Always Leverage Real Estate
Today I'm going to give you an example of what leveraging can do for your real estate investments.
Let’s say you have $600,000 to buy a property. Assuming there is a net operating income of 9%, you would make $54,000 a year. The depreciation would be $10,600, so you would be paying taxable income of $43,000/year. After tax, income would be about $41,000/year. Now with appreciation, the IRR, or internal rate of return, would be about 10% so you would be at about $59,000/year. This is not taking into consideration such as paying down mortgage across time and fluctuation of interest rates, however this is just a simple example.
You are better off doing a deal for $600,000 and putting $200,000 down, that way the down payment on three properties for $600,000 each or $1.8 million for one property, the math would work the same way. In this new example, a $600,000 property with $200,000 down, net operating income is the same, the only difference is you have to pay a debt service which we will say is 6% just to keep it easy. So it leaves you with a $30,000 net operating income. Depreciation is the same at $10,600, your taxable income is $19,400, your income tax is $5,800. So your after tax income is $24,000 compared to $59,000.
The difference is you can do the second example three times so you go from $41,000/year in after tax income to $72,000/year in after tax income just by leveraging one third of your investment. This ends up being a 21% cash on cash return on your $600,000. So your net operating income is $90,000 versus $54,000. So you picked up $36,000/year by leveraging your money. This applies in both larger and smaller cases.
Thanks everybody and have a great day!
Ray Martin, Ray Martin Stratford, Ray Martin Easton, Ray Martin Connecticut, Ray Martin Real Estate, Martin Caselli