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UP2 Residential Real Estate Investment. What are the rates of return?

Investment in residential real estate is both less volatile and more profitable than investment in the stock market or any other common investment vehicle.

In a typical residential real estate investment in today’s market an investor can anticipate an annualized return on investment of between 20% (at 5 years) and 46% (at 30 years).  The annualized return ratio increases with the length of time the property is held due primarily to the reduced interest paid on debt service as the mortgage loan nears maturity.

This projected rate of return exceeds the return on the top performing large company mutual fund over the preceding 20 years (Fidelity New Millennium Fund, which had an annualized rate of return of 13.2%).  The projected 20.63% return after just 5 years on this real estate investment transaction even exceeds the New Millennium Fund performance over the preceding 3 years (at 20.34%).

Source: Kiplinger.com

The following PROFORMA shows the 30 year statistics for an example transaction. This transaction shows the purchase of a property at $250,000 with 25% down ($62,500) with a 30 year fixed-rate mortgage at 4.875%.  The transaction assumes a first year rental rate of $2,150.  This is a conservative estimate for rent for a property of this value.

 

Click here to see the assumptions used for these example transactions. Click here to see the detailed table.

This PROFORMA does not even take into account the superior cash-flow gains from the tax treatment of residential investment which enables many investors to defer income taxes by taking depreciation deductions on an appreciating asset, something a investment in securities does not provide.

The return ratios can be further improved by utilizing AmeriFund’s Texas Two-Step to reduce the cash investment required on a transaction.

The following PROFORMA shows the superior rates of return on a Texas 2-Step transaction that reduces the borrower’s cash investment to $37,500.  The follow chart shows the significance of leverage in a real estate transaction.  This transaction assumes that an investor can acquire a property requiring renovation at $210,000, spend $15,000 to remodel the property, resulting in an appraised value post-improvements of $250,000.  Utilizing the Texas 2-Step financing format the investor can reduce his cash investment from $62,500 to $37,500.  The effect of the additional leverage (lower cash outlay on a transaction of equal value) is to increase the annualized ROI at 30 years from 46% to 79.86%.  The rate of return almost doubles by reducing the initial cash investment.

 

This transaction PROFORMA assumes the same terms, inflation ratios and operating expense ratios as the transaction shown in the prior table.

Are you interested in increasing the yields on your investments? Contact your AmeriFund loan consultant today to learn more about the advantages of investing in residential real estate.