Thinking about real estate investing? Do you know how to evaluate an investment?
I recently had a client come in looking for a single-family home as an investment opportunity. I had three different properties for them to consider. And now, it’s time to look at what’s behind door number one, two, and three.
To analyze these three properties, there are usually four variables I consider:
- The cash on cash rate: cash income earned versus cash invested
- Passive appreciation: how much will the property gain (or lose) in value if I do nothing?
- Principal paydown: how much of the total amount of the mortgage will be paid down?
- Forced appreciation: how easily can I increase the value of the property?
On the surface, one townhouse appeared to have a return in the 30 percent range while the other two properties (which had granny suites) sat somewhere in the mid-40s.
Now, conventional wisdom (and sometimes the rules) stipulate that you should (or sometimes must) put a 20 percent down payment on an investment property.
However, I showed these buyers that, by putting the bare minimum payment down (sometimes as little as five percent), their return on investment (ROI) would skyrocket.
Here’s why: while reducing the cash invested negatively affects the cash on cash rate, every other variable increases significantly. The ROI soared to over 100 percent!
Being able to put less money into any one of these properties creates the possibility of taking the remaining cash and parking it elsewhere: in investments, or improvements to the property, or maybe even buying more than one property if your cash (and your blood pressure) will allow it!
Before you can make this decision, however, you need to make a plan for each property.
You may have assumed the plan would be to hold one of these properties and earn rental income. But maybe one of those townhouses is expected to appreciate rapidly, making it a good candidate to flip next year. Or it could be that one house is a real fixer-upper on a large plot of land – a prime candidate for redevelopment.
If all (or even some) of that made sense to you and you want to learn more about real estate investing, contact us today for your copy of our free guide to real estate investing. The guide is full of definitions, local (Kingston and area!) examples, and other useful information to help you get started. We will also meet with you to discuss your readiness to invest.
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