Understanding the Numbers on Buy & Hold
- The property
- Property $200,000
- Down Payment 20% - $40,000
- 4 unit complex – rent per unit $800/month ($3200/mo total)
- 2% Rule –
- at 2% this property would rent for $4,000/mo
- This property is at 1.6%
- 50% rule –
- 50% of rental income will go toward expenses
- This property would be $1600/month
- This expenses include – repairs, vacancies, utilities, taxes, insurance, managements, turnover costs, and occasional big ticket repairs
- Net Operating Income – NOI
- Income after fees, these would be the fees listed in the 50% rule and do not include principle and interest
- For this property - $1600 (not the true number, but based on 50% rule)
- Cash flow
- Any money left after subtracting principle and interest from NOI
- Prinicple and Interest – 30 yr fixed at 4% on $160,000 - $764/mo
- Cash flow = $3200 - $1600 (NOI) - $764 (P&I) = $836/mo or $10,032/yr
- Cap Rate
- Annual NOI/purchase price
- $19,200/200,000 = 9.6%
- Return on investment of $40,000 over 30 year life of mortgage
- Cash flow - $10,032 annual return – 25.1% return
- 30 years = $300,960
- This is a conservative estimate since this money could obviously be re-invested as it was received monthly and the rent would be increased to reflect inflation over the 30 year period
- Property value at 3% appreciation for 30 years
- $485,452
- 30 year total return on $40,000
- 485,452+300,960 = $786,412
- This is a ~10.5% annual return on investment
- $40,000 invested in stocks/mutual funds at 7% would have returned $304,49
I believe this is all correct, but wanted to get some feedback to confirm my understandings of these concepts was correct. Am I missing anything in these calculations. Thanks.
Jesse