Joe: Hey, it's Joe again.
A lot of people ask me how do you figure the return on investment of a property?
There's lots of analysis tools out there to figure out what the cap rate is of the rental
property, or how much return you're going to get, or what the long term investment value
is.
But I think you want to be able to compare apples to apples with your investments.
So if I say, 'I can go to Bank of America and I can put my money into a money market
and I can get 2% return on that money.
Or I can go into mutual fund and get x return.
Or I can go out and buy this stock and I can get this return.
And I'll have an idea of where we're at in the continuum and how my investment in real
estate compares to those.'
Joe: Investment in real estate almost always compares favorably over those types of investments.
I think the reason most people buy mutual funds and stocks is because the people who
sell those things -- that's how they make money.
They won't make money when they sell you investment property.
They make money when they sell you stocks.
And stocks are the accepted way to buy property and to put your money.
But I don't believe that you have control over stocks.
I don't believe that you have any control over what happens in the boardrooms of these
big corporations or, first of all, whether they're doing things legitimately, and if
they are, whether or not they're going to do the right thing, or whether they're going
to make money on it.
There's no way that you can know those things.
And even the experts who look at these businesses and decide whether or not their values are
there and all the stock analysis that they do -- they're still not going to have any
control over that particular investment.
Joe: Whereas, with real estate, you can buy a piece of real estate.
You can look at the market where that real estate is, and determine whether or not you're
going to be able to have income and whether or not it's going to be sustainable over the
long term.
And that's determined by rental values.
Rental values can drop and you can still get a decent return on your properties if you're
doing it this way.
You can also get professional management who can handle these things for you.
But you can take them out of the transaction any time you want.
If you feel that they're not doing a good job, you can pull them out and you can give
somebody else the job to do it for you.
Or you can take over and do it yourself, which is not something I would want to do.
Still, there's lots of good property managers out there.
And if you find somebody with a license, then they are accountable to the board of realtors
with their ethics and they've got to follow through with doing it a certain way.
So make sure that if you do get a property manager, you find somebody who's licensed
or somebody who's working directly under you on a day to day basis.
Joe: Anyway, how do you figure the return on investment for a property that you're buying
long term?
And here is, I think, the easiest way to do return on investment.
First, you have to set aside the value of the property or the amount that you have into
it.
Let's say you bought it and you fixed it up.
Take the money you paid to buy it, the money you paid to turn on the utilities, the money
you paid to fix up the property to get it habitable (and hopefully you have somebody
to do all this work for you -- don't do work on properties yourself).
Get all of that stuff done.
Get that total cost.
Then, you get a tenant in there and find out how much that tenant is going to give you
annually.
If that tenant pays you $1,000 a month, then that's $12,000 of annual income on that property,
at least theoretically.
There's going to be vacancies, and there's going to be repairs in addition to the things
you've done eventually so there's going to be reductions in this, but let's get to that
in a second.
So you've got $12,000 a month coming in.
Joe: Now you've got to subtract your property taxes from that $12,000 a month.
Let's say your property tax on this property is $2,000.
So now you've got $10,000.
And, you've got a property manager handling the property for you and let's say they're
going to cost you 10% of your rent, so there's going to be $1,200 on that.
Then, you're going to have insurance on that so let's say that costs you $400 a year, so
you get insurance, landlord insurance on the property in case it burns down or there's
some other problem or there's some liability -- it also covers liability insurance.
So you subtract that as well.
You're subtracting taxes, insurance, property management, and then ultimately you're also
going to add some repairs in there.
But instead of adding repairs in there, I'll take that and I'll subtract it from the income
and then I'll take that sum -- let's say its $8,000 that's left, and I'll divide that $8,000
by the amount that I paid for it.
Let's say I paid $32,000 for that property, so that means that if I divide that $32,000
into the 8, I'm going to get 25%.
So I've got a 25% return on my investment if I paid 32000$ for that property; a 25%
return.
Joe: Now you've got to figure in the other costs like vacancies and other repairs; things
like that.
Out of that 25%, you're probably going to have between 1% and 4% extra costs.
If you figure it out of the income that you get, you're probably going to get between
70% and 100% of the actual income.
I think it probably averages on my properties to about 90% of the income, not including
the taxes and insurance and property management -- 90% of the income actually comes to us
that we expect to come to us.
And so we base the return based on that.
Joe: Now that's the easiest way for me as an investor to look at this.
There's also going to be additional income that I'm going to get on these properties.
I'm going to get depreciation which I talked about earlier, which is going to reduce my
taxes -- it's going to save me real money on my taxes.
I'm going to get appreciation on the property.
The values are going to go up over a period of years so hopefully that will become a reality
again.
And then hopefully I'm also, when I buy these properties, going to buy some equity into
those properties.
So maybe I buy 20% to 40% of equity into those properties when I bought it.
If I bought and paid $32,000 for it, and if it's the real market value and just two years
ago it was, let's say $48,000 - that means I got an instant 20-30% of equity right away
out of that deal, and I can figure that into my return.
But I don't like to do that with the value because it's so hard to tell what the values
are, especially right now.
Maybe a few years from now, I'll be able to look at the values and say, 'Wow, that's how
much we paid for it and that's what it's worth now.'
Joe: I like to go back right now and look at the prices that people were paying for
them just 2 or 3 years ago.
If you look at those numbers, that'll give you a pretty good idea of where it's going
to come back to over the next 4 to 5 years.
At least that's my theory.
Joe: So that's how to figure the return on investment for cash flow properties if you're
doing cash deals.
And if you're interested in buying these kinds of properties where you can get 15-18% return
on investment and you want to buy some of the ones that I've got for sale, and you don't
have more than $50,000 to invest, I can help you.
I can help you buy multiple properties, too.
I've got people that come in and buy 4 to 10 properties from me at once, and basically
we create a whole retirement program for them.
But they've got cash to invest and you're going to need anywhere from $25,000 on the
cheaper end stuff that we've got up to about $100,000 if you're buying multiple properties.
I hope that helps.