Look at a Rental This Way
Appreciation, tax advantages, cash flow, leverage and equity
build-up contribute to the rate of return on rental real estate. If that
sounds confusing and it’s keeping you from investing in rentals, try looking at
it a different way.
Consider
this, look at only cash flow and equity build-up to determine whether to buy
the property. They are easy to calculate and their outcomes are both reliable
and predictable.
Most
homeowners, based on their familiarity with their own home, should feel more
comfortable with a rental than alternative investments. A conservative strategy
is to purchase slightly below average price range homes in a predominantly
owner-occupied neighborhood. Collect the rent, pay the bills and make necessary
repairs.
A
cash on cash rate of return is determined by dividing the cash flow before
taxes by the cash invested in the property. It considers all of the “real
world” income and expenses related to the property.
The equity build-up occurs from the normal process of amortization with an increasingly larger portion of each payment applied to reduce the principal loan amount.
In
this hypothetical example, the combination of the Cash on Cash and the Equity
Build-up is almost 12% which is considerably higher than certificates of
deposit and bonds and nowhere near as volatile as stocks or mutual funds.
In
most of today’s markets, rents are expected to continue to rise and due to a
low inventory of homes for sale coupled with growing demand, prices will
continue to rise. Even though there is value in appreciation, tax advantages
and leverage, they could be considered an unexpected bonus to this basic rate
of return.
Ready To Start
Building
Keji & Associates of Fairfax Realty is a team of licensed agents working daily to get homes sold for our clients in all parts of the metro area. We delight our clients by delivering world class service every step of the way and we strive to create a win-win situation this is all part of our values and beliefs. Contact us @ 301-613-2043 , visit our website www.metrohomesrealty.com
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