I can’t really wrap my head around it, you can have a tenant in there that maybe covers the mortgage, but it’s not really a good investment if you’re not getting a return?
Even if you use 500k to buy a property cash, wouldn’t that money be better off in the market?
In: Economics
You’re missing a couple pieces. The first 2 are additional forms of return outside of pure cash flow. The third is leverage.
The first is every mortgage payment is giving you equity in the house. So if your tenant is covering your mortgage, at the end of 30 years you own the home and have a substantial asset even though from a cash flow perspective you didn’t really get a return.
Second, homes can appreciate in value, giving you another way to see a return even if the cash flow is break even. If you bought a house in 2019, it is likely worth much more than you paid because of that appreciation.
The third is leverage. You mention buying a house with $500 thousand cash but the market will beat that every time. The thing that makes real estate an investment vehicle is leverage or debt. You wouldn’t use $500 thousand to buy a single home. You would use $500 thousand as 5 $100 thousand down payments on 5 $500 thousand homes. Now you have assets of $2.5 million which means any home appreciation skyrockets your rate of return.
Latest Answers