Investment properties – Let’s do the math
Have a few thousand dollars, and want to make an investment in real estate? Wondering how the numbers work, and why real estate is such a great investment? Let’s take a look at the numbers.**
Here’s what we’ll start with (2015):
- We’ll buy a 3-bedroom home in Palmdale, where you can actually buy a property like this for $125,000
- 20% down (your total investment) = $25,000
- Your monthly payments, including mortgage, taxes and insurance will be roughly $800
- You’ll rent your property for $1,100/mo
In the above scenario, you made a $25,000 investment and will be repaid at a rate of roughly $300/mo. Assuming there will be unexpected maintenance costs, let’s assume you pocket $2,000 a year. So, you own a $125,000 with a loan balance of $100,000. You have $25,000 in equity.
5 years later (2020)…
- By making your mortgage payments, you’ve paid off $10,000! Mazal Tov! Your loan balance is now $90,000
- Since rental rates increase at roughly 5% per year, you’re now charging $1,200/mo, and pocketing roughly $3,000 a year.
- Over the past 5 years, after all the expenses and mortgage payments, you have pocketed roughly $10,000, reducing your original investment to $15,000 out of pocket.
- During these 5 years, the market performed as we expected, and your home is now worth $140,000.
To recap, your home is worth $140,000 and your loan balance is only $90,000. You have $50,000 in equity! Plus, you’re almost half way to repaying your original investment.
At this point you have 3 choices…
Option 1: Cash Out
So far, you’ve taken a $25,000 investment and turned it into $60,000. Don’t believe me?
- You put in $25,000
- You’ve repaid $10,000 of that loan through monthly rental income (+$10,000)
- You’ve repaid the bank $10,000 (+$10,000)
- Your property went up in value by $15,000 (+$15,000)
- So… $25k + ($10k + $10k + $15k) = $60,000!
- If you sell your home right now for $140,000 and pay the remaining loans back the bank ($90k) and yourself ($15k), that leaves you with $35,000 of pure profit! Not bad.
Option 2: Stay the Course
You have a great, low payment because you locked in your interest rate back in 2015. You have good income and don’t want to increase your debt. You can continue down the same path, repaying yourself a few hundred dollars a month, paying off your mortgage over the next 20 years, increasing rents at a modest rate, and watching your investment get more and more valuable. In 20 years, your monthly income will increase by $700/mo, since you will have paid off the bank and will own your property free and clear.
Option 3: Leverage your debt
This is what the wealthiest real estate investors do – use someone else’s money to make even more money. Here’s how:
- You have $50,000 in equity on your first property (above) – refinance the property, taking out $20,000. Combine that with the $10,000 from your original investment that you’ve already paid back, and you have $30,000 to work with.
- Buy a second property for $150,000, which brings in a few hundred dollars per month of income, after all of your monthly expenses are paid.
- You now own 2 properties, worth a total of $290,000, collecting $500+ per month in income… all thanks to a $25,000 investment 5 years ago.
Imagine what the future might hold…
What if you were to follow the same process every 5-10 years? How many millions of dollars of investment property would you own by the time you retire – all thanks to that one small investment back in 2015? How many thousands of dollars of income will you pocket every month (and hand down to your children some day)?
Compare that scenario to putting $25,000 into your retirement fund this year. Which is going to provide more for you 40 years from now?
Call me! Let’s invest in your future! (310)926-2386. Or send me a message through this website.
** Of course, before making any investment, it’s always a good idea to do your research and speak with accountants, financial advisers, seasoned investors, mortgage brokers and Tweet the Today Show for advice.