ROI - Return On Investment.

Advance apologies; this blog post is pretty numbers intensive.　 But the numbers turned out so striking I just had to share.　 Quick, go refill your coffee, then come back.　 I think you'll find this case study pretty fascinating.　 I could hardly believe it myself when I ran the calculations and came up with an ROI of 35%.

Let me set this up for you.　 A client called me this week and asked me to calculate the numbers on a property that she was looking to purchase that would make a good rental.　 She has the nearly $36k needed for the down payment.　 She is an experienced investor who already owns a few other rentals.　 Here is what she found for a home in the area:

This home is listed for $179,800 purchase price.　 The financing we discussed requires a 20% down payment of $35,960. She would have a mortgage of $143,840, with a fixed rate of 4.5% (4.732 APR).

Her total monthly mortgage payment would be $855.32 and she'd collect rent from a tenant of $1300. That means positive cash flow is $444.68 per month.　 If you multiply that by 12 months, that works out to $5,336.16 per year, which is a whopping 14.8% per year ROI just on her capital investment (down payment) alone!!　 This sounds pretty lucrative so far.

 But then consider the property should appreciate in value, the loan is paid down by someone else (the tenant), equity growth over 10 years, and she now has an investment that really soars.　 Let's say she only holds this property for 10 years.　 And, let's say she only increases the rent she charges to her tenant by 1% per year, and let's say that the property only increases in value by 1% per year.　 (We suspect that it could perform far better, but let's be conservative with our estimates.) Hold on, take another sip of coffee and hang in there with me.　 It gets even better.

Over ten years, she would have collected positive cash flow of $60,538.　 Yowza!

 Now, let's suppose we are 10 years into the future and this home only appreciated 1% per year (conservative).　 This home is now worth $196,644 and she decides to sell.　 She pays seller expenses of approximately $14,300 and pay off what is left of your mortgage - $115,200.　 She would walk away with a check payable to herself in the amount of $67,144.　 I'd tell her: "Quick! Run out the door and cash the check before something thinks you've robbed a bank".

So, over that 10 year period she collected $60,538 in positive cash flow plus she net $67,144 in proceeds from the sale, for a net gain of…(wait for it)…$127,682.　 No, I'm not kidding.　 Average that net gain over 10 years and she just made over 35% per year on her initial investment of $35,960.　 Has Warren Buffet heard about this???

Certainly we must grant that these types of results are not common and the life of a landlord is not for everyone.　 But the takeaway from today's lesson is that there are still deals to be found and if you would like to explore further, we should talk.

Talk with you soon.

Christine