The Power is Now

Real Estate Investing: 2 Proven Ways to Double Your Money – The Motley Fool

It’s easier than you might think to double your money through investing. According to the rule of 72, you can double your money in 10 years by earning around 7.2% per year. Real estate investing makes it even easier because you don’t have to rely on capital appreciation alone.

Let’s talk about how you can double your money with rental property investing and real estate investment trusts (REITs), as well as whether house flipping would work for you.

Rentals

With stocks, the majority of returns come from capital appreciation. You can juice returns a little with dividend stocks (see the next section), but for the most part, you’re dependent on capital appreciation. If you use leverage to buy real estate, you earn in four ways: capital appreciation, rent, tax shields, and debt paydown.

Let’s say you buy a rental for $500,000 with 25% down and a 20-year, 5%-rate mortgage. Here’s what returns look like after 5, 10, and 20 years, assuming you net $200 a month from rent (after all expenses) and the property appreciates 3% per year.

Year

Equity

Mortgage

Property Value

Cash Flow

Value

0

$125,000

$375,000

$500,000

$125,000

5

$269,817.29

$309,819.75

$579,637.04

$12,000

$281,817.29

10

$549,314.67

$229,669.04

$778,983.71

$24,000

$573,314.67

20

$1,406,931.23

$1,406,931.23

$48,000

$1,454,931.23

Data source: Bankrate calculator and calculations by author.

In the example, it took less than five years to double the initial investment of $125,000. By year five, the investment had turned into $281,817 despite just 3% annual capital appreciation and net cash flow of 0.48% of the purchase price.

The investment took off because the tenant is paying down the mortgage. Real estate prices tend to stay consistent over time and retain value, so investors are able to use a lot more leverage than they can with stocks. In the example, the net from rent each month of $200 doesn’t seem like much, but the tenant is also covering a $2,531 monthly mortgage payment.

This is the key to success with rental properties. You can’t count on a ton of capital appreciation, and cash flow can come and go with repair costs or other problems. But if you can keep the property occupied and the tenant paying down the mortgage, you’ll build equity and, in turn, wealth over time.

REITs

Like rentals, you can’t count on REITs to have a lot of capital appreciation. They do have high dividend yields, however.

Let’s look at two charts for a popular REIT, Extra Space Storage (EXR -0.53%):

EXR Chart

EXR data by YCharts.

Extra Space stock is up almost 80% over the past three years, representing a 21% annualized return. But when you add the dividend, which REITs are obligated to pay, that return increases to just about a double (100% gain):

EXR Chart

EXR data by YCharts.

REITs are required to pay 90% of net income to shareholders as a dividend. Many REITs have super-high dividend yields of 8% or even in the double digits. That yield is attractive, but you might do even better by targeting a growth REIT, like Extra Space has been, and reinvesting the dividend.

Smaller, growing REITs might only yield 2% or 3%, but if you target growth-stock REITs, that dividend can be free money to invest right back in the stock.

House flipping

For most people, house flipping isn’t a good way to make money. You need to time the market correctly, buy a house on the cheap, get a good bid for the remodeling, and sell the house fast. That’s a lot of factors that need to work out perfectly, and even if they do, the IRS considers house flipping a business, so you’ll pay higher taxes on gains than you would have with long-term rental sales.

That doesn’t mean it’s impossible. Let’s say you buy the same house as you did in the rental section, putting 25% down on a $500,000 purchase. But instead of renting it right away, you take six months to remodel and then sell.

That’s an initial investment of $125,000; six months of loan payments, which comes out to another $15,000; and construction costs. The flip only works if you increase the sale price by a multiple of your construction costs.

So if you put $40,000 of work into the property and sell it for $600,000, you’d have a total investment of $180,000 ($125,000 + $15,000 + $40,000), a mortgage of $370,000, and a net sale price (minus 6% selling costs) of around $564,000. Your $180,000 investment turned into $194,000 in six months, good for close to an 8% return. If you could do it again immediately, you’d have an annual return of 16%. That’s a doubling in 4.5 years.

Yes, it’s possible but not probable. Every deal needs several things to go right, and one bad deal can kill your momentum and start the whole process all over again.

Help/FAQ

featured

own shows