Episode 100 – The Rules of Real Estate. Part 2


Picking up from where we left off.

Everyone, welcome to another wise money tools video. Last week, we kind of dove in a little deep on some numbers for real estate investing, and we want to pick it up from there. So what we’re gonna do is talk about how to use the banking system as part of your real estate investing. Okay, so now let’s do something kind of interesting. So we’ve looked at an all cash buyer. And we’ve looked at a buyer who’s using bank leverage. But if you recall, when we started this, we were talking about an investor who basically had $250,000 in cash right now. So what a more aggressive investor might do is take the 250, and actually buy 5 homes, leveraged with bank money. And let’s see what that looks like.

So now they take basically 50,000 per home down payment, get a bank financing. Now their annual rental income is just about $90,000 a year, expenses of $4,500, the mortgage just about $79,500. And so now they’ve got a net operating income of $5,700. And if we look at the total appreciation from that, and net income, it’s basically the same as buying one home 15.29%. Okay. But now if we have a future sell here, and we’ve got an appreciated value, let’s just say that home goes, I don’t know how many years in the future this is, but it goes from 240,000 to 350,000. Maybe it’s the next 10 years, seven years, 12 years, who knows.

But that means there’s equity appreciation of $110,000 per house. So an all cash return on investment would be about 45%. So what that means is if I walked in, and you put $240,000, down on the house owner free and clear, and then it grew to 350,000, my equity would be 110,000. And that rate of return or return on investment ROI, about 45%. Okay, but if I leverage that, and again, I’m buying five houses. And now my leveraged ROI is over 200%. This is where using leverage and multiple homes starts to really make a meaningful difference in your wealth. So now we’ve got over $550,000 in equity between the 5 homes, and our ROI or return on investment on the multiple Homes is over 229%.

So the moral of the story is, once you determine what kind of investor you want to be, that might give you a sense of how it aggressive you should be with your capital, and whether or not you should use leverage or not.The shorter this duration, the worse if you will, you’re going to find financing, the longer the duration, the more probability that you’re going to have some pretty significant returns to accumulate your wealth. Okay, so that is a quick down and dirty 30,000 foot overview. But I was really interesting to go through these numbers the other day with this client of mine. Because I know they really wanted the property but we wanted to make sure we assessed it right, they ended up the property got bid up.

And so basically what would happen if they wanted this property what they would have had to pay even more, which would have brought their ROI down their cap rates down. And they probably ended up dodged a bullet on this one. But what I hope they and all of you get a sense of is whether or not you should use leverage or not. Now the next video we’re going to do we’re going to take kind of this same scenario, but we’re going to plug it into whether or not we should use the banking system as part of this process. And whether we should use our banking system financing availability to pay cash, or just use the down payment and see how that all works out.

Okay, in the meantime, if you have any questions, shoot them to questions at wise money tools.com will answer this as quick as I can. Make sure you subscribe. If you ever want a strategy session, just click on the link below and set up a few minutes where we can have a conversation together. And the meantime you have a great week and I will see you next week. Until then, take care.

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