A common struggle for real estate investors is overestimating what they can accomplish in one year and underestimating what they can do in five.
The math is simple – say you purchase a 10 unit multifamily property for $2,000,000 and had a down payment of $400,000. With an interest rate of 5.055% and a 30 year term, you’d be paying $103,716.12 in principle and interest per year – with $23,372.71 going towards paying down the principal in year 1.
That doesn’t seem like much. But over the first 5 years of the loan, you will be paying down $129,598.04 of the loan amount – meaning your equity in the property increases by that much.
Even if the property value stays the same, your equity grows from $400,0000 to $529,598.04 – 32% growth overall. On top of that, if the property is a 6 cap, it’s earning $120,000 a year in income so $16,284 more per year than the loan payment. On its own, that doesn’t feel like much.
Cash Out Refinances and Buying More Properties
If you hired a good property management company to take care of the building, they should be able to increase the rents and decrease your expenses over that time period – say they can combine the two to increase your net operating income by $20,000 per year so your property is earning $140,000 a year instead of just $120,000. At that same 6 cap, the property is now worth $2,400,000.
Combined with the paying down of principal, you would have a good return on your initial investment. Now, with that much equity in the property, you could go back to the bank and get a cash-out refinance.
Depending on their terms, you can get a certain amount of capital out based on the appraised value of $2,400,000. For the sake of discussion, let’s say you can get 80% out and leave 20% in equity. After paying off the old loan, that would mean you would be getting $449,598.04 in tax-free cash from the new loan.
So you go buy another 10 unit, $2,000,000 property nearby and do the same thing again.
Then, 10 years in, you would have $635,528.47 in equity in the first building and $929,598.04 in the second property – meaning your initial $400,000 turned into $1,565,126.51 in 10 years – a 290% return on your initial investment in a decade.
Creating Options For Your Portfolio
The reality is real estate investing isn’t passive if you don’t hire a property management company, but it is a lot more so if you do hire one to handle the emergency maintenance calls, finding tenants, et cetera.
On top of that, a good property management company is able to increase the value of your property, so you can focus on growing your portfolio rather than managing the day-to-day problems real estate investors are required to handle.
If you want some help in finding success with your investments in real estate, we are here to help. Contact us today.
