The 4 big reasons to invest in Cash Flowing Real Estate!
Well it’s been a little over 3 years since I stopped working as a chemical engineer to work on our real estate portfolio full time, periodically I’m asked if there is anything that I miss or would change?? My answer is NOTHING… there is nothing I would change in my life because every experience both negative and positive have molded the person I am today, but enough cheese for one day. The reason that I’m writing this specific article, is because so many people avoid spending the time necessary to even learn some basic fundamentals of investing in real estate and it could shave so many years of investing compared to a typical 401K or the stock market achieving a MUCH larger growth. So let’s begin by laying out the 4 benefits of investing in real estate and what that would mean for YOU personally.
- Cash Flow
- Equity Building
- Appreciation
- Tax Benefits
CASH FLOW:
So the term “Cash Flow” as it relates to investing in real estate investments is described as the money left over once you take all of the income (Rental, Laundry, misc) and then you subtract all of the expenses (Taxes, Insurance, Utilities, in addition to Principal & Interest Payments). This dollar amount that is left at the end of every month is looked at as Cash Flow. We will describe in more detail how important this piece is and I’ll go through an example at the end of this article to tie together the actual Return on Investment for real estate that is FAR superior to any stock market investment strategy!
EQUITY BUILDING:
Now Equity building is the second solid benefit for investing in real estate that other peoples money pays for. If for example you have a mortgage with the bank for an investment property that has a balance of $100,000 and this is amortized over 20 years at 5% interest, your monthly payment will be approximately $660/month. From this payment, there will be a portion of interest and a portion that will go against the principal amount of the loan and in this example, by making 12 payments you will have reduced the amount owed to the bank by around $2500. Therefore after making 12 payments to the bank from the income received from tenants, you now OWN $2500 worth of additional equity in the home!
APPRECIATION:
This nice little benefit is like GRAVY…and is very dependant on the geographic location of the investment. As it stands now, if you are lucky enough to have assets in Boston, or Vancouver your real estate investments may appreciate 10–15% annually if not more! The great thing about owning physical real estate investments, is that these investments over time (There are exceptions to this rule) tend to increase in value, and even in slow moving markets will increase at the rate of inflation or approximately 3%. In the above example, let’s assume that our investment is valued at $200,000 day 1 and appreciates by 3% annually, our investment is worth $206,000 on day 365! So we have $6000 in additional equity from appreciation.
TAX BENEFITS:
This is SO underrated as a benefit to owning investments, and I’ll do my best to describe why this is the case. First of all, even though these investments are appreciating in value over time, we are able to depreciate these assets which offset income that is produced therefore reducing our tax obligation to the government! We also have the ability to deduct any and all interest payments, maintenance, expenses, upgrades etc to the building further reducing our taxable income. This can result in HUGE reductions in money owed to the government, especially when people are in larger tax brackets that would normally not have any deductions. I absolutely love the saying that “It’s not what you make, it’s what you KEEP” and this is SO true….
Let’s walk you through an example, this is a real building we own and acquired a couple years back. The only difference here is that our returns would be double what we use for this example because I did NOT put 20% down initially and in this case we had the seller finance 10% of the purchase price. The first benefit is CASH FLOW and in the example here, we have a monthly cash flow of $1106, or annual is $13,277! The next thing to look at is Equity building….
In this example we can see that our monthly P&I payment is $945.06 and so by making 12 payments to the bank, we will pay ~$3550 in principal and therefore have this amount in equity after the first year, and remember this amount increases over time because a higher portion of our monthly payment will go towards principal the more we pay down the loan.
Let’s assume a conservative 3% appreciation on this building based on a value of $179,000 purchase price, so in this example the building would appreciate by $5370.00 in a calendar year. Now it’s time to add this up and see what our total ROI would be for our initial investment to purchase which in this case is $39,380 for the downpayment and closing costs.
Initial Investment = $39,380
Annual Cash Flow = $13,277
Equity Build = $3550
Appreciation = $5370
Total $13,277 +$3550 + $5370 = $22,197
ROI = Total Return $22,197 / Total Initial Investment $39,380 = 56%
This is a REAL example and so an a calendar year, our initial investment of $39,380 returned a total amount of $22,197 or 56% return by leveraging the banks money! In contrast, if we had invested the same $39,380 into the stock market assuming a great year of returns at 10%, we would have earned $3938 for the same investment….I’m really hoping by now you are having an AHA moment and the light bulb is on and bright! How many years would you need to invest at 10% to get the returns you see from this example?? MANY… and in this life, time is the absolute most precious commodity!!!
We have not even considered the final benefit, which is the wonderful tax deductions that investors receive for entering into this wonderful arena! Hope this provides you with some insight on why we have spent the effort not only to learn about the benefits of investing in real estate, but also why we have taken massive action to build a portfolio of assets that provide the returns that I’ve described in the example above.
Feel free to ask me questions or follow us at Philip Henry or our Facebook Page
