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Real estate investing

Gold is going crazy. Stocks are tempting. Real estate has crashed and is now crawling along like a man in the desert who can't find water.

If you have money in the bank, you are probably disgusted by the low rate of return. It is a scary world at the moment. No one has a crystal ball. All anyone can do is look at the facts on the ground about real estate (pun intended). Once you have the facts about your local real estate situation, you can compare real estate to gold and stocks and make an educated decision.

What about stocks?
The stock market is really no rocket ride if you look at the last ten years. It is like hot rod with a broken drive shaft; it's exciting, and it makes a lot of noise and rocks up and down, but it doesn't really go anywhere.

What about gold?
Gold is cool. It is sensitive to inflation. If you hold the real thing in a safe place, it is probably a pretty good hedge against inflation.

What about real estate?
In many but not all areas of the U.S., real estate is back to being what it once was - a way to have your cake and eat it too. During the boom which ended in 2006-2007 values quickly passed the point at which it made sense to buy hold and rent-out real estate.

Because of the fall in values and interest rates, real estate can once again be a cash-flow machine. For example, if you buy a 3 bedroom 1400 S.F. house built in 2004 and in ready-to-rent condition for $100,000, and rent it out for $1,200 a month, what happens?

In this example let's say you are borrowing the money. If you borrow $80,000 with an FHA insured investor loan, your payment will be about $560 P.I.T.I. (principal, interest, taxes and insurance). If you subtract your $560 payment from your $1,200 rental income, that leaves you with a gross monthly income of $640. How much did you invest out of your pocket? You invested about $20,000, right? Let's just say your monthly net is $500. How long will it take to recoup your $20k? It would take 40 months before you had zero dollars invested. If we stop here, this would be an unbeatable investment!

It gets better...
Inflation is coming like a freight train. FED Chairman Bernanke said: "I have a printing press and I know how to use it." During the inflation of 1970s annual inflation hit 14%. Let's say we average 10% inflation a year for the next 10 years - your $100,000 rental would be worth $110k after year one. The next year it would gain $11k and would be worth $121,000. Carry this exercise out another 8 years and see what happens. The house would be worth about $260k after year 10.

How can gold or stocks hold a candle to the above investment? Your market may not. Your local real estate market may not produce numbers like the above example. Let's say your real estate market produces numbers half as good - instead of paying off the $20k in 40 months it takes 80 months. Your equity gain would not be $160,000 over 10 years, it would only be $80,000. It still rocks as an investment, doesn't it? Consider getting a Realtor and a lender and exploring the facts for your area.