Returns From a Cash Purchase of Real Estate

by Ernesto R. Martin

In a cash purchase of one or more apartments, your after-tax income is considerably greater than with bonds and there is also significant appreciation.

First, income. That from the real estate is essentially tax free -- in our example the investor gets to keep nearly the entire $4,750 monthly -- because the expenses and depreciation of the property shields the income, while the interest from the bonds is taxable and, in this case, the bond monthly income became $3,700 after taxes for someone in the 20% tax bracket; in this case, after taxes, the condos deliver 28% more income than the bonds.

Second, appreciation. At a conservative estimate of 2.5% annual appreciation, the value of a $1 million real estate investment after 20 years is about $1.64 Million, compared to a similar investment in bonds where the $1 Million doesn't grow. And the appreciation could be much higher. If we use the national average for appreciation of 3.55%, the value at 20 years is over $2 Million, and using the Miami average over the past 18 years of 5.39%, the value at 20 years is over $2.8 Million. So, over the long term, a properly chosen investment in Miami condos should have a total annual return exceeding 10% (roughly half in the form of ongoing income, and half in appreciation when the condos are sold); and because the income half is mostly tax-free, it is comparable to taxable income (such as that from bonds) of 11 - 12%.

This, of course, is roughly twice the return of investment-grade (i.e., safe) bonds, and it is even superior to the long-term performance of a stock investment in an S&P 500 index mutual fund.