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Updated almost 5 years ago on . Most recent reply

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Brandon Gamblin
  • Saint Louis, MO
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Hypothetical of a rental situation for clarity

Brandon Gamblin
  • Saint Louis, MO
Posted

The following is a hypothetical situation about investing in rental properties that I came up with in my head from what I already know. I don't know if its correct or incorrect, but here goes:

Let's just say I bought a single family home for $30,000 and the repair amount is $10,000, then that means the total amount I invested so far is $40,000. Also, let's assume that the property has an FMV of $90,000. If I divide the amount I invested, which is the $40,000, by how much I expect to make per month in cash flow, let's just say, $500 per month, that will give me the number of months that it would've taken me to get my money back through the cash flow. So, $40,000/$500 = 80 months = 80/12, which is approximately equivalent to 6 years and 6 months (I got 6.66666…… on my calculator)? So, it would take somewhere around 6 years and 6 months to get a return on my investment.

Is this how this works?

Also, if I make my money back after those 6 ½ years, and then turn around and sell the property at $90,000 (Hopefully it would have appreciated over those 6 years) then isn’t that another $50,000 that I have made on my investment of $40,000.

Is this how that works or am I missing something?

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Aaron K.
  • Specialist
  • Riverside, CA
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Aaron K.
  • Specialist
  • Riverside, CA
Replied

You missed $40,000 of profit because the money you make from cash flow is profit, plus the $50k in capital gains and you also get your initial money back when you sell.  Alternatively you could put $40k into the house refinance it with a loan for $50k and immediately get back $10k more than you put in and have something that cash flows maybe $250 per month with $0 invested

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Kenneth Garrett
  • Investor
  • Florida Panhandle/Illinois
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Kenneth Garrett
  • Investor
  • Florida Panhandle/Illinois
Replied

@Brandon Gamblin

You have the concept correct.  You paid cash of $40,000 and the property cash flows $500 per month it would take 80 months to get your money back.  There are tax advantages during this process which are depreciation, property taxes and appreciation if any.  Since you don’t have a mortgage you miss out on mortgage pay down and mortgage interest.  $40,000 is to small for most lenders.  I like to use leverage so I have as little of my money in the deal as possible and I can do more deals.  You’ll pay taxes on the increased value above your basis, that is why investors utilize the 1031 exchange process to defer the tax implications on the gain. 

  • Kenneth Garrett
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