by David | Apr 10, 2015 | Real Estate Basics
Amortization is one of the most amazing concepts in real estate investing. It has to do with another amazing concept called OPM, which stands for Other People’s Money. Before we get to amortization, the idea behind OPM is that you don’t have to use your own money to purchase properties (or, at least you don’t need to use all of your money for the purchase). An obvious example for OPM is a mortgage. If there’s a property you want to purchase that’s valued at $100,000, you don’t need to have $100,000 in order to purchase it. With a conventional loan, you only need 20% of that price. In other words, if you only have $20,000 you can still purchase a property that’s worth $100,000.
That’s a simple example of OPM. Now, what is amortization? Amortization is the fact that, over the course of the life of that loan, you’re paying it down and slowly owning more of that property.
For example, the day after you purchase that $100k property with $20k of your own money and finance the other $80k from the bank, you own 20% of that property. Since you’re paying the bank a mortgage payment every month, you’re slowly paying back that loan. So after 10 years, you won’t own only 20% of the property, you’ll own 30% of it. And after 30 years (if this is a 30-year loan), you’ll own 100% of that property. In other words, you initially paid 20% of the price and after 30 years you’ll own the entire thing.
But, David, like you said, we’re making monthly payments to the bank to return the 80% back to them. That’s right, but the question is who is paying them back? If you’ve purchased the right property, your tenants’ rent payment should pay back the mortgage. You can see an example from my first home here. With my first property, the rent paid by my renters covers not only the mortgage but also all expenses! The rent pays for the mortgage, insurance, taxes, property management, and maintenance. In other words, my tenants are paying the bank back for the loan that I borrowed.
So, amortization is that slow increase of how much of the property I own vs. how much of it the bank owns. After 30 years I should own the additional 80% of the house without spending any more than my enitial payment of 20% of the property price.
Another example: Let’s say I’m able to save $20,000 a year for the next ten years, and every year I purchase a property with a conventional 30-year loan. After 40 years, I’ll own the ten houses free and clear (no more mortgages). So, in the first ten years I spent $20,000 per year, and after 40 years I’ll have ten houses for a total value of $1,000,000 (not taking appreciation in to account).
That’s how amortization is an amazing part of real estate.
by David | Apr 1, 2015 | Income Report
March, like February, was pretty normal in regards to income from my two rental properties. I spent time this month checking out different properties and, as I wrote in a previous post, I found house #3 which is currently being renovated.
This month’s numbers are:
House A
| Item |
Amount |
|---|
| Rent |
$795.00 |
| Mortgage |
-$316.67 |
| Insurance |
$0.00 |
| Taxes |
$0.00 |
| Management |
-$79.50 |
| Cash flow |
$398.83 |
House B
| Item |
Amount |
|---|
| Rent |
$725.00 |
| Mortgage |
-$413.49 |
| Insurance |
-$30.58 |
| Taxes |
-$72.68 |
| Management |
-$72.50 |
| Cash flow |
$135.75 |
Since it’s the end of the first quarter of 2015, I spent some time looking at the goals I defined for this year and checking where I’m at with each. Here’s a quick review:
- Finance goals:
- Save at least $45,000 – So far this year, we were able to save $12,000 which puts us slightly above our monthly goal of $3,750.
- Purchase 3 additional properties – I plan to purchase my third rental property next month so we’ll be at 1 out of 3 for the year.
- Grow my net worth to $150,000 (it’s currently at $100,000) – Since the savings are going well, we’re on course with this goal. Other pieces that are working to my advantage is:
- Amortization – the fact that rent paid by my tenants is paying off the mortgages and specifically the principle I owe means that I own more of each house (slowly but surely). I’ll calculate this and blog more about it towards the end of the year.
- House value increase – House prices going up will also contribute to the net worth goal.
- Real estate income – Besides saving from the income we receive from our day jobs, we also have a stream of income from our rentals which is helping our net worth grow. Some of the cash flow we use to make additional payments on the mortgage and reduce the principal, but the rest is accumulating and working toward building our net worth.
- Personal goal:
- Start a family – We’re pregnant! Super cool and super exciting! It’ll be interesting to see how having a baby will affec our ability to continue saving.
- Passive REI blog goal:
- Write one post per week – I haven’t been doing well in this area. I’m currently at about one post every two weeks, so I will need to spend more time on the blog since there is a lot I’d like to share!
So that’s how 2015 is starting out! What do you think?
by David | Mar 15, 2015 | My REI History
Earlier this month, I blogged about how February was a month of “getting back into the game” after a break I took since purchasing house #2 late last year. Well, I’ve been doing a bunch of networking and studying different markets and potential investments. In the end, I decided on the next property I want to purchase and signed the contract on this house today!
The house is located in Memphis, TN and is priced at $54,700. The yearly net operating income is $6,127, which means the cap rate is 11%. The rest of the numbers are:
| Item |
Amount |
|---|
| Rent |
$675.00 |
| Insurance |
$26.50 |
| Taxes |
$70.41 |
| Management |
-$67.50 |
| Net Operating Income |
$510.59 |
Similar to house #2, with this purchase I’ll be paying for 40% of the property and using a loan for the other 60%. The loan terms are identical to the loan I took for house #2: 10 year mortgage with a 7.25% interest rate. The monthly mortgage payment comes out to $385, bringing the monthly cash flow to $125.59.
| Item |
Amount |
|---|
| Rent |
$675.00 |
| Insurance |
$26.50 |
| Taxes |
$70.41 |
| Management |
-$67.50 |
| Net Operating Income |
$510.59 |
| Debt Services |
-$385.00 |
| Monthly cash flow |
$125.59 |
With these numbers, my cash on cash return will be around 6% depending on closing costs, and around 4% if we factor in vacancy and maintenance. For those of you who are looking at that number and not understanding how this could be a good investment, take a look at the last paragraph in my post about house #2.
by David | Mar 1, 2015 | Income Report
February was a month of getting back into the hunt for me. In January, things went quiet in the REI world for me since there was a lot to do at work and at home during the first few weeks of the year. But now I’m back to REI work. I spent a lot of time this month networking with fellow real estate investors and talking to turnkey real estate companies to learn what else is out there.
This past month, I also started researching multi-unit properties such as apartment buildings. Going from investing in single family homes to multi-units is a big leap, but I think it could be an important one since I understand that I need to scale in order for passive real estate investing to really impact my life.
All went well with my properties in February. Cash flow is identical to last month, and you can see the breakdown here:
House A
| Item |
Amount |
|---|
| Rent |
$795.00 |
| Mortgage |
-$316.67 |
| Insurance |
$0.00 |
| Taxes |
$0.00 |
| Management |
-$79.50 |
| Cash flow |
$398.83 |
House B
| Item |
Amount |
|---|
| Rent |
$725.00 |
| Mortgage |
-$413.49 |
| Insurance |
-$30.58 |
| Taxes |
-$72.68 |
| Management |
-$72.50 |
| Cash flow |
$135.75 |
Total cash flow generated from passive real estate investing is $2,049.
Plans for March: continue to network with other real estate investors and turnkey companies to find my next purchase. Even though I’m researching multi-family units, I believe my next purchase will be a single family property. But I will be spending a good amount of time on researching multi-family options… I’ll keep you updated on how that goes.
by David | Feb 23, 2015 | My REI History
After owning real estate for about 6 months now, I’ve come to learn a few things and I wanted to share some thoughts with you:
Turtle speed.
With two rental properties, my monthly cash flow has been around $365 each month. That’s a 9% return on my investment which is a pretty good return. While a good return, this low amount of cash flow is teaching me that I need to continue spending time researching markets/properties and continue purchasing and investing in real estate. It also teaches me that staying in the single-family market is probably not a good idea. I need to grow and get into small multi-family units and also into larger apartment buildings. That’s probably the best way to “speed” things up and get larger amounts of monthly cash flow.
More isn’t better, it’s a must.
Owning two properties is great, but it’s not enough. There are a few reasons for that:
- The returns from two properties don’t meet my goals. My goal is to be able to retire early thanks to passive income from real estate. The cash flow from two properties (even after the mortgages are paid) is not enough to achieve that goal.
- While my properties are doing well so far (I haven’t had any problems with tenants or maintenance), in the future I will have expenses (maintenance, vacancy, etc.). If one of my two houses is vacant I’ll be at 50% vacancy which is very high and it will take a big bite out of my earnings. On the other hand, if I have ten units and two of them are vacant, my vacancy drops to 20% and the income from the other eight units will cover for the low performing units.
Staying focused.
I learned that staying focused on real estate investing isn’t easy! With a full-time job it’s not easy getting home after a long day and researching markets, networking, dealing with banks, title companies, etc. Furthermore, this isn’t something that can be done quickly. I don’t have the capital to buy 20 properties at this time; that will take several years, if not a decade. Because of this, I need to make sure I’m in the real estate game every day for the years to come. So, how can I stay focused? Well, there are a few things that help:
- Love it. I like real estate, which helps. More than that, I love the idea of early retirement. I love talking about it. I love sharing with others that there are possibilities beyond the 9-5 if they start thinking out-0f-the-box.
- Thinking about my “why.” I have a goal which is why I got into real estate. Whenever I feel like I don’t have energy, I just think about my “why,” or open this post (definitely helps to write it down!).
Looking at the future.
Last year I had a return of over 14% on my investment. Looking to the future, I can see that if both of my tenants leave at the end of their lease (August and December 2015), my returns are going to take a big hit since I’ll need to pay for getting the house ready for a new tenant and also for finding a new tenant. On the other hand, if I have 50 units and a handful of them leave each year, the hit on my total return will not hurt as much. This is, of course, the recurring theme: growth is the only way to achieve my goals!
Recent Comments