This was an actual deal that we looked at. It showcases the power of real estate and why we continue to prefer real estate as an investment class over stocks. While this analysis was specific to a single-family investment, the
same fundamentals will apply to a multifamily asset class, just with some variations and bigger numbers.
The property can be found here and it is currently rented and has no HOA payment.
The property is currently rented at $1,325. The monthly principal and interest (PI) payment for a $92,000 loan amount and with 5.5% interest rate is $522.37.
The actual expenses paid monthly for the property are shown below:
We’ve previously talked about secondary expenses that should always be included in your analysis though they are not actually paid monthly. This is necessary to understand what your cash flow would really look like:
In essence, you actually spend $828 monthly for this deal, but as a savvy investor, you’ll allocate $1,123 monthly for the expenses of this deal.
Return on Investment
Based on the information above, this is what the projected cash flow looks like:
In essence, you’’ll be making $200 – $500 monthly from this deal! The best part is that this is just one way that this deal pays you. Let’s explore all the ways you’ll be paid:
Cashflow: $200 – $500 per month is an actual amount of money that you’ll be able to put in the bank and see right away.
Debt Paydown: A year from the day you sign the deal, the $92,000 debt you took will have reduced to $90,866.57, and that is being paid by your tenant (so treat them right!)
Appreciation: Yes, this is no science and involves an element of hope. 3 – 7% appreciation is not uncommon with all else equal. For the sake of being conservative, we’ll use a 5% appreciation.Depreciation: The IRS allows you to claim depreciation on your income tax return for real estate investments. Your annual depreciation deduction is the value of the building (sale price minus land) divided by 27.5 years. In this case, your depreciation amount is $115,000 divided by 27.5 or $4,181.82. You’ll effectively pay taxes on only the difference between $5,968 and $4,182 or $1,786. Assuming a 25% tax rate, you just saved yourself $1,045 in tax payment!
Debt Destruction: This one is a little trickier. Remember the time value of money and how money today is worth more than money in the future because of inflation – that’s the concept in play here. The intrinsic value of your debt reduces with time because of inflation. So, you “earn” 3% (inflation) on an 80% loan or 2.4% on your invested capital of $23,000.
Leverage plays a vital role here in maximizing your returns – if you are too levered or you don’t buy positive cash flowing asset, you may be in for a not too pleasant surprise.
We chose to be a little conservative with some of these numbers. A skeptical investor can also question the appreciation and debt destruction component of the real estate returns, and rightfully so. But even in such a situation, you still have over 30% return on investment in the first year alone.
This right here is exactly why income-producing real estate is the best asset class to invest in. It is an asset class that pays you in multiple ways.
Do you agree or disagree? Share your thoughts and comments below.
You don’t have to be great to start, but you must start to be great!
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