BUYING AN INVESTMENT PROPERTY
PART I – RENTAL
This is the first of 3 part blog about buying investment property. There are many different styles, methods and philosophies. I will be covering Straight Rental- Part II will be Fix and Hold and Part III will be Fix and flip.
Buying an investment in real estate is tricky at best. The biggest mistake I see is folks who don’t know how to figure true cash flow, otherwise known as Cash on Cash. C.O.C. is the return on the down payment, closing costs and any other initial investment. An example is as follows:
Home Price $130,000
20% Down Payment $26,000
2% Closing Cost $2,600
= Total Investment $28,600
Loan Amount = $104,000
Rent = $950.00 per month
Payment @ 5 ¾% = $750.00 per month
Profit = $200.00 per month
Cash on Cash = Yearly Profit = $2400.00 Now the investment is $28,600. Divide the profit by investment: $2,400.00 divided by $28,600 = 8.39% R.O.I (Return on Investment)
This is a real life scenario that one of our investors bought. He is making a 8.39% on his investment, but that is not all!!
You need to add appreciation. Yes the market is not appreciating today, but the 20 year average is over 3% per year. Using that number, add 3% to the $130,000 Sales Price that is $3,900.00
Add $3,900.00 to Net Profit $2,400.00=
Total Return $6,300.00
Total Return on Investment = 6,300 divided by $28,600 = 22.03%
Where are you making 22.03% return on your investments? But that is not all!!
In addition to hard cash as shown above there are tax deductions that are allowed which may make your profit jump to 40%. When you consider buying a rental, know your numbers and be realistic. I bought my first rental at 19 and as they say “The rest is history”
Thanks,
Brian
