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I Bought an Investment With a 17% Yield Last MonthBy
Thursday, April 21, 2011
I sat next to a billion-dollar real estate investor yesterday morning.
We were on a plane from Baltimore. He had just retired as CEO of one of the largest Internet businesses in the world. Now – as a retirement diversion – he runs a billion-dollar real estate investment fund.
I asked him what kind of property he was buying.
He told me he'd just bought an 80,000-square-foot building next to a Home Depot for $3 million. The property is about the size of two large supermarkets... or a small Wal-Mart.
A large retail property like this probably rents at more than $12 per square foot. But let's be conservative and assume my friend gets just $5 per square foot. At this rate, he will make $400,000 per year in rent. That's a yield of 13% on his investment. (At $12 per square foot, the yield jumps to 32%.)
This is obviously a sweet deal. You might think only billionaires or professionals have access to deals like this. It's true. To get in on something like this, you need lawyers. And industry connections. And staff. But most of all, you need cash. At least $1 million.
But here's the thing: There's a way for you to make similar real estate deals right in your own neighborhood.
You don't need industry connections or any staff. You'll need a lawyer, but he can do the work you need for a few hundred dollars. Best of all, you can get in on deals like this for as little as $10,000.
The big opportunity I'm talking about is buying single-family homes in working-class neighborhoods, and renting them out.
Over the past two years, millions have walked away from their houses and ruined their credit. They're now renters. Millions more lost money between 2007 and 2010 on their properties. They're afraid of home ownership. They're renters, too. Finally, after a 10-year boom in home ownership, there isn't a large availability of rental properties in most areas.
In short, now is the time to buy rental property. You buy property at bargain prices, rent it out at premium rates, and generate double-digit income yields.
For example, my partner Peter and I just bought a house in Palm Beach County that sold for $500,000 in 2008. We bought it for $80,000. After renovations and upgrades, our total cost will be $95,000. My partner has already secured a renter for $1,350 a month.
That's a gross yield of 17% on our investment. The net, after all annual expenses, will still be in the double digits. And that's not counting appreciation – which could easily double our returns if the market for this sort of property starts moving up, as I expect it to.
My brother Justin owns a company called Pax Properties. He's bought more than 50 rental properties in the last two years. And he is buying more.
Justin says there are four critical elements to being successful as a landlord...
First, you can't just buy any cheap house. Target a specific neighborhood. You're looking for ugly ducklings that'll turn into swans as working class neighborhoods turn into up-and-coming neighborhoods.
Second, you must finance yourself before you meet with sellers. Cash is best. A letter of credit from a bank will also work. Make sure you fix the interest rate for at least as long as you plan to own the property.
Third, choosing the right tenants is almost more important than choosing the right property. The wrong tenants will bring you constant misery.
Fourth, budget for rainy days. Real estate is a 365-day business: 350 days will be sunshine and blue skies... but 15 days will bring rain and trouble. Make sure you've budgeted emotionally and financially for those days.
That's a good start for your research. But there's one more important thing you need to know: Don't invest for appreciation. Invest for income. Only invest in deals where you can make double-digit returns on your investment from the rent alone.
Real estate like this will definitely appreciate. And if we have the kind of inflation some are predicting, it will be very sweet. But consider it a bonus.
First, make sure you get paid.
Good investing,
Mark
Further Reading:
Steve agrees real estate is the place to be right now. Catch up on his arguments and suggestions here...
This could be the decade of renters. And whether you rent out a property you might otherwise sell, or find potential capital gains in shares of a real estate investment trust, there could be an opportunity right in front of you.
"All things considered," Warren Buffett says, "the third-best investment I ever made was the purchase of my home."
Mortgage rates are still near record lows, and prices are extremely cheap... but banks are catching on. If you want a 30-year mortgage with a low interest rate, you'd better act soon...
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