Once upon a time, in a neighborhood not so far away, there lived two investors who made different choices. Who fared better? You be the judge.
Real Estate Investor X:
Investor X purchased a fully rented three-unit property generating $60,000/year, for $900,000.
The investor put in $180,000 as a down payment to make the purchase possible. At the end of the first year, Mr. X was left with $10,000/y cash flow after all expenses including annual mortgage payments. The return on investment or Cash on Cash was 5.5 percent (10K made over 180K invested).
In addition, by the end of year one, Mr. X’s tenants paid the mortgage, of which around 20K is equity.
By the end of the second year, Mr. X increased the rents by two percent and was left with a cash flow of 11K/year.
The average cash flow for the first and second years is 10.5K. The average annual equity on the mortgage is 20K. Mr. X made 30.5K since the purchase and invested 180K, which gives a rate of return of 17 percent.
Real Estate Investor Y:
Investor Y purchased a vacant three-unit property generating $25,000/year for $600,000.
The investor put in $120,000 as a down payment to make the purchase possible. At the end of the first year, Miss Y was barely paid all expenses, including the annual mortgage. The return on investment or Cash on Cash was close to zero percent (little to no cash flow left).
In addition, by the end of year one, Miss Y’s tenants paid the mortgage, of which around 11K is equity.
By the end of the second year, Miss Y renovated the three units for 50K and covered out of pocket the monthly costs without tenants for six months (17.5K). She rented again after the renovations and increased the total income from 35K to 55K/y. The new cash flow is now 20K/year. Miss Y had to invest 120K + 50K + 17.5K = 187K to make a profit in six to 12 months.
The average cash flow for the first and second year is 10K. The average annual equity on the mortgage is 11K. Miss Y made 21K since the purchase and invested 187K, which gives a rate of return of 11 percent.
Boston Real Estate and the Bottom Line
Which real estate investment would you be more confident to invest in?
