I used to kind of freeze up when people talked to me about investment property. I would smile and nod and parrot, “Yes, it looks like a good investment.”
However, now I am so thrilled to be able to articulate WHY. I took a class (a couple, actually), in investing – how it works, what numbers to crunch, etc.
Let’s do a scenario that shows how you can experience a 15% return on investment, aka ROI, when investing in Tri-Cities real estate.
The property is purchased for $130,000, with 20% down. On a 30-year fixed rate mortgage with an interest rate of 5%, the monthly mortgage payment is $558.29. Add taxes and insurance and HOA fees, the owner pays out an additional $180.00 per month.
The property rents out for $1200/mo. This is actually a real possibility, since our rental market is so tight, and our subject property is in south Richland, located literally minutes away from stores, houses of worship, freeway interchanges, and school with high test scores.
One thing we need to figure out for our equation, is the vacancy rate. In our market, vacancy is highly unlikely, but we’ll pretend one month of the year no one will be in the property. So, income ($14,400 – twelve months of rent) minus vacancy ($1200 that one month no one is there) minus expenses ($180.00 x 12, those monthly expenses for a full year) equals Net Operating Income (NOI).
Expressed another way…
– $1,200 (Vacancy)
Now, NOI minus Annual Debt Service, which is the monthly payment multiplied by twelve, ($6700 in this case) equals $4,340, which is the Pre-Tax Cash Flow.
-$6700 (Annual Debt Service 558.33 x 12)
$4,340 (Pre-Tax Cash Flow)
Finally, to get the ROI, we divide the Pre-Tax Cash Flow by the Down Payment pus Other Costs of Acquisition (($26,000 down payment, $3,000 in closing costs =$29,000) and we get 15%
4,340 ÷ 29,000 = .15…15%
A 15% return on investment is FANTASTIC! With savings accounts, stocks, bonds, etc. you are lucky to get a single digit rate of return. So 15% is enormously profitable!
Any questions about investing in real estate?? Give me a call. I love using my financial calculator now!
(Stock image via Shutterstock. Used with permission.)