What is a Good Return on a Rental Property?
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What is a Good Return on a Rental Property?


Alright guys what’s going on this is
Daniel one half of the Kwak brothers and in this video we’re gonna talk about
what is a good return on a rental property to that intro let’s get right
to it alright y’all welcome back what is a good return on a rental property right
that’s a question that I get a lot you know that’s something that I think a lot
of people talk about so before we begin to the topic of course never forget to
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all right guys so it’s something that I get asked a lot you know what is a good
return on a rental property and well I’ve had a lot of opportunities to
analyze a lot of different deals you know so I’ve done over I think now I’ve
got like 80 something units and I’m doing a lot of different deals around
the country and raised a lot of money so it’s something that I’ve done rather
often and in my experience the answer to that question of what makes a good
return on a rental property is it depends right now I know you guys are
ready to shut off this video find out where I live and just you know give me a
nice sucker punch in the throat but in the hostel guys I know as much as you
guys me sick of may be sick and tired of hearing that those two words it depends
it is absolutely true it does depend it depends on what you’re looking for
because well there’s different things that rental properties offer in terms a
if a return right so when we’re talking about what makes a good return on a
rental property there’s a lot of things we have to keep in mind so let’s go
ahead and use an example right so let’s say that we have a 10 unit building so
we have 10 units and let’s say that we buy it for $800,000 so we bought it for 80,000 a unit and
let’s say that the net operating income right so that’s the Noi Noi stands for
net operating income let’s say it makes $80,000 a year now obviously that’s not
the Casa look because we still have to deduct our debt service from it but I
want to show you guys basically that there are four different ways to get a
return from a rental property so you know hopefully as I break this down and
I explain the different ways that you can get a return on a rental property
you can then decide based on your own financial situation what is a good
return on a rental property for some it may be the cash flow may be something
else right so it completely does depend so the first way obviously is the cash
flow right and how good is the cash flow what a pretty good number is this kind
of stay above 8% cash on cash return so what does that necessarily mean right so
let’s go ahead and break that down so in order for us to calculate what our cash
flow is you know we already have our net operating income of $80,000 we have to
know what our debt service is because unless we know what our debt service is
which is the mortgage we’re not going to be able to figure out how much money
there’s gonna be left for us right to call it cash flow so I’m gonna go ahead
and calculate the mortgage and one of my favorite mortgage calculators to use is
Carl’s mortgage calculator that’s kar el Pasto vs mortgage calculator I’m gonna
put in the value which is $80,000 and let’s say in this scenario we put 20%
down so we put a hundred and sixty thousand dollars down I’m gonna just use
5% interest because the going rates five and a half if you’re an expert investor
you should be able to go in the bank and get four or five for six so I’m just
gonna kind of meet in the middle and just say five percent and I’m gonna put
it on a 30-year a morte because that’s what a lot of people are doing nowadays
I personally prefer a shorter number in these amortization cuz I like paying off
properties quicker rather than later but for the sake of the example I’m just
going to go ahead and use thirty years so our debt service is thirty four
thirty five sixty six so I’m just gonna use it $3,400 just round down thirty
five bucks just kind of use cowboy math and I’m gonna go to my calculator and
I’m gonna multiply thirty four hundred and multiply it by 12 that gives me an
annual debt service of forty thousand eighty dollars okay so if I subtract
forty thousand eighty eight hundred dollars from the eighty thousand that’s
gonna give me my cash flow so I’m gonna subtract eighty thousand for forty
thousand eight hundred from eighty thousand and that puts us at thirty nine
thousand dollars thirty nine thousand two hundred dollars which we divide that
by twelve that’s our monthly cash flow thirty two sixty six sixty six right so $3,266.66 that’s our monthly cash flow
now if we want to take it a step further we can go ahead and compare that to the
down payment that we put in in terms of our investment to acquire the building
and figure out you know what is the return right what is the cash on cash
return right so I’m going to go ahead and take thirty nine thousand two
hundred because that’s the number annual debt service before I’m sorry that’s the
cash flow before we divide it by twelve I’m gonna divide that by a hundred and
sixty thousand and that gives us a twenty four point five percent cash on
cash return right now obviously you can have an investor be in it with you who
provides the hundred and sixty thousand if you split the deal fifty-fifty that
gives your investor twelve point two five percent cash on cash return another
way for you guys to make a return on investment property is the amortization
right so the amortization is the principle that you pay off through your
debt service right so I’m gonna go ahead and look at here in my in my table right
in my Carl’s mortgage calculator and I’m gonna see that in 2000 right so
if I did this deal today right my first very my first full year of paying this
off I’m gonna pay nine thousand seven hundred sixty-one and 71 cents right in
terms of my long term efforts right that’s what I like I like paying off
that amortization I laughs I like paying off that principal but now remember guys
we did it at a 30-year amortization so let me go ahead and change that to
twenty and in twenty twenty get this guy’s right so in a 30-year amortization in 2020 the very first full year of us
owning this property we pay nine thousand seven hundred sixty one dollars
and seventy one cents in principle if we did it at a 20-year amortization that
very first year we pay 19,700 sixty five dollars and forty six cents that’s more
than double if you did it at a twenty compared to a thirty so now this is
where the answer it depends start to make more sense if you’re somebody
that’s more focused on long-term finances and let’s say you have a lot of
cash flow already you’re working a really high paying job or you know
you’re a full-time investor and you’re already kind of financially free and
you’re not hurting for money right now then in that case you would need to get
the 20-year because you want to be able to pay off more principal and get that
long-term gain right that long-term wealth build that off and get it paid
off and enjoy it then but if you’re somebody that’s hurting for cash right
now well get nine thousand six one seven because that’s literally a difference
you’re sacrificing the amortization for the sake of cash flow which is money
today another way is appreciation appreciation happens in many different
ways I’m not going to get too much into it because well there’s a lot of
different ways to appreciate it for example there’s passive appreciation
there is a forced appreciation there’s phased appreciation and there’s
also earned appreciation there’s four different ways to appreciate the value
of a property I’m not going to get into it right now but I will make another
video talking about the four different ways of appreciating property especially
return on a rental properties when we’re talking about and answering the question
what is a good return on a rental property the last one I’m going to talk
about is the depreciation the depreciation long story short is the tax
benefits of owning rental properties and the way you do that long story short
guys is you take the value of the building and not the land because
remember guys land is not depreciable you cannot take advantage of
depreciation on land so if I were to get this thing for 800,000 and let’s say
that the building value was seven hundred twenty thousand right so ten
percent of the purchase price is for the land rather than the building what I’m
gonna do here I’m gonna divide that by twenty seven and a half
why twenty-seven and a half well that’s actually the life cycle of how long the
IRS is willing to let us real estate investors depreciate the building so
we’re gonna take that number because we’re able to depreciate it for twenty
seven and a half years I’m gonna take that seven hundred twenty thousand
number which is the value of the building because of course the building
is what we’re able to depreciate I’m gonna take that number and it’s divided
by twenty seven and a half okay that gives me an annual depreciation of
twenty six thousand one hundred eighty one dollars and eighty one cents that
means I get twenty six thousand one hundred eighty one dollars and eighty
one cents worth of depreciation where’s the tax advantages right and for a lot
of individuals like who I work with a lot doctors
depreciation means a lot and for a lot of individuals write for a doctor let’s
use a doctor as an example let’s say they make a lot of money they make half
a million dollars a year right in that case they may not care about the cash
flow as much or even the appreciation as much they might be more focused on these
two instead compare that with an entrepreneur who’s thirty years old
they’ve got let’s say four kids and they got into real estate because they want
the cash flow they want the passive income in that case this is not going to
be as important asked to this right so what makes a good return on a rental
property well it depends it depends on who you are where is the building and
what’s your exit strategy right now we can get into a lot of different topics
here we can talk about how the economy can change a lot of these returns for
example the economy can change a lot to the cash flow because well based on the
economy the rents can go up or the rents can go down right vacancy numbers can go
up and they can also go down based on the economy the taxes can go up a tax
didn’t go down contractors how much they charge that go up it can go down right
so a lot of the economy it could defer a lot of different things same thing with
the amortization aspect well the amortization aspect has a lot to do what
thanks do you guys think that banks get affected by the economy yes or no I
think that’s an obvious yes right and same thing with appreciation do real
estate does real estate values get lower and higher based on the economy yes or
no yes absolutely absolutely so these are things that we need to keep in mind
guys when we’re calculating what makes a good return on a rental property so I’ve
broken down four different ways that an individual can get a return on a rental
property so what makes a good return on a rental property you decide you’re it’s
up to you to make the choice and it’s up to you right to go ahead and figure out
what you need out of these four things based on where you are financially what
are your financial goals what are your assets what are your liabilities who are
your dependents there’s a lot of things that we can think about here and at the
end of the day guys right that’s my goal right as somebody on
YouTube’s right making a 14 15 minute video on you know on real estate it’s up
to you guys ultimately to go ahead and sit down and really think about the
stuff and put in the work my job again is to at least answer the right
questions give you enough information show you could at least start that
conversation so again guys don’t forget to click that subscribe button click on
that notification bell as well because we will be putting more content out like
this where we talk about numbers and specifics and you always want to be the
first one to do that as well also feel free to check out our book 0 to 75 units
com I wrote it literally in a week and you
know you’ll be able to get it done probably in a day I always make the joke
that you can get it done in one bathroom sitting so it’s actually detailing my
very first step on how I got into real estate investing so hopefully this video
was helpful guys there’s a lot of different videos that we talked about in
terms of how to calculate numbers on a rental property all the links should be
in the description below so again guys thank you so much for watching don’t
forget to subscribe and click that notification bell and again guys much
love to you I’ll see you guys in the next one

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