Here’s how to protect your investment from an unpredictable market.
On my last blog, I mentioned how to create predictable growth in an unpredictable market through cash flow, amortization, and appreciation. Today I’m continuing the discussion to make sure you’re even more prepared if and when the market becomes unpredictable.
Before the crash of 2008, most investors relied solely on appreciation to make money as opposed to cash flow or amortization. A lot of properties were purchased based on appreciation only. Today, it’s important to focus on CAP, or cash flow, amortization, and positive leverage.
I have a very simple illustration to share with you to explain this further. Let’s say you purchase a three-unit property with two bedrooms, each for $1 million. The down payment of 25% will be $250,000. A 3.75% interest rate is pretty standard for this, which would bring the yearly payments total to $41,680.
You could rent this apartment out for roughly $2,200 per month, giving you a gross income of roughly $79,000. When you take out the property taxes, insurance, and maintenance, you walk away with $65,000 of net operating income (NOI). Take the $41,680 away from that and put roughly $5,000 in reserves for potential vacancies. This gives you a cash flow of roughly $18,320 per year. This translates to 7.13% cash on cash, which is great.
“It’s important to focus on cash flow, amortization, and positive leverage.”
Are these numbers feasible? Yes, they are. You can get a three-unit property for this price even in this market. It’s not easy, but it’s possible.
As for the amortization part of it all, you’re paying down the loan balance every month, so your leverage is great. After 30 years, you can expect to see a 400% increase in your equity. This is a good illustration of how to properly invest in real estate so that you can build wealth.
If you have questions about investing in real estate, how to get started, or anything else, don’t hesitate to reach out via phone or email. I look forward to hearing from you soon.
