Definitions:
Return on Investment (ROI): This allows for comparison of all types of investments across the board. Comparing apples to apples, or say stocks to real estate. Calculation: (Money invested/money received) on an annual basis. Example: You pay $20,000 down for a house that gives you $2,000/year in rent (after expenses), you are receiving a 10% Cash on Cash Return (CoC ROI). This is called cash on cash because we are only accounting for the rental income. With real estate there are many other aspects to factor in when calculating actual return.
Cash Flow :The monthly income received from rent after all expenses and mortgage payment are taken out. This is the key to retiring or replacing your active income received from your job. Cash flow from rent shows up every month whether you work or not.
Net Operating Income (NOI): Rental income after operating expenses are taken out. This has not subtracted the mortgage payment yet. This would be your Cash Flow amount if you paid all cash for a property.
Cap Rate: What the ROI would be if you paid all cash for the property. (Annual NOI/Purchase price of home). $7,000 year Cash Flow/$100,000 purchase price = 7% Cap Rate. This is used more in commercial investments. By using leverage you can exponentially increase returns through the power of leverage!
It’s Math, not Magic!
Below are only a few of the ways Real Estate can exponentially catapult your wealth and help you achieve financial independence in only a few years, no matter what your age. The way to financial freedom is by establishing regular cash flow. In addition to monthly income through rent, here are some additional benefits you receive by choosing to invest in Real Estate that you definitely don’t in the stock market, and how they skyrocket your wealth. This is why Real Estate investing is the IDEAL investment!
I -Income received from rent each month. Whats left over after expenses is called cash flow, and this is the key to financial independence.
D -Depreciation is a huge tax advantage of owning rental properties. Divide the home price by 27.5 yrs and that’s what you can deduct each yr.
E -Equity buildup. Your tenant pays down the loan you used to acquire the property increasing the amount of equity over time.
A -Appreciation. Regardless of short term market corrections, home values will increase over time (estimated at 4%/yr in stable markets).
L -Leverage is what really explodes your returns on investing. You get to put in only a small % of the capital to buy, but receive 100% of the tax & income benefits! Let’s use an example of investing $20,000. If you purchased stocks, you would only have $20,000 invested. If those stocks went up 5% that year, you would now have $21,000 and would have realized a true 5% return. Now, lets say you invest that same $20,000 into a rental property. You borrow $80,000 to purchase a $100,000 home. Lets say that home went up 5% that year and is now worth $105,000. You now have $25,000 in equity and realized an actual return of 25%! Say the home produces $200/month in cash flow ($2,400/yr). Just from the income you are receiving a 12% return ($2,400/yr rent income/$20,000 down payment). This still doesn’t include the returns you would receive from tax benefits through depreciation! Do you see how all these factors can be added to produce a very attractive return! Even the income alone of 12% will easily beat stocks suggested 7% annual return. There is a reason why more millionaires have been made through real estate than any other business. It’s the math, not magic!
This is a real world example, and we actually have many properties that consistently beat these conservative numbers. Please reach out with any questions or to learn more about how real estate can provide consistent income for both the short and long term!
What’s your financial freedom number? How much money do you need to retire?
We have our clients work backwards to achieve their financial goals. Use this example of someone that decides they want to achieve an investment income of $75,000 annually to replace their current job. Breaking that down further, it comes to $6,250/month. Using an average rental that cash flows $450/month, they would have to buy 14 properties to reach this goal. If they bought 2 properties per year, they could achieve financial independence within 7 years! Don’t forget, when these properties are paid off, the annual income would more than double to easily achieve a total income of over $150,000/yr. This beats investing in stocks & 401(k)s any day of the week!