Real Estate Investments
How would you like to give yourself a 10% pay raise annually? 20%? All while controlling a saleable asset that’s historically been proven to be recession proof, and a hedge against inflation? It may not be as hard as you think! Let me show you how this works!
Some quick definitions:
Cash Flow: Total Monthly Income – Total Debt Service. ($1000 per month rent – $600 mortgage and $200 Utilities = $200 per month Cash Flow. Multiply by 12 for Yearly Cash Flow.)
Cash-on-Cash Return: Yearly Cash Flow/Total Cash Investment. (Property Cash Flows $3500 for the year divided by the $10,000 cash you have invested = 35% Cash-on-Cash Return!)
Capitalization Rate (Cap Rate): The Rate at which an investment property earns money. It is calculated by taking your Net Operating Income (NOI) divided by the Purchase Price. Example: A Property is purchased for $100,000. This property brings in $1200 per month in rent ($14,400 for the year.) It costs $325 per month to maintain, or $3900 for the year. The NOI is $875 ($1200 – $325) per month, or $10,500 for the year. $10,500/$100,000 = 10.5% Cap Rate.
Let’s say you find a 3 Bedroom, 2 Bathroom Single Family Residential property (the absolute most desirable!) that you would like to buy, and rent out. You buy this property for $50,000 and it rents for $650 per month. If you pay cash for this property, you’re looking at a 15.6% Cash-on-Cash Return! Compare this to the 1-2% (maybe?) interest you’re getting in your savings account! Of course, you will realize a much higher Cash-on-Cash Return, but less Cash Flow if you finance the property – it all depends on your available cash and ability to obtain financing.
How about Cap Rate? Our example property is renting for $650 per month, and costs $200 per month to maintain. Our NOI is $450 per month x 12 months = $5400. $5400/$50,000 = 10.8% Cap Rate. Overall, this is an excellent investment.
Lastly, when crunching the numbers for an investment property, buy only for Cash Flow – Appreciation is a bonus. That’s not to say there won’t be Appreciation. From 2000-2010 (which includes the worst Real Estate Bubble this country has ever seen) the median prices have actually gone up! If you have any other questions, or would like to get a list of potential investment properties available in your area, drop me a line at Garrow215@yahoo.com!