Have you ever wondered how real estate investing works?
It’s an important question.
Among houses, apartments, offices, hotels, and industrial buildings, there’s over
$35 trillion invested in real estate.
But how does real estate investing really work?
Fortunately, the basics are pretty straightforward.
Let’s look at a simple example.
Imagine you purchase a house for $500,000, which you plan to rent to tenants.
Typically, for a $500,000 property, your investment includes a 20% down payment — $100,000 —
and an 80% mortgage — $400,000.
We call this $100,000 of equity and $400,000 of debt.
To simplify the math, ignore closing costs for now.
Congratulations, you own a rental property!
Find your tenants!
There’s a similar, nearby house that rents for $2,500 a month.
You match that — that’s $30,000 a year, in gross rental income.
Once the cash is flowing, your total return is that amount, minus expenses and mortgage interest…
…plus the change in your property’s value over time.
Let’s walk through that in more detail: You have to pay your property taxes and insurance,
as well as some ongoing operating and maintenance costs.
Let’s say, $5,000.
Mortgage interest is your other major expense.
Your $400,000 mortgage might have a 4.5% interest rate: that’s another $18,000 in costs.
So, $7,000 a year in residual income.
$7,000 divided by your $100,000 investment equals a 7% annual return in cash flow.
For simplification, we’re ignoring things like income tax and depreciation.
But there’s more than just cash flow.
You can also benefit from potential appreciation in both the rent and property value.
The industry rule of thumb is 3% per year of appreciation.
Altogether, you might make 7% a year in rent and 3% in appreciation.
That’s a 10% annual return over the long term.
For comparison, the stock market has an average historical return of about 8% return a year.
In fact, real estate has outperformed stocks over the past 30 to 40 years.
…But not everyone has the time or money to be a landlord.
That’s why Fundrise has built the first easy to use, online platform for real estate investing.
Imagine getting all the benefits of owning real estate directly but at a fraction of
the cost and without the work.
You can learn more about getting started with real estate investing today at fundrise.com.