If you’re an investor and you’ve found a property, but wondering how to determine if it’s a good deal or not, keep reading!
Hey its your favorite local Realtor, Eren Millam w/ Premiere Property Group. I specialize in all things Lewis County because it’s where I live, work, & play. I’ve been in the industry almost a decade, much of that time spent setting the bar for customer service, social & digital marketing, and shattering pricing records. I do 1-2 videos a week covering the market, reacting to real estate gurus, educating and informing you to make the best financial decisions when it comes to real estate. If you’d like to learn more about me, upcoming events in the area, or check out my weekly blog, you can visit my website, LewisCountyHomes.com.
The 4 Main Benefits of Investing
There are 4 main benefits to investing. Cash flow, Appreciation, Principal Reduction, & Tax Savings. In addition to that, there are 4 ways to quickly estimate your rate of return. These can also provide guidance into whether you should pay with cash or get a loan. While getting a loan is not the Dave Ramsey way, it usually pays better if you invest intelligently.
Cash flow is the amount of money left over after all expenses. Take your expected Gross Operating Income, subtract operating expenses to get your NET operating income. Now take your NET and subtract your annual debt service (loan payments) to get your cash flow before tax. Now you’ve got your cash flow. Take that number and divide it by the amount of cash you invested, and now you have your cash on cash rate of return. This number will come out as a %. In general a 10% cash on cash return is a good rule of thumb, but depending on your goals and risk tolerance, there is no set number to shoot for.
Cash on Cash Rate of Return
Let’s do an example on one of my current listings!
I have a building for sale in Chehalis listed at $292,500. Gross operating income is $13,800. Subtracting operating expenses of $1000, the net operating income is $12,800. Let’s say you wanted to pay cash for this property so there’s no debt service. This means the cash flow before tax is $12,800. Take that number and divide it by the cash invested, $292,500 and you have a 4.3% cash on cash rate of return. Essentially, this shows it will take a little over 23 years before you get your money back. However, a savvy investor will realize that current rents are about 1/3 of market value so the building is being under utilized. Once you have market value rents, you’d be sitting on a 12.9% cash on cash return and under 8 years before you get your money back.
The weakness of cash on cash values is they do not give any value to appreciation, but it is a good tool for a quick check of the feasibility of an investment.
I like to keep my videos short, so we’ll cut it off there and cover the other benefits and rates of return for later videos. If this was helpful to you in any way, consider giving it a like so more people who have the same question can see it and consider subscribing to my channel so you don’t miss any need to know information about our current market. Again, I’m Eren Millam with Premiere Property Group, and remember, never settle for less than extraordinary!
If you’re thinking of buying or selling your home in the west Lewis County area, contact me today! I’d love to hear from you! Eren Millam – Managing Broker Premiere Property Group, LLC WA License No. 26933
Chehalis, WA 98532 | Centralia, WA 98531 | Adna, WA 98522 | Boistfort, WA 98538 | Napavine, WA 98565 | Onalaska, WA 98570 | Rochester, WA 98579 | Toledo, WA 98591 | Vader, WA 98593 | Winlock, WA 98596
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