Rough Real Estate Numbers - Part two?

Question

This is an extension to the question at:
http://answers.yahoo.com/question/index;_ylt=AugGVlZf1hoSdm4r_RZbE5bsy6IX?qid=20070729172517AABaUYj
Basically, I am looking for an opinion as to if my real estate investment estimates are realistic.

I'd like to thank CommonCents for reminding me that I forgot depreciation in my calculation, and it makes a HUGE difference. So I need to add the following assumptions:

- 50% of the purchase price is depreciable, 50% is land
- 25% of yearly expenses are depreciable
- Depreciation is 2.5% of the depreciable amount per year

As a sidenote, I am aware of the advantages of leverage, but I am choosing not to do so because I want to maximize short-term cash flow and minimize risk. I realize that this severely undercuts long-term growth.

-->Adam

Answer 1

100xx007.

Answer 2

You'd do better by putting the money in a CD to be honest. And you'll do a LOT better in the stock market.

The only way to make real money in real estate is to leverage your position. If you have $250k in cash you should be able to leverage anywhere between $1.25 and $2.5 million in real estate without even trying hard. That would bring your ROI into the 30% to 60% range, not a crummy 6% gross. If you don't leverage your position you will NOT "maximize short-term cash flow and minimize risk," you'll just screw your return into the toilet. I'm out of the game now -- too many hassles dealing with tenants even with a property manager -- but my ROI averaged 100% per annum and one property returned over 200% per annum. The worst of the lot was a bit over 50% per annum.

Your assumptions on the apportionment of depreciable improvements vs non-depreciable land would indicate that you're buying in a very high cost area. Land value of 10% to 20% of the total investment would be much more realistic. Many of the current high-cost areas are seeing deflation of real estate values so you'll be looking at negative appreciation for a while.

The depreciation allowable depends upon the type of property. For residential real estate the required lifetime is 27.5 years and for non-residential it's generally 39 years. Adjust your depreciation projections accordingly.

I'd strongly suggest a couple of courses in finance and investments along with real estate. You need to do a LOT more homework and planning if you're going to make any money at this. The mere fact that you reject a leveraged position tells me that you are extremely uninformed in real estate investment and that is NOT the way to make money at it.