Real Estate is one of the best forms of investing. As we all know, property typically goes up in value or at least stays at a constant.
When purchasing a property for rental, it’s a good idea to look for a deal in which you can get cash flow. Your return on investment will increase as the property mortgage is paid down and you will have passive income at the same time. Here’s how it works. Let’s say I buy a property at 250,0oo.00 and I put 20% down. (50,000.000.). Let’s also assume I purchased this property at 20,000.00 under value. Which means the property is actually worth 270,000.00. By buying it for 250 I have already increased my equity by 20,000.00 and gave me a total equity of 70,000.00. Purchase price of 250 less 50 I put down; a mortgage of 200,000 plus the 20 thousand at the time of purchase. Home value of 270 thousand minus the mortgage amount of 200 thousand leaves 70 thousand as equity.
Now because I paid 50 thousand out of pocket I want to get that back so I rent the property out for let’s say 1200.00 per month. The mortgage payment on 200 thousand will be about 800.00. The insurance, maintenance costs, utility costs, and a budget amount set for upgrades and repairs would be about 400.00 a month, leaving you a cash flow amount of about 400.00. 400 dollars a month times 12 months gives you a 4800.00 dollars a year cash flow.
Now let’s take that 4800.00 divided by your investment, which is the down payment of 50,000.00. This gives you a 9% ROI. (Return on investment). A 9% return is much better than what a bank can give you, but let’s look a bit further. Because property typically increases in value by an average of 4-6% per year the new value of the property in one year will now be 286,200.00 dollars. So let’s now take your down payment or investment of 50 thousand and divide it buy the new value of 286,200.00. This will gives us a cash on cash return of 17%
Because a rental property is classed as a business the government allows us to right off the depreciation of the property. We are allowed the right off up to 30% per year for depreciation. 30% of the new value of 286,200.00 leaves you with a depreciated value of $ 200,340.00. On paper this gives you another cash on cash return of 70%. So let’s add up to percentages to see what our total return on investment will be. In our first calculation we got 9% + a 17% cash on cash and then + 70% on depreciated value which gives us a total of 96% return on investment, meanwhile the renters are paying down the mortgage and giving us a cash flow of 400.00 per month, 4800.00 per year. That’s a pretty good return on our initial investment of 50,000.00.
Now if you were to use OPM for the down payment the returns now become staggering. Time to go out and find some properties to buy. Just be sure when your looking at a deal you do your do diligence. Do diligence is your part in checking all statements and conditions are true and correct. This becomes another topic that we will discuss at a later time.