If you are thinking about investing into real estate, you need to consider the four values of real estate investment to figure out if something is a good investment.
Cash FLOW
Appreciation
Tax Benefits
Mortgage Paydown.
Too often, people think only about the cash flow- but we will explore ALL of these values so you can be well-informed about your prospects in real estate!
We will go through these values with an example scenario.
CASH FLOW
Let’s say you find a property that you can get with a $300,000 mortgage and a 15% down payment. You’ll be paying about $1400 a month for your mortgage and we’ll say your rent is $1800. With $200 to save each month for property management and potential issues, this leaves you with a cash flow on this property of $200 a month or $2400 a year.
Now, if this is all you consider when investing in real estate, you might say ‘$2,400 a year!? Not worth it!’ BUT- let’s look at the other three values first!
APPRECIATION
In Utah, the appreciation to home values has been 10%, but let’s play it safe and use the national average, which is 4%, meaning the home will be worth $12,000 more after owning it for one year.
TAX BENEFIT
Take the purchase price of 300,000 and you can depreciate it by 27.5% or so. I’m not a tax accountant (see your own for specifics!) but basically, your home will ‘depreciate’ in value of about $9,000. You won’t save $9,000 in taxes- that’s just $9,000 you won’t get taxed on. If your tax rate is 25%, that means there will be $2,250 in taxes that you won’t have to pay any longer.
MORTGAGE PAYDOWN
Mortgages are interest heavy at the beginning, but even so, you will pay off $5000 the first year of owning this home, and remember-that the mortgage is being paid for by the renter, not yourself.
SO! Let’s put it all together. The cash flow and tax benefits will be something you will help you each year, to the tune of $2,400+$2,250=$4,650, while the appreciation and mortgage paydown will pay off when you sell the home ($12,000+$5,000=$17,000). Put this together, and while you don’t see the appreciation and mortgage paydown benefits until you sell, your return on investment is amazing!
Your 15% investment in the down payment ($45,000) has gained you a total of $21,650 in cash/value. That’s nearly a 50% return on investment in just the first year!
Maybe that’s why they say more millionaires are made through real estate than any other means?
If you have any questions about investing in real estate, feel free to reach out to me, anytime!
