Alright guys what's going on this is Daniel one half of the Kwak brothers
and in this video we're gonna talk about what is a good return on a rental
property to that intro let's get right to it alright y'all welcome back what is
a good return on a rental property right that's a question that I get a lot you
know that's something that I think a lot of people talk about so before we begin
to the topic of course never forget to click that subscribe button and click
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use it to put some money in your pocket all right guys so it's something that I
get asked a lot you know what is a good return on a rental property and well
I've had a lot of opportunities to analyze a lot of different deals you
know so I've done over I think now I've got like 80 something units and I'm
doing a lot of different deals around the country and raised a lot of money so
it's something that I've done rather often and in my experience the answer to
that question of what makes a good return on a rental property is it
depends right now I know you guys are ready to shut off this video find out
where I live and just you know give me a nice sucker punch in the throat but in
the hostel guys I know as much as you guys me sick of may be sick and tired of
hearing that those two words it depends it is absolutely true it does depend it
depends on what you're looking for because well there's different things
that rental properties offer in terms a if a return right so when we're talking
about what makes a good return on a rental property there's a lot of things
we have to keep in mind so let's go ahead and use an example right so let's
say that we have a 10 unit building so we have 10 units and let's say that we
buy it for $800,000
so we bought it for 80,000 a unit and let's say that the net operating income
right so that's the Noi Noi stands for net operating income let's say it makes
$80,000 a year now obviously that's not the Casa look because we still have to
deduct our debt service from it but I want to show you guys basically that
there are four different ways to get a return from a rental property so you
know hopefully as I break this down and I explain the different ways that you
can get a return on a rental property you can then decide based on your own
financial situation what is a good return on a rental property for some it
may be the cash flow may be something else right so it completely does depend
so the first way obviously is the cash flow right and how good is the cash flow
what a pretty good number is this kind of stay above 8% cash on cash return so
what does that necessarily mean right so let's go ahead and break that down so in
order for us to calculate what our cash flow is you know we already have our net
operating income of $80,000 we have to know what our debt service is because
unless we know what our debt service is which is the mortgage we're not going to
be able to figure out how much money there's gonna be left for us right to
call it cash flow so I'm gonna go ahead and calculate the mortgage and one of my
favorite mortgage calculators to use is Carl's mortgage calculator that's kar el
Pasto vs mortgage calculator I'm gonna put in the value which is $80,000 and
let's say in this scenario we put 20% down so we put a hundred and sixty
thousand dollars down I'm gonna just use 5% interest because the going rates five
and a half if you're an expert investor you should be able to go in the bank and
get four or five for six so I'm just gonna kind of meet in the middle and
just say five percent and I'm gonna put it on a 30-year a morte because that's
what a lot of people are doing nowadays I personally prefer a shorter number in
these amortization cuz I like paying off properties quicker rather than later but
for the sake of the example I'm just going to go ahead and use thirty
years so our debt service is thirty four thirty five sixty six so I'm just gonna
use it $3,400 just round down thirty five bucks just kind of use cowboy math
and I'm gonna go to my calculator and I'm gonna multiply thirty four hundred
and multiply it by 12 that gives me an annual debt service of forty thousand
eighty dollars okay so if I subtract forty thousand eighty eight hundred
dollars from the eighty thousand that's gonna give me my cash flow so I'm gonna
subtract eighty thousand for forty thousand eight hundred from eighty
thousand and that puts us at thirty nine thousand dollars thirty nine thousand
two hundred dollars which we divide that by twelve that's our monthly cash flow
thirty two sixty six sixty six right so
$3,266.66 that's our monthly cash flow now if we want to take it a step further
we can go ahead and compare that to the down payment that we put in in terms of
our investment to acquire the building and figure out you know what is the
return right what is the cash on cash return right so I'm going to go ahead
and take thirty nine thousand two hundred because that's the number annual
debt service before I'm sorry that's the cash flow before we divide it by twelve
I'm gonna divide that by a hundred and sixty thousand and that gives us a
twenty four point five percent cash on cash return right now obviously you can
have an investor be in it with you who provides the hundred and sixty thousand
if you split the deal fifty-fifty that gives your investor twelve point two
five percent cash on cash return another way for you guys to make a return on
investment property is the amortization right so the amortization is the
principle that you pay off through your debt service right so I'm gonna go ahead
and look at here in my in my table right in my Carl's mortgage calculator
and I'm gonna see that in 2000 right so if I did this deal today right my first
very my first full year of paying this off I'm gonna pay nine thousand seven
hundred sixty-one and 71 cents right in terms of my long term efforts right
that's what I like I like paying off that amortization I laughs I like paying
off that principal but now remember guys we did it at a 30-year amortization so
let me go ahead and change that to twenty and in twenty twenty get this
guy's right so in a 30-year amortization
in 2020 the very first full year of us owning this property we pay nine
thousand seven hundred sixty one dollars and seventy one cents in principle if we
did it at a 20-year amortization that very first year we pay 19,700 sixty five
dollars and forty six cents that's more than double if you did it at a twenty
compared to a thirty so now this is where the answer it depends start to
make more sense if you're somebody that's more focused on long-term
finances and let's say you have a lot of cash flow already you're working a
really high paying job or you know you're a full-time investor and you're
already kind of financially free and you're not hurting for money right now
then in that case you would need to get the 20-year because you want to be able
to pay off more principal and get that long-term gain right that long-term
wealth build that off and get it paid off and enjoy it then but if you're
somebody that's hurting for cash right now well get nine thousand six one seven
because that's literally a difference you're sacrificing the amortization for
the sake of cash flow which is money today
another way is appreciation
appreciation happens in many different ways I'm not going to get too much into
it because well there's a lot of different ways to appreciate it for
example there's passive appreciation there is a forced appreciation
there's phased appreciation and there's also earned appreciation there's four
different ways to appreciate the value of a property I'm not going to get into
it right now but I will make another video talking about the four different
ways of appreciating property especially return on a rental properties when we're
talking about and answering the question what is a good return on a rental
property the last one I'm going to talk about is the depreciation the
depreciation long story short is the tax benefits of owning rental properties and
the way you do that long story short guys is you take the value of the
building and not the land because remember guys land is not depreciable
you cannot take advantage of depreciation on land so if I were to get
this thing for 800,000 and let's say that the building value was seven
hundred twenty thousand right so ten percent of the purchase price is for the
land rather than the building what I'm gonna do here I'm gonna divide that by
twenty seven and a half why twenty-seven and a half well that's
actually the life cycle of how long the IRS is willing to let us real estate
investors depreciate the building so we're gonna take that number because
we're able to depreciate it for twenty seven and a half years I'm gonna take
that seven hundred twenty thousand number which is the value of the
building because of course the building is what we're able to depreciate I'm
gonna take that number and it's divided by twenty seven and a half okay that
gives me an annual depreciation of twenty six thousand one hundred eighty
one dollars and eighty one cents that means I get twenty six thousand one
hundred eighty one dollars and eighty one cents worth of depreciation where's
the tax advantages right and for a lot of individuals like who I work with a
lot doctors depreciation means a lot and for a lot
of individuals write for a doctor let's use a doctor as an example let's say
they make a lot of money they make half a million dollars a year right in that
case they may not care about the cash flow as much or even the appreciation as
much they might be more focused on these two instead compare that with an
entrepreneur who's thirty years old they've got let's say four kids and they
got into real estate because they want the cash flow they want the passive
income in that case this is not going to be as important asked to this right so
what makes a good return on a rental property well it depends it depends on
who you are where is the building and what's your exit strategy right now we
can get into a lot of different topics here we can talk about how the economy
can change a lot of these returns for example the economy can change a lot to
the cash flow because well based on the economy the rents can go up or the rents
can go down right vacancy numbers can go up and they can also go down based on
the economy the taxes can go up a tax didn't go down contractors how much they
charge that go up it can go down right so a lot of the economy it could defer a
lot of different things same thing with the amortization aspect well the
amortization aspect has a lot to do what thanks do you guys think that banks get
affected by the economy yes or no I think that's an obvious yes right and
same thing with appreciation do real estate does real estate values get lower
and higher based on the economy yes or no yes absolutely absolutely so these
are things that we need to keep in mind guys when we're calculating what makes a
good return on a rental property so I've broken down four different ways that an
individual can get a return on a rental property so what makes a good return on
a rental property you decide you're it's up to you to make the choice and it's up
to you right to go ahead and figure out what you need out of these four things
based on where you are financially what are your financial goals what are your
assets what are your liabilities who are your dependents there's a lot of things
that we can think about here and at the end of the day guys right that's my goal
right as somebody on YouTube's right making a 14 15 minute
video on you know on real estate it's up to you guys ultimately to go ahead and
sit down and really think about the stuff and put in the work my job again
is to at least answer the right questions give you enough information
show you could at least start that conversation so again guys don't forget
to click that subscribe button click on that notification bell as well because
we will be putting more content out like this where we talk about numbers and
specifics and you always want to be the first one to do that as well also feel
free to check out our book 0 to 75 units com
I wrote it literally in a week and you know you'll be able to get it done
probably in a day I always make the joke that you can get it done in one bathroom
sitting so it's actually detailing my very first step on how I got into real
estate investing so hopefully this video was helpful guys there's a lot of
different videos that we talked about in terms of how to calculate numbers on a
rental property all the links should be in the description below so again guys
thank you so much for watching don't forget to subscribe and click that
notification bell and again guys much love to you I'll see you guys in the
next one