For many non-primary residence property owners, the thought of converting their properties into rental or income producing properties just doesn't seem worth the time or effort. They dread the idea of tenants and everything that comes along with them. But what their counterparts in the investment arena know is that it IS worth it and here's why: The 4 main reasons to own rental property: - Income: This is your cash flow after you pay all expenses and mortgage payments
- Principal Reduction: Your tenants rents pay down your mortgage -- essentially buying your property for you
- Income Tax Savings: You can take depreciation deductions. This can help offset tax implications from your cash flow and principal reduction. Any amount leftover can create a "loss" on paper - which then can be used to offset earned income from other sources like your salary. It's a tax-saving BONANZA!
- Appreciation: As you own your property, it will most likely go up in value.
If you are thinking about purchasing income producing property, it takes more than finding one that's priced right. You should educate yourself on the different elements that make a property viable as an investment and define true "good investment." One of the first two things I would recommend you do would be: - Work with a good accountant
- Any accountant can help you analyze the property. But here is where YOUR education and knowledge is vital. Through better understanding (not necessarily mastery!) you can speak intelligently with your accountant about the various components in assessing a property's performance, ask the right questions and challenge anything that doesn't look right. Through better understanding, you can know up front if you're working with the appropriate accountant. Don't put blind faith in anyone -- not when your hard earned money is on the line. You are responsible for finding and surrounding yourself with the best advisors possible and it helps when you know a little about the subject matter at hand.
- Engage the services of a knowledgeable REALTOR® fluent in the concepts relevant to investing and to your long term goals as an investor.
- Sure, any real estate agent can sell you a piece of investment property. But one worth his salt will be able to truly advise you through careful analysis of the property, often working in conjunction with your accountant to ensure you are investing your money wisely and that the investment maintain it's performance long-term.
Some Elements Required to Make a Sound Analysis on Potential Investment Property: - Purchase Cost
- Amount of Cash Invested
- Amount, Interest Rate and Monthly Payment of your Mortgage(s)
- Amount of Interest Paid Last Year (LY)
- Total Depreciation LY (From Seller's Schedule E)
- Total Operating Expenses LY (From Seller's Schedule E)
When it comes to Amount Invested or Equity, more is not always better. We've been conditioned to think in terms of owning more equity in real estate is a positive thing. In your primary residence, it is. In rental investment, however, it works somewhat in reverse.Take a look at these investment scenaros: An Investor has $300,000 to invest and finds a $500,000 rental buidling with 10 units. Each unit rents for $550 per month and has a 6% vacancy rate. He looks at the Seller's Schedule E from his last year's tax returns to calculate the Depreciation and Operating Expenses
If he puts down his entire $300,000 and finances the remaining $200,000 at 9%, he is looking at something in the ballpark of:- Return on Investment of 20.2%
- Capitalization Rate of 11.6%
- Cash on Cash Rate of 12.9%
Not bad you say? By stock market and bank standards, sure... but look at what can happen with minimal investment... | If he puts down only 20% of the asking price at $100,000 and finances the remaining $400,000 at 9%, he is now looking at results somewhere in the ballpark of: - Return on Investment of 49.9%
- Capitalization Rate of 11.6%
- Cash on Cash Rate of 19.5%
Doesn't this look better? And in this scenario -- he can take the remaining $200,000 and invest it elsewhere and get similar returns multiplying his benefits. |
These rate are the different ways you can look at this investment. Each utilizes a different formula extracted from different elements of the property analysis such as cash flow divided by cash invested (or equity), or cash flow plus principal reduction divided by cash invested (or equity). |
These scenarios also work for those of you who already own investment property. If you've owned something for a long time, your return on your investment is no longer what it used to be. You see, return is calculated on cash invested -- not the purchase price as most people believe. So the more cash or equity you have invested, the lower your returns. It may be time to sell and or refinance to get your investment dollars working hard for you again. If you'd like to learn more about this or would like to invest in our local community - contact me and let's talk. There's a lot at stake here. If you make that smart decision to invest in your future, build wealth and take control of your money, I will make it my priority to help you reach your goals. 
For a free copy of an article titled "Does Your Investment Property Still Measure Up" by real estate investment pro Tom Lungstedt, simply download and print it or email me and I'll send you a copy ASAP! 
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