Wake-Up Money, Secrets to Investing
Most people think of investment property only in terms of monthly cash flow, but that’s just one piece of the puzzle. Even with $0 monthly cash flow, your investment is still working for you in multiple ways:
1. Cash Flow -$0/$65,000 = 0% Return On Investment
2. Leverage -You own $275k of real estate for a $61,875 cash investment
3. Debt Reduction -$2,256 in principal reduction the first year. In essence the tenant is buying you the house and giving it to you at the end of the loan. $2,256/$61,875 = 3.65% Return On Investment
4. Tax Savings -About $8k/year in depreciation.
5. Appreciation -If this house goes up 5% in value this year, it will increase by $13,750. $13,750/$61,875 = 22.22% Return On Investment
- $275,000Price
- $61,87520% down payment + closing costs
- $220,000Loan @ 6.95%; 30-year; fixed rate
- $1,456Monthly principal; and interest payments
- $294Monthly taxes and insurance payments
- $150Monthly reserve for maintenance/repairs
- $1,900Monthly rental income
- $1,900Total monthly expenses
- $0Monthly cash flow
Possible Total Return on Initial Investment (after first year):
- 0.00%From Cash Flow
- 3.65%From Principal Reduction
- 22.22%From Appreciation
- 25.87%Total Return on Investment
When this property is free and clear, you will have nearly $22,800.00 a year in “Wake-up” money.
Of course, by then the rent (and the “Wake-Up” money) will probably be a lot higher, as will the property’s value.
