Using Real Estate to Leverage the Effects of Inflation

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You would think that real estate is the furthest thing from a way of managing finances during a financial downturn.  But think again.  By investing in a home and immediately putting it up for rent, you can gain the upper hand on the amount owed, resulting in a self-sustained asset that will end up being a hard asset in just a few years. 

Using the example below, along with some solid reasoning, I believe I can demonstrate the best way to utilize today’s extremely low interest rates along with undervalued homes on the market – to your advantage.

HERE'S HOW IT LOOKS ON PAPER

If you purchase a home for $150,000 and assuming you are putting a 30% down payment on it – the amount left that would need to be financed is $105,000.  When you factor in the low interest rate of 5.25% that is widely available for qualifying buyers today, you end up getting a great deal on the amount.

Keep in mind the ideal situation in this scenario is to obtain a 20-year amortized loan, which means that it would be paid off faster, giving you a ticket to financial freedom sooner than the typical home loan term of 30 years.

Back to the equation:  When you factor in a down payment of $45,000 on a $150,000 house, the financing amounts to payments of about $700 plus change for principal and interest and $220 or so for taxes and insurance.  The house in our example would easily rent for $950, even $1,000 per month – leaving you with positive cash flow, something that is a welcome phenomenon during this recession. 

Owning a home that pays for its own mortgage is the best of both worlds.  Think about how smart a move that is, especially when you look at the way the current real estate market has been.  While undervalued homes are bad news for sellers, it’s a great thing for buyers!  If you’ve got the extra cash, what is stopping you from availing this excellent opportunity to own a property that can and will perpetually rent out and provide POSITIVE cash flow?

WHY IS NOW BETTER THAN LATER?

There are two solid reasons why I am sharing this important concept with you.  Two factors that make this one of the best times to get out there and purchase real estate as a means to help in a financial slump, in other words, help you get through the current period of inflation.

1.  LOW, LOW MARKET PRICES

We have all heard the infinite market analyst reports about how it is just not a seller’s market.  And THAT is largely the bad news that is often highlighted in the news and on the web.  But flip over to the buyer’s side of real estate these days and things seem a lot different.  Now, more than they have been in a long time, housing prices are at a near all-time low.  It is as if you are turning back the clock seven, even eight years and you are looking at a market and corresponding prices from back then.  Those savings add up!

2.  RENTING OUT IS EASY

The second reason to invest in a rental property right now is that this is a good time to rent out a home.  Unfortunately, there are a lot of families who could not keep their homes up and are getting out of their homes through distress sales transactions, in other words, foreclosures or short sales.  They end up needing to “move down” into a home that is worth less.  Obviously their credit will have suffered after going through a foreclosure or even a short sale, so they need to find a home to rent during their financial recovery stage.  And as sad as it is, this situation does not seem to be going anywhere anytime soon.

As the owner of a rental home, however, this works in your favor.  By renting out the home you purchased as your investment property, there is a very good likelihood that it will be rented out almost immediately, meaning that in just two decades (and trust me, time flies) your second property (or third, or fourth or more – the opportunities are endless in this regard) will be completely paid off.  You will own a hard asset that, despite what we are seeing today, will very likely be worth more money as time goes on.

The bottom line is that you will have a BIGGER bottom line, if you are smart about the current outlook and situation in real estate.  And in today’s over-inflated economy, how can an extra asset or more cash in your pocket possibly hurt?