I recenlty attended an investor meeting that focussed on real estate returns based on leverage using a buy and hold approach. I had long subscribed to the idea for years that if a buy and hold strategy was employed making 25% on money, instead of putting it in low yield investments, was possible. It was quickly pointed out to attendees that more was possible. In fact, it was demonstrated mathematically to all participants that 25% was a minimum not a maximum. An annual return of 30%+ was possible even for conservative investors.
Here is how the math goes. This is based on a real property that I am in the process of selling to an investor, but there are many more available for those that want to contemplate a buy andf hold approach to real estate.
Hamilton single family dwelling converted legally into a duplex. Two living spaces, two bedoorm 1 bath down and four bedroom two bath up, one furnace - a cost effective investment. Two car garage off an alley in an area where parking is a scarce resource - this offers another potential source of income for cash flow that would be additional to the analysis below.
Property Cost: $175,000 (includes fees and closing costs)
Down Payment: $35,000 (20%)
Mortgage: $140,000 @ 4% (80% of total cost)
Finance: $5,600 ($466 pm, 85% to interest, 15% to principal)
Taxes: $1,200 pa
Maintenance: $3,400 pa (2%)
Management: $1,200 pa ($100/month)
Total Costs pa: $11,100 including interest charges
Rental Revenue: $21,000 pa + utilities ($1,750 per month + utilities)
Equity: $800 paid off principal year 1 (0.5% of $140,000 - this increases each payment)
Appreciation: $5,250 (3% - very conservative)
Net Operating Income: $9,900 pa (Rental Revenue less Operating Costs)
Capitalization Rate: 5.6% (based on whole investment against NOI, but only $34,000 was actually invested)
Actual Growth: $15,950 ($9,900 + 5,250 + 800)
Actual Investment: $34,000
Actual Return: 46.9%
It is the difference between what is actually invested and the total cost of the property that determines the Actual Return on Investment compared to the Capitalization Rate. Cap Rate is a good thumb nail look at things from a top line perspective, but it is far from the whole story as the numbers clearly show.
I look at three numbers to tell the whole story: Equity / Debt Retirement, Appreciation, and Cash Flow / NOI.
In this case, the ROI is >40%. It makes sense to refinance this to a point where it is closing on 20% instead of 40%. Sure, 40% is better than 20%, but if that was put into a new property that is leveraged like this one, then your money is working for you and not sitting idle in equity.
I am always looking for investors who want opportunities like this example.
If you are one of those savvy investors, call or text me 905.510.0835 or send me an email firstname.lastname@example.org