Last year my wife and I welcomed a baby girl into this world. Abigail is now 21 months old. She is walking, talking and counting to 10. A child prodigy. I expect her valedictorian speech will be the perfect blend of insight and funny. So it was an uncomfortable experience reading a recent Wall Street Journal article on the 10 year, 6 percent compound rate increase in today's college tuition that would see the cost of higher education for Abigail balloon to around $350,000, not include living expenses.
The only thing a dad can do is think about how we can cross this river without either of us drowning in decades of debt. And although this may surprise you, today's lifeboat is shaped like a house.
Ultimately, a home's value is what it can provide in shelter or the income that it can provide an investor.
During 2002-2005, costs of homes far exceeded the rents they could produce. Rising home prices encouraged only speculative investing. Value investors stayed away from the real estate market. Today, value investing is back. Record low mortgage rates and depressed prices have helped real estate investors earn returns of more than 8 percent without any factor for future appreciation. Experienced investors are turning toward residential real estate for sources of retirement income and future ivy league education costs.
In the past, "break-even" was the goal of investment real estate. This means that the total costs of the property, including the mortgage, are paid for by the rent it produces. After a 20 percent down payment and 30 years, the owner would have a paid-for property producing income into the future. Although the owner incurs the cost of maintenance and management, he also benefits from the tax advantage of depreciation and any future rise in rents.
Today's investment real estate is better than "break-even" and readily available to all.
Take the following example: a 3-bedroom home in Oceanside is currently listed at $330,000. The same floor plan is being rented by professional management for $2,150 in the same community. Today's real estate investor is able to secure a 4.5 percent mortgage after putting 25 percent down. Total costs on the property (HOA, insurance, mortgage, property taxes and one month for professional management and/or vacancy) yields $511 a month (7 percent return) plus a principle payment of $323. The property is providing cash-flow and paying itself down, and had a combined return of more than 11.5 percent.
Low mortgage rates and leverage are to thank for these returns. A 30-year, non-owner occupied loan under $417,000 is around 4.5 percent in today's market. But in today's high tax rate environment, investors are considering their options with a 15-year mortgage. The current rate on a 15-year mortgage is around 3.5 percent; almost a full percentage point better than a 30-year investor loan. The same property in the above example would cease to yield any cash on a monthly basis. The total costs on a 15-year loan option would be "break-even" with rents. However, over $1,000 a month would be going towards the principle payment of the property. The Oceanside investment would be paid off in 15 years. The property could then be sold, re-mortgaged or just used as a income stream for retirement and/or paying for college expenses.
The attractive part of a 15-year mortgage is that the owner would pay much less in total interest over the life of the loan. Using the above example, a 15-year mortgage would see the owner pay around $70,000 in total interest, where a 30 year fixed would be around $200,000 in total interest payments.
The prohibitive barrier to real estate investment in today's market for many is the 25 percent down payment. The above example would require a down payment of $80,000. Also, selecting the right property and management is not for every investor. But for those dads with little girls destined for an Ivy League school, they might want to consider their options in investment real estate.
The only thing a dad can do is think about how we can cross this river without either of us drowning in decades of debt. And although this may surprise you, today's lifeboat is shaped like a house.
Ultimately, a home's value is what it can provide in shelter or the income that it can provide an investor.
During 2002-2005, costs of homes far exceeded the rents they could produce. Rising home prices encouraged only speculative investing. Value investors stayed away from the real estate market. Today, value investing is back. Record low mortgage rates and depressed prices have helped real estate investors earn returns of more than 8 percent without any factor for future appreciation. Experienced investors are turning toward residential real estate for sources of retirement income and future ivy league education costs.
In the past, "break-even" was the goal of investment real estate. This means that the total costs of the property, including the mortgage, are paid for by the rent it produces. After a 20 percent down payment and 30 years, the owner would have a paid-for property producing income into the future. Although the owner incurs the cost of maintenance and management, he also benefits from the tax advantage of depreciation and any future rise in rents.
Today's investment real estate is better than "break-even" and readily available to all.
Take the following example: a 3-bedroom home in Oceanside is currently listed at $330,000. The same floor plan is being rented by professional management for $2,150 in the same community. Today's real estate investor is able to secure a 4.5 percent mortgage after putting 25 percent down. Total costs on the property (HOA, insurance, mortgage, property taxes and one month for professional management and/or vacancy) yields $511 a month (7 percent return) plus a principle payment of $323. The property is providing cash-flow and paying itself down, and had a combined return of more than 11.5 percent.
Low mortgage rates and leverage are to thank for these returns. A 30-year, non-owner occupied loan under $417,000 is around 4.5 percent in today's market. But in today's high tax rate environment, investors are considering their options with a 15-year mortgage. The current rate on a 15-year mortgage is around 3.5 percent; almost a full percentage point better than a 30-year investor loan. The same property in the above example would cease to yield any cash on a monthly basis. The total costs on a 15-year loan option would be "break-even" with rents. However, over $1,000 a month would be going towards the principle payment of the property. The Oceanside investment would be paid off in 15 years. The property could then be sold, re-mortgaged or just used as a income stream for retirement and/or paying for college expenses.
The attractive part of a 15-year mortgage is that the owner would pay much less in total interest over the life of the loan. Using the above example, a 15-year mortgage would see the owner pay around $70,000 in total interest, where a 30 year fixed would be around $200,000 in total interest payments.
The prohibitive barrier to real estate investment in today's market for many is the 25 percent down payment. The above example would require a down payment of $80,000. Also, selecting the right property and management is not for every investor. But for those dads with little girls destined for an Ivy League school, they might want to consider their options in investment real estate.