Today, I’d like to delve into the concept of return on investment, specifically within the realm of real estate. Many of you may be familiar with mutual funds, stocks, and bonds, but it’s crucial to realize that the returns promised in these investments often fall short of expectations. In reality, there are typically only one or maybe two avenues to generate returns from these traditional investments.
In the world of stocks, you can either gain from capital growth or receive dividends. Capital growth stocks aim for the appreciation of their value over time, while dividend stocks provide a steady stream of income in the form of dividends.
Now, what makes real estate particularly intriguing is that it offers four distinct avenues for returns on every property. Let’s briefly go through these four returns using an example property priced at just over $160,000, with an initial investment of $30,000 to $180,000, leveraging our way into it.
- Cash Flow: The first return to consider is cash flow. After covering all expenses, including property management, principal, taxes, insurance, and other costs, you’re left with a cash flow figure. In this example, the annual cash flow is $4,605, representing a 14.3% return on investment.
- Depreciation: In addition to cash flow, the government provides a tax benefit in the form of depreciation, which allows you to deduct the structure’s value over 27.5 years. Considering a 25% tax bracket, this amounts to an extra $1,168 in returns, equivalent to a 3.6% return on investment.
- Tenant-Induced Equity: Your tenants make monthly payments, covering your principal and interest. This reduces your mortgage over time, effectively creating equity in the property. In the first year, this equity amounts to $1,892, resulting in a 5.9% return on investment.
- Appreciation: While appreciation’s rate varies with market conditions, even a modest 1% increase in a $160,000 property represents a $1,600 return. Assuming a 5% appreciation rate, this translates to an impressive 23.5% return on investment.
When you combine these four returns, the numbers can be quite staggering. Real estate offers multiple avenues for generating returns, which, when aggregated, create an investment vehicle with unmatched potential. It’s this comprehensive approach to returns that makes real estate an attractive investment tool for many, offering a higher chance of reaching financial goals.
To truly grasp the power of these returns, you must experience them firsthand. The total rate of return on real estate becomes nothing short of remarkable when all these income streams are considered.
If you’re curious to learn more about real estate investment or how these returns work, don’t hesitate to reach out to info@homepartnerscapital.com. We’re here to assist you on your journey towards financial growth through real estate.