In today’s Local and National Real Estate Market, it has never been a better time to buy real estate investment properties. Yes, I know, this statement coming from a Realtor (Me) is cliché. But…just hear me out, and then make a judgment call. (We would love your comments below as well).
When investing in any market it really comes down to the numbers. All investors want to know what the expected rate of return on their money will be and what is the risk involved on that investment? Wouldn’t you be asking these two same basic questions with any investments? I would!
So when I say, it comes down to the “Numbers”, I am referring to the purchase price, down payment amount, mortgage payment, taxes, expenses, rental rates, cash-on-cash return, etc. Below is an example of a simple analysis that I would do on a property that one of our clients is considering:
Investment Property Example #1
|Down Payment:||$46,375 (25%)|
|Loan Amount:||$139,125 (75%)|
|Mortgage Payment:(30 yr. fixed @ 5%)||$747/mo.|
|Net Cash Flow||$326/mo.|
|Cash-on-Cash Return||8.4% (Annual Basis)|
(This is an actual property that we did an analysis on in Orange County in the past 60 days)
So what do all these numbers mean???
Let me break this example down…First you want to see what your purchase price is going to be on a property, or at least what you think you can purchase it for. In this case it was $185,500. Then you want to figure what your down payment is going to be if you are getting a mortgage. Typically the minimum down payment for an investment property is 25%. In this example, it would be $46,375. The remaining 75% ($139,125) will be your loan amount.
Based off a 30 year fixed mortgage at 5% interest, your mortgage payment will be $747 per month. Then you want to add the Homeowners Association (HOA) Dues of $267 per month, the property taxes of $170 per month, and the Insurance of $40 per month. So your total monthly expenses on this investment property would be $1,224 per month.
Next you want to research what the current market rent is for a property and in this case it is $1,550 per month which would become your Gross Income for this property. Subtract your total expense of $1,224 and you are left with a net income or net cash flow of $326 per month.
Now multiply the monthly net income of $326 by 12 and that gives your $3,912 net return per year on this property. When you divide your return of $3,912 over the actual money you invested ($46,375) you get your Annual Cash-on-Cash return which is 8.4% in this situation.
When you put your money into a CD at the bank they might tell you that it will be a 1% yield. Meaning your cash-on-cash return is 1%. Or when you open an IRA account and the financial advisor says, “Historically these investments have averaged a 4% annual yield”, they are referring to your cash-on-cash return.
I’m not saying that bank CD’s or IRA accounts are a bad investment; I have simply given you a basic formula to calculate your ROI on any real estate property in Orange County, California or anywhere in the nation. So do your research to see what the best investment for you is and what will provide you the best return on your investment.
Right now there are many investors buying up as many investment properties as they can, because the ROI is looking great! Combined with the low interest rates and low prices, buying real estate investments in Orange County or anywhere in the nation is in large demand right now and is a smart long term investment!