Originally Posted by waldorfknitmama
How long would it be to begin to receive steady income and maybe even live off of real estate---- or is it really not realistic?
I don't know that it is possible to answer that question without answering (not that I expect you too, just giving food for thought) many, many questions.
Like how much money to you need to live? $50,000 a year? $100,000 a year?
A very, very rough rule of thumb gauge based on my old appraisal days is a good quality (condition, location, secure tenants) property that yeilds a pre-tax, pre-debt service cash flow of $50,000 would cost $500,000.
This is based on a capitalization rate of 10%, something too long and probably too boring to explain unless someone is really interested but the better quality of real estate, the lower the capitalizatoin rate, the higher the cost.
If you couldn't pay cash for the $500,000 property and needed to finance 75% of the purchase price, the annual debt service on $375,000 for 20 years at 8% would be $37,400.
$50,000 cash flow less debt service of $37,400 = $12,600 after debt service but before income taxes.
In my example, it would take 20 years to clear $50,000 on the $500,000 if one had a 25% down payment and financed the rest of the purchase price.
(I have no idea what commercial real estate interest rates are at the current time, a different rate would obviously change the #s)
Although it hasn't been mentioned, I am going to comment on any number of the get-rich-quick pitchmen one can find on late night tv. Any real estate plan/scheme/method that someone is selling can only be trouble. None of them work, it is all a shell-game.
When in banking, I would get so many people coming thru the door trying to buy commercial real estate with no money down it was ridiculous.
Despite what the recent sub-prime residential mortgage mess might be telling us, no real bank is going to loan someone 100% of the purchase price of a commercial property.
Maybe one could use the equity in their primary residence as collateral - generally a very bad idea- but the bank will (or should) have a loan covenant in place called a minimum debt coverage ratio.
In my financing example above, the bank I worked for (a national, traded on the NYSE bank) would have required a debt service coverage ratio of 1.25x, meaning the property would need to produce a pre-tax, pre-loan payment cash flow of $46,750.
125% of 37,4000 is 46,750 or another way of looking at it is cash flow must cover debt service by 100% plus another 25% as an extra cushion.
At a 100% financing and a loan of $500,000, cash flow from the property covers the loan payments only. Any income taxes would need to come from the owner's savings or other source of income. Any hiccup in the rental cash flow, like a tenant paying late, increase in real estate taxes not covered by lease clauses, etc., puts cash flow into the red and quite possibly, repayment of the loan in danger. This is why a real bank generally doesn't do 100% financing of investment/commercial real estate.