the amount of the financing itself. On $150,000, 80% is $120,000. Dividing $120,000 by 30 (the number of years to pay it off), gives you $4,000. That means the tenants will pay down $4,000 a year off the financing aver - aged over 30 years. (Yes, I realize the amortization table doesn’t look exactly like this, but, remember, we are aiming for simplicity with this illustration). Now, divide the $4,000 by the investor’s initial investment, which would be considered $35,500 (20% down on the $150,000 pur - chase, plus $5,500 in closing costs for the lender, title, appraisal, inspection, etc.) If you divide the $4,000 average increase by the initial investment of $35,500, you will find that the $4,000 is an average 11% increase on the initial investment year after year for 30 years. Already this investment is getting an intriguing return, and we have yet to discuss the cashflow or tax benefits or to hedge against inflation. Looking at the cashflow, we have determined $200 per month as a potential income for a $150,000 property. Many would shy away from this investment because the poten- tial income is too low and may not meeting the “cash on cash” return requirements they set for themselves. Nonetheless, let’s see if we can find a benefit to a property that may have been overlooked in the past. If such a property were available, and we felt confident we could retain renters and also raise rents, we should take the time to pencil out that growth over time. We should not get caught up in the first couple of years of cashflow. I have seen that short - sightedness derail many a great deal. Let’s take a close look. In Year 1, $1,200 per month rent (0.8 rent to value ratio/ RTVR) would pro- vide $200 per month cashflow. The property was purchased partly
because of the ability to raise rents. That being said, what is the aver- age rent increasing by these days? Double-digit percentages are being quoted across the U.S.—I have seen averages of 10% published. For the purpose of this example, let’s beat down that number to a 3% average rental increase for the foreseeable future of this property. So, 3% of $1,200 is $36—nothing earth shattering. That kind of increase doesn’t get the real estate investor excited, and it does not freak out the renter either. That means that in Year 2, the rent becomes $1,236, making the cashflow plausibly $236. Do the quick math and you find that is an 18% growth in your cashflow. This is compound growth. Every time you raise the base rent by 3%, you get potentially an 18% growth in the cashflow. That’s very exciting. But that’s not the best part. Does the lender receive an increase in the payment of the loan to pace infla - tion the way the investor does? No, the loan is a 30-year fixed loan. In fact, inflation running rampant and devaluing the dollar so rapidly caus- es the lender to receive a compound decline in repayment. Let’s use the rate of 6% to work out the numbers. We are not that high presently, but let’s beat this equation up a bit. With a payment of $719.46 per month for 30 years, we have a total of $259,005.83 princi- pal and interest over 30 years. But, remember, every time a payment is made in our high inflation environ - ment, the dollar spent is worth less. You can calculate each dollar each year for 30 years using the amorti- zation calculator included with the QJO Investment Tool app, which can be downloaded from your app store. You will see that the value of those collective dollars is $98,050.61. The investor paid back 81% of the initial balance in real dollar value.
Please visit www.aaronbchapman. com to schedule a time to discuss this topic in more detail. Also visit the Loan Process tab for more infor - mation on financing with my team and the app. •
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Aaron Chapman is a veteran in the finance industry, which he entered in 1997, after experience in mining, heavy equipment operation, welding and long-
DISCLAIMER: SecurityNational Mortgage Company, and its loan officers, unless individually licensed and specifically denoted in their credentials, are not qualified to, and are prohibited from representing themselves as accountants, attorneys, certified financial planners, estate planners, investment specialists or tax experts, and will not advise you in those matters. Always seek the advice of a licensed professional. This article is for informational purposes only, contains the opinion of the author, not necessarily the opinion of SecurityNational Mortgage Company, and should not be construed as lending advice. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant ’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Aaron Chapman, NMLS#267844, SecurityNa- tional Mortgage Company Inc., Co. NMLS# 3116, Equal Housing Lender. Any amounts, figures, payments or loan terms stated are based on continually changing markets, rates, loan programs and borrower specific qualifications, and subject to change without notice. See loan officers featured for a personal consultation and accurate pricing. The above information is the sole intellectual property of the author. Any distribution without written consent of the owner is strictly prohibited © 2022. home, building their dream home, or investing in multiple properties for long-term cash flow. He’s presently ranked #14 in an industry of over 300,000 licensed loan originators closing in excess of 100 transactions per month. Chapman’s expertise is helping real estate entrepreneur walk through the tough parts of building a real estate business. haul truck driving. Since entering the finance industry, his clientele has ranged from those purchasing their first
34 | think realty magazine :: march – april 2022
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