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REAL ESTATE RETURNS
Evaluating the Numbers
CASH ON CASH RETURNS IN REAL ESTATE INVESTING.
by Aaron Chapman
I
am a very simple person and use basic principles in all
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spent? The $5,500.00 went to ser- vices, but the $20,990.00 went from a liquid account to a non-liquid asset. It is still theirs, just not in a place they can readily convert into a boat. With regular rent coming in and regular payments to the loan being serviced, the $20,990.00 becomes $104,950.00 as the initial lien is diminished by income from the tenant. That is an $83,960.00 gain just on the amortizing of the loan. Divide that by 30 years you get an average of $2,798.66 per year which is equal to 13.33% of the initial 20% added to that $20,990.00 every year until you reach $104,950.00 total. So, let’s shelf that part of the return and turn our attention to the money that was actually spent — the $5,500.00. Using the $396.97 per month, it is possible to recover the spent $5,500.00 in 13.85 months. At that point, an investor has broken even. Since 30 years is equivalent to 360 months and the first 13.85 was used to recover the spent funds, 346.15 months are open opportunity for cashflow. Receiving $396.97 per month for 346.15 months will yield $137,447.16 in income. Add that to the $83,960.00, and the actual dollar gains are $221,407.16. That is all without factoring in rent raises, tax benefits, appreciation or paying payments with future dollars effect- ed by inflation! I know what you’re thinking…What about maintenance and vacancy? Watch for the Novem- ber/December issue of Think Realty Magazine for the answer! •
facets of life and business. Wanting to find a more elementary way to evaluate I started looking at the very basic numbers on a potential invest- ment property purchase. I believe the 30-year fixed loan to be the greatest asset in a transaction (watch for December for this explanation), so I figured no simpler instrument to start with. Let’s apply some straight- forward math and see if this makes sense to more than just me. We will start with the following assumptions as a baseline (based on a loan I am presently working on for an investor in Kansas City with Bridge Turnkey Investments): • $104,950.00 acquisition price • $20,990.00 initial investment (20%) • $83,960.00 loan • 1% rent to value ratio = $1,049.00 (actual rent is higher) • $5,500 in approximate settlement (title fees, lender fees, taxes, insurance, inspections, appraisal, etc. actual expenses are lower) • 8% property management fees • 568.11 PITI (based on locked rate of 4.75% and 5.003 APR) • $396.97 per month cashflow NOT counting maintenance and vacancy Looking at this example, I will ask many investors how much money they spent at closing. Often the sum of $26,490.00 is the provided answer. I beg to differ…Is the $20,990.00 really
Aaron Chapman has been in the fi- nance industry since 1997. His clientele ranges from first-time home buyers to those investing in multiple properties for long-term cashflow. He is presently ranked #14 in an industry of more than 300,000 licensed loan originators.
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