Many years ago, Las Vegas hotels would entice
customers with inexpensive rooms, meals and entertainment so they would
gamble. It may have worked initially but if you’ve been to Las Vegas
recently, the bargains are gone. Hotels expect each division to be a
profit center on its own. As a consumer, I might not like the changes
but as an investor, I’d have to be pleased with increased profitability.
Years ago, real estate investors used to accept negative cash
flow buoyed by tax incentives in hopes of making a big payday due to
appreciation when they sold it. Today’s investors are focusing on
tangible, current results like cash flow and equity build-up.
Cash flow is the amount of money you have left over after
collecting the rent and paying the expenses.
Since rents have gone up
considerably due to supply and demand in the last few years and mortgage
rates are at near record lows, income is up and expenses are down, making the
cash flows attractive.
If the cash flow is sufficient, you could have a good investment
even if the value of the property never increased.
Cash on Cash doesn’t
consider appreciation and measures the cash flow before tax advantages by the
initial investment. A rental with $3,170 CFBT divided by an initial
investment of $29,000 would generate a 10.93% Cash on Cash rate of return.
Low down payments on investor properties are also a thing of the
past. Non-owner occupied mortgage money is available but the investor
should expect to put down 25-30%. An advantage of having a smaller mortgage
is a lower payment.
Most mortgages are amortized loans with both principal and
interest due with each payment. The forced savings of the principal
contribution builds equity in the property and can be considered a part of
the rate of return.
A $100,000 mortgage at 4.5% for 30 years would have $1,613.29
applied to principal in the first year. Divide that by the same $29,000
initial investment and the amortization would generate another 6%.
Without factoring in appreciation or tax advantages, this rental
example generates much more than most alternative investments. There
certainly are many different aspects that affect the risk and return on
rental investments. If you haven’t scrutinized single-family rental
opportunities in a while, you should look again.
As a Residential Finance Consultant, I have the
training and experience to provide solutions to make homes more
marketable and help structure favorable transactions. Please
forward this article to your friends or family who could benefit from it.
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