Appreciation
and tax savings are legitimate contributors to an overall rate of
return on rental real estate but what if you didn’t consider them at
all. If you only looked at one or two, very conservative measurements,
you might decide to invest especially knowing that there are more
benefits that will accrue to your investment.
If we bought a property for cash, collected the rent and paid the
expenses, the amount left would be called Net Operating Income. In the
example below, if would generate $7,200 a year which would be a 7.02%
cash on cash rate of return which is considerably higher than the
current 10 year treasury rate of around 2.3%.
If we place a mortgage on that property, the rate of return actually
increases due to leverage. After the principal and interest are paid,
the net operating income obviously decreases but the cash on cash rate
of return increases to 9.10% because the borrowed funds means less cash
invested.
Another contribution to the investment’s rate of return occurs with
the mortgage due to amortization: the principal reduces with each
payment made which increase the investor’s equity. In this example,
the equity build-up divided by the initial investment yields a 5.25%
rate of return in the first year.
Single family home for rental purposes offer the investor high
loan-to-value mortgages at fixed interest rates for long terms on
appreciating assets with tax benefits, reasonable control and an
opportunity to earn higher than normal rates of return. Call if you'd
like to talk about what kind of rental opportunities are available.
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