash flow. In ten years, the equity could be $75,000. On the other hand, the $25,000 initial investment in a mutual fund earning 5% annually would only grow to about $40,000 in the same 10 years. It would require an additional $2,700 each year to reach the same $75,000 value.
Leverage is just one of the many benefits that make rental real estate the IDEAL investment. Whether you are saving for higher education, retirement or wealth accumulation, consider rental real estate. Using single-family homes as investments are attractive because homeowners have a better understanding than many other investments and self-management is a possibility.
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