When you start thinking about making a real estate investment, you need to take time to think about the risks that you will be taking. The risk and pay-off between speculating on development of a subdivision or becoming a first time landlord are enormous. Either also requires significantly different levels of capitalization. Your goal needs to be minimizing risk while maximizing profit or cash flow.
Real Estate Investment Cash-On-Cash Return
When it comes to a real estate investment, many investors want to leverage their money. Borrow to use other people’s money to make a profit from it. Still, you need to invest some of your own money. That’s the cash that’s counted when you calculate a cash-on-cash return for your real estate investment.
When you buy a $40,000 house, put in $4,000 of your own money, and take a loan for the balance, you need to calculate how much you are earning on your own money after subtracting what it costs for the money you borrow.
The amount of interest you pay on the loan will become lower each month as you pay down the loan. However, a $36,000 loan at 5% will cost you $1,973 in interest the first year. If you rent the house for $500 per month, you’ll have $6,000 in cash flow. Of course, there are other costs of ownership. The two required costs are property taxes and insurance. Let’s assume the property tax is $550 and the insurance is $625. The cash-on-cash equation goes like this – $6,000 (income) – $1973 (interest) – $550 (property tax) – $625 (insurance) = $2,852.
The $2,852 is your profit on your $4,000 investment. Your annual cash-on-cash return is 71.3%. That’s the power of leveraging your real estate investment.
Managing Your Real Estate Investment
Once you realize how much you can earn by leveraging your real estate investment, it becomes time to consider how much time and work you’ll need to put into managing your real estate investment. Almost certainly, you’ll do the bookkeeping for your first real estate investment. Probably less than an hour of work each month. But that’s for a low risk rental house that you easily place a quality tenant in and he or she stays for several years.
Consider some other more risky real estate investments such as a vacation home, college student rental, or a low income rental with a high turnover rate. These high risk real estate investments will take much more of your time and work.
The work includes cleaning and repairs after every vacation family leaves, at the end of every college year, and when any tenant moves out. After cleaning and repairs, you have to advertise and show it to the next perspective tenant.
Finding the right real estate investment is about much more than only finding a good deal with great cash flow. You also want to find an easy to manage property that doesn’t take too much of your time.
If you want to work directly with me on finding the right real estate investment for you or any of my other investing models that have proven highly profitable, please join me at www.wendypatton.com/what-is-wendy-pattons-inner-circle.
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By Wendy Patton
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