After reading "The Millionaire Real Estate Investor" the author was illustrating how the longer you have your property, the lower your % Return on Equity ((annual price appreciation + annual debt pay down + annual cash flow) / total equity in the property). He mentioned that many investors will maximize their money's earning power by pulling out the cash and re-investing. Very interesting concept! BUT - one thing I noticed: how on earth is the cash flow column increasing in his example so quickly? For example, on a 70k house, the cash flow was $300 annually. Within 5 years, it was nearly $1200 annually. Then it clicked: the loan stays the same, but your power to raise rents goes up! So, for example:
$700/mo rents to start out with (1% of prop)
$25/mo cash flow
but in 5 years, @ 5% increase a year, the rent is now $890
$890 - $700 = $190.
$190 + $25 = $215 a month cash flow instead of just $25 a month.
Please, please forgive me if I am not making sense, or if my numbers are off. But is this concept correct?
any input???
