We've been investing in residential real estate since 1998. We started investing in real estate as a way to bring long term security to our family. As small business owners, our investment properties serve as an additional retirement vehicle, besides just a 401K. We own and manage 24 rental units, both single family homes and multi-unit properties.
We understand the buying process and have real world experience in the pros and cons of investment property ownership. Whether you are interested in acquiring a single property or building a portfolio, we have the expertise to help you achieve your goals.
Investments in residential real estate tend to get better the longer you own them. One of our favorite real world examples is a client who has owned a rental house for 30+ years. Of course the house is paid off now. The rental income he receives each year exceeds the original purchase price of the house!
When looking for an investment property it is important to consider its financial performance in addition to its location and features. Three formulas commonly used for evaluating and comparing investment properties are the Gross Rent Multiplier, Capitalization Rate, and the Internal Rate of Return.
Gross Rent Multiplier = Sales Price ÷ Gross Annual Income
What is it for? Quick and easy comparisons. This formula is used to compare properties if you don’t have a lot of detailed information about expenses. It tells the number of years the property would take to pay for itself in total rent received. GRM’s in our area range between 10 and 20 (lower is better).
Capitalization Rate (Cap Rate) = Net Operating Income (NOI) ÷ Sales Price
What is it for? More accurate and reliable method than GRM. The Cap Rate is the income (after deducting operating expenses) reflected as a percentage of the sales price. Cap Rates in our area range between 2% and 12% (higher is better).
NOI is calculated by subtracting the operating expenses (excluding mortgage interest) from the total rent.
Internal Rate of Return = Net Cash Return ÷ Down Payment
What is it for? To determine the interest rate you are receiving on your down payment. Net Cash Return is calculated by subtracting the annual mortgage interest from the NOI.
Investing in real estate is more hands on than other investments. It can be a bit like owning a business. Leveraging your investment dollars and receiving returns on those dollars in multiple ways are a couple of the advantages. In most cases, an investment property can be purchased with a 20-25% down payment, so for $80,000 to $100,000 you can own a $400,000 asset. Three ways to get a return on your investment are Cash Flow, Principal Reduction, and Appreciation.
If the rent you receive exceeds the mortgage payment and the other ownership related expenses you receive the difference each month.
The principal amount of your mortgage is reduced with each monthly payment which is being paid from the rent received.
Real estate appreciates in value over time - your entire asset appreciates, not just your down payment.
Example: A $400,000 property appreciates 3% = $12,000. Appreciation of $12,000 ÷ $100,000 Down Payment = .12 or 12% return on initial investment