A Letter To Mom: Example Investment Property

Mom,

You have talked to me about ways you and dad could invest your money in real estate. Real estate investing is safer and generally has a higher rate of return than stocks, bonds, or other more "traditional" ways of investing.

I wanted to send you this as an example to show you what I hope to accomplish in my career and also as a way to illustrate what real estate investing is all about.

The house is listed as follows:

Price: $120,900

Gross Income: $23,700

Operating Expenses: $9240

Net Operating Income: $14,460

Using the given information, it is suggesting that you would be making $14,460/year or an extra $1205/month.

But, most investors use safer numbers and take half of the income and count that toward ALL expenses EXCEPT a mortgage.

So using the 50% rule, this property would yield $11,850/year or $987.5/month. This is still a decent chunk of change.

So how do you get in to a property like this? Well you would have to qualify for a traditional mortgage or you would need an excess of cash lying around. You might also talk them into owner financing, a land contract, or maybe you have an investor friend that will lend you some hard money.

So if you don't pay cash, then you would take your mortgage out of the $987.5/month and the rest would be your profits.

You would need 10% Down = $12090 to qualify for traditional financing. And then your mortgage payment would be about $490/month. This cuts into your profits and yields you with $497.50 a month profit, or $5970/year.

Using a simple return on investment formula, we can see that we invested $12090 to get $5970 or a ROI (return on investment) of 49.3%

That is astronomical!!! But the numbers are't that simple, these numbers just mean the deal is still worth investigating.

The total purchase will still cost you $120,900 plus the cost of financing (about $67,000 over 30 years). So you are in it for $175,000 in total debts if you pay for it on the life of a 30 year loan. If you made extra payments, or made chunks of cash to pay it down, then you would be in it for much less. But the good news is that the money that is used to pay down the property ISN'T YOUR MONEY! It comes from your tenants. Essentially, you are giving a bank money, to give other people a place to live, so they can give you money so you can retire.

But I digress....

Another number to look at is the Gross Rent Multiplier. This tells you how long until your investment covers its cost.

Cost = $120,900

Gross Rents = $23,700

GRM = 5.10

Therefore: It would take 5.1 Years for your investment to cover its cost.

One of the best factors to look at is the Net Monthly Rent Multiplier (NMRM). This tells you how long until you "break even" on your original investment.

Initial Investment: $12,090

Net Rental Income: $497.5

NMRM: 24.3 Months till you "break even"

Essentially, you will see your initial investment back in your bank account in full after about 2 years.

This is the time power of money, the power of real estate, and the power of hard work.

This is how you can use OTHER PEOPLE'S MONEY to turn $12,090 of YOUR MONEY into $500/month cash flow and a $120,900 asset.

The other key to the puzzle is the hard work.

Up front, you may only see the $500/month. And that $6000 a year doesn't seem worth a whole lot of work. (This is also what you have me for #propertymanagement).

The work includes, general repairs, major repairs, advertising potential vacancies, screening tenants, maintaining exterior and common areas, collecting rents, etc.

Now all of this seems too good to be true, and if you think that, then it probably is. As with all investments, you make your money when you buy. If you buy smart, then there are numerous exit strategies to make money in real estate. Renting is only one way to generate cash flow and prepare for retirement.

I know it's a lot to read.

I love you,

Your Oldest and Favorite Son