It’s time to pull all this together and see the overall numbers on real estate investing. The benefits include monthly cashflow, appreciation of the property, mortgage being paid down every month and the tax benefit called depreciation. So let’s look at the example I’ve used in other posts on this blog of one of my rental properties.
Rent – $1,550
Taxes – $450
Total expenses = $1,277
Profit = $1,550 – $1,277 = $273/month or $3,276/year
As you can see here the monthly cashflow on my property is $273. So if we want to know what that will be over 30 years we can multiply that by 360 month. That numbers is $98,280. But we didn’t figure in that over time rents rise. If we take into account an average annual rent increase of 1% that figure climbs to $188,280 or $6,276/year profit. Now over those 30 years the mortgage payment stays the same but the taxes and insurance increases. If those increase at 1% and rents increase at about 2% per year, we have our 1% gain. So just on cashflow alone we have returned a 18% profit off our initial investment of $35,000.
Now let’s add in the appreciation of the property combined with the paying down of the mortgage, which the tenant does for us. This property I discussed in another blog post here. The initial value is $175,000. Assuming an annual average increase in value of 3%, after 30 years we own an asset that is worth $430,000. This comes out to an annual profit of $14,333 or a 41% return on the initial downpayment we made of $35,000.
So on the initial investment of $35,000 we made:
$188,280 in cashflow
$430,000 in asset appreciation while the mortgage was paid down to zero
Totalling $618,280 over 30 years. That is $20,609 made each year which gives us an annual return on investment of 58.8%. Wow! But wait! We have to factor in the benefit of depreciation which means that we have paid little to no taxes on this gain over those 30 years. Let’s assume a 20% tax rate on this cashflow. That $188,280 should have resulted in taxes of approximately $37,600 but did not due to us being able to depreciate the property. Adding this into the equation gives us a total of $655,936 (or $21,864/year) which equates to a total ROI (return on investment) of 62.5%.
As you can see here, real estate over the long haul has the ability to greatly build wealth. Most of the gains discussed here came from appreciation and mortgage reduction over time. You really have to take the long term approach as the monthly cashflow doesn’t look all that impressive. If you do however practice that patience and keep at it over the years, you can see the incredible value you wind up with. I hope I’ve made a solid case for real estate investing as a fantastic long term investment that you might consider.