Understanding the 4 Areas of Return with Rental Properties | 002

In this episode James and Jassen create a simple Scenario with a rental Property. After running the analysis on this Scenario they open a few Charts and discuss the four areas of return for real estate investments:

  1. Appreciation
  2. Debt Pay-down
  3. Cash Flow
  4. Gross Depreciation

Toward the end they answer some questions about how to price the services professionals can offer using the Real Estate Financial Planner™. During next week’s Office Hours James and Jassen will go over a new marketing tactic that is currently being tested.

Watch the video of the presentation here.

You can also listen to this episode on our podcast using the player below.

Understanding the 4 Areas of Return with Rental Properties Episode 002 – February 12, 2019

Episode Overview

James showcased some new Charts he added to the Real Estate Financial Planner™ while explaining the four areas of return when investing in rental real estate.

Created Scenarios

[002] Single Rental Property

This is a basic Scenario with a rental Property. The inputs we used are listed below.

  • Duration: 480 months
  • Effective Income Tax: 15%
  • Inflation Rate: 3%
  • Mortgage Interest Rate: 4.875%
  • Target Monthly Income in Retirement: $10,000
  • Yearly Safe Withdrawal Rate: 4%

Next we added an Account from the drop down menu across the top of the page and input the following.

  • Name: Starts with $100K
  • Opening Balance: $100,000
  • Yearly Rate of Return: 8% fixed

Then we went back into the [002] Single Rental Property Scenario, scrolled down to the Accounts and added the Starts with $100K Account .

After that we added a Property with the following attributes.

  • Address: 1234 Main Street
  • After Repair Value: $350,000
  • Purchase Price: $350,000
  • Mortgage Interest Rate: 5.125%
  • Down Payment Percent: 20%
  • Closing Costs Percent: 1%
  • Rent Ready Costs: 0
  • Seller Concessions: 0
  • Land Value: 15%
  • Account for Down Payment: Starts with $100K
  • Account for Income and Expenses: Starts with $100K
  • Appreciation: 3%
  • Monthly Rent: $2,000
  • Rent Appreciation: 3%
  • Vacancy Rate: 3%
  • Property Taxes: 0.650%
  • Property Insurance: 0.4%
  • Yearly HOA: 0
  • Maintenance: 10%
  • Property Management: 0

Finally we added a Rule to Buy a Property When Account Has Down Payment.

  • Apply This Rule to the following Scenario: [002] Single Rental Property
  • Buy Which Property: 1234 Main Street
  • Which Account do you want to check for Down Payment: Starts with $100K
  • Minimum Account Balance: $5,000 (check box for Inflation Adjusted)
  • Maximum Number of this Property to Buy: 1

Once the analysis was complete they opened the Chart for Return in Dollars (Gross Depreciation).

Return in Dollars (Gross Depreciation)

This Chart shows us how much return we are getting from Appreciation, Debt Paydown, Cash Flow, and Cash Flow from Depreciation.

  • Appreciation: The dollar amount of return you get by owning a property which tends to keep pace with inflation, increasing and compounding over time.
  • Debt Paydown: With each monthly mortgage payment you are paying down the debt you owe. With a fixed mortgage you pay more toward the principle of the loan each month.
  • Cash Flow: This is calculated by subtracting the amount you pay for mortgage, taxes and insurance from the rent you receive from your tenant. Often this number will start out as negative because the rent you are getting does not cover the mortgage, taxes and insurance but as rent an inflation go up over time you will reach a point when cash flow becomes positive.
  • Gross Depreciation: Since this property is a rental we get to depreciate the cost of the building (not including the land) over 27.5 years. In layman’s terms this is the dollar amount you get to reduce your income by on your taxes.

Please Login to copy this Scenario to a Free Plan, Plus Plan, Copper Plan or better.

Copy Scenario into my Real Estate Financial Planner™ Software

002 Single Rental Property with 2 Accounts, 1 Property, 1 Rule, 1 Goal

Skills Covered

Additional Episodes

>