Proponents of real estate investing indicate it is a sure-fire way to grow your investment portfolio over time. But how does it work exactly? While there are several different ways one can invest in real estate – buying and developing land, purchasing tax liens, owning multi-family buildings such as apartments, flipping homes, vacation rentals, this article focuses on the long-term gains as well as cash flow that can be had while investing in a home or condo that is then rented out.
For example, if an investor buys a property with a mortgage and expenses, the investor may have a goal to not only cover the monthly expenses, but provide marginal profit. Although this may seem paltry for the work involved, watch how this can change over time with the below example property:
Property Purchase Info
Purchase Price
$200,000
Loan Amount
$125,000
Monthly Payment (30 yr fixed at 4.25%)
$614.92
Other monthly expenses (property taxes, insurance, water/sewer, garbage)
$350
Maintenance
$333
Property Management Fee
$85
TOTAL MONTHLY FEES
$1382.92
Even if the max rent per month this investor can get during the first year is $1,600, the savvy investor isn’t worried as that can quickly change. Here is why:
- Rent rates can increase. A 5% annual rent increase can quickly increase that $1,600 per month to $1,945 per month in five years.
- Expenses can increase. Property taxes, utilities, maintenance, etc can all increase annually, but what is likely the largest monthly expense – the mortgage – will stay the same if the investor has chosen a fixed-rate mortgage.
Projected Net Monthly Profits
Projected Profit Year 1
$1,704.96
Projected Profit Year 5
$4,445.39
Projected Profit Year 10
$9,018.99
Projected Profit Year 20
$23,418.94
Selling
Furthermore, when the time comes to sell the investment, the investor will have all of that appreciation to bank on. Assuming modest appreciation of 5% per year, after 20 years, the property sales price would be about $542,528. With a mortgage balance of $60,029.25 at year 20 and even taking off 7% for closing costs, the equity would be $444,521.79 (including the $75,000 initial investment) for a total projected profit on the initial investment of $582,683.48 (including monthly profit and equity). With a positive net cash flow per month, the investor will have paid for his or her expenses on the investment and pocketed the profit at the end of the day.
Of course, this is not a guarantee that each investment will perform as indicated above. There are risks involved in every type of venture, but if you have been wondering how real estate investors do it and would like to learn more, please give me a call at (360) 223-4501 or send an email to josh@denfinder.com.
Hi! We’re Josh and Jolene Baijot, the creators of this website. We’re also commercial real estate brokers in Bellingham, Washington. Thank you for taking the time to read this blog post. We appreciate your time spent on this site. You can connect with us on Facebook, Instagram, or contact us through this website.
