Ben Sage, Moving Woodstock
When is an 8% return on investment actually 35% ???
Good day all!
Many of you know that I am not only a Real Estate Salesperson, but also a Real Estate Investor. The purpose of this blog post is to show how you can absolutely demolish returns expected through traditional stock-market investments through Real Estate Investment.
So, how is it possible to earn HUGE returns on your investment in this volatile marketplace?
Let’s use my new listing at 42 Vansittart Avenue in Woodstock as an example.
Asking Price is $157,750.
Both units are currently rented, grossing $16,800 annually.
Landlord covers Property Taxes ($2,138 annually), Water ($1,100 annually), and Water Heater Rentals ($380 annually)
You should probably have insurance too ($600 annually).
This leaves a NET OPERATING INCOME (NOI) of $12,582.
When you consider that you’ll earn $12,500 on a purchase price of $157,750, you end up with a RETURN ON INVESTMENT (ROI) of 7.92% or, 8%.
This 8% return on investment assumes that you paid $157,750 in CASH for the property.
Not a bad return, when I consider what my Mutual Fund portfolio looks like at the end of 2011……but….
BEHOLD the POWER OF LEVERAGING!
Suppose, however, you decided take out a mortgage on the property, as opposed to pay cash for the full amount. How does the investment look then?
Well, you’d need a 20% downpayment (thanks to the instability in the global markets, investors need to pay 20% upfront in order to purchase “speculative” property).
So, your 20% downpayment would be $31,550.
Lets assume closing costs at 1.5% (may be more, may be less, depending on certain circumstances). Another $2,366.25.
Your total out of pocket expense would be $33,916.
We now must add the cost of borrowing that money into our expenses. Year 1 on a mortgage (using 4% fixed/15 years) would cost you $4,893, reducing your ROI to $7,688
Considering you’ve only invested $33,916, and you’re earning $7,688 on that investment, it now shows a return of 23%.
TRADITIONALLY, PROPERTY VALUE IS AN APPRECIATING ASSET
Calculating Capital Appreciation based on 2.5% annual increase in property values (historically, increases have been much higher than that, however, lets be reasonable here – historic increases are largely unsustainable, and a more conservative approach is prudent) shows a further gain of $3,950 in equity.
LOOKING AT THE BIG PICTURE…..
After the first year, you’ve seen a 23% return on your cash investment, and you’ve seen an appreciation in the asset of 2.5% or $3,950 (representing a further 12% return on your cash investment), for a TOTAL RETURN ON CASH INVESTMENT of 35% in your FIRST YEAR!
MONEY OUT = $33,916
CASH RETURN = $7,688
CAPITAL APPRECIATION = $3,950
I have been successful helping clients buy, sell, or lease residential, commercial, or investment properties in the Woodstock, Ontario area since August of 2007. With technical experience ... Read More...