Real Estate Vs. Other Fixed Income Assets

In this article we explain the fundamental difference between traditional fixed income investments and rental real estate income streams.

Other Fixed Income Assets - Accumulate and Draw-Down

The traditional investment concept (stocks, bonds, CDs, 401Ks, etc.) is to accumulate enough capital so you can later draw-down (withdraw) funds over a period of time.

Simplistically, to determine how much you need to accumulate you need to know: the amount you will draw down per month, how long you will live and what inflation will be during these years. For example, suppose you plan to draw-down funds for 30 years, at $5,000/Mo and there is zero inflation, zero transaction fees, zero taxes and zero capital appreciation. If that is the case, then the math is easy:

30 Years x 12 Months/Year x $5,000 = $1,800,000

If inflation exceeds capital appreciation you need to accumulate more. For example, if you expect 3% net inflation during the draw-down period you would need approximately $3,000,000. Also, what if you or your spouse live longer than planned or inflation is higher than you expected?

Real Estate - Income Streams

With real estate, the concept is to accumulate sufficient income streams over time such that the aggregated income streams meet your income needs today and into the future. The calculations necessary to completely explain how real estate works is beyond the scope of this brief article so, for simplicity, assume each property generates a cash flow of $250/Mo (after all recurring expenses). If this is true, then you need to accumulate $5,000/$250 or 20 properties.

How much would it cost to purchase each property? As in the previous example, we will ignore inflation and appreciation. Assuming each property costs $180,000 and you obtained 30-year financing with 20% down at 5% interest, you will need about $36,000 for the down payment plus another $12,000 to cover closing costs, market prep, etc. or $50,000/property. Simplistically, 20 x $50,000 = $1,000,000 is what you need to establish a $5,000/Mo income stream. Note that when the mortgages are paid off the cash flow will significantly increase. Plus, unlike traditional investments, the revenue will continue almost indefinitely.

What if there is inflation? Rents and property prices have historically tacked with inflation. This makes inflation beneficial because your largest cost, debt service, is fixed. The other costs (taxes, insurance, etc.) will certainly increase somewhat with inflation but they will remain a relatively small part of the collected income.

Summary

This was a high level comparison between traditional investment approach of accumulate and draw-down vs. real estate based revenue streams.


Want to know more about investing in Las Vegas real estate? Contact us today. You will be glad you did.

Eric Fernwood, Realtor | 702-358-8884 | EricFernwood@gmail.com
Cleo Li, Realtor | 512-296-0425 | CleoYLi@gmail.com

Vegas International Properties Group (VIP Realty Group)
7570 Norman Rockwell, Suite 140
Las Vegas NV 89143