HOW HARD IS YOUR INVESTMENT WORKING?

HOW HARD IS YOUR INVESTMENT WORKING?




The question as to when to sell an investment property depends on many factors including: the likelihood of future appreciation, the cash flow it produces, the ease or difficulty of managing the property, and the property’s fit in the investor’s overall investment portfolio.

However, real estate investors should not overlook a simple measure to determine how hard their invested dollars are working: the property’s “Return on Equity.” By doing this, an investor can compare a particular property with other potential investments in an effort to maximize the return on their investment equity.

Example: A small four-plex was purchased several years ago on very favorable terms. It produces a nice cash flow that resulted in an extraordinary 20% return the first year. Even with the following assumptions, which would produce a high return on equity, the return falls to less than 5% after 7 years.

• 10% down payment • Appreciation at an average of 4% per year

• 90% Loan-to-Value (LTV), 7% fixed mortgage (30 years) • Annual net income increasing by 2% per year

Year

Value

Debt

Equity

Equity/Value

Annual Net Income

Return on Equity

1

$300,000

$270,000

$30,000

10.00%

$6,000

20.00%

2

$312,000

$267,257

$44,743

14.34%

$6,120

13.68%

3

$324,480

$264,316

$60,164

18.54%

$6,242

10.38%

4

$337,459

$261,163

$76,296

22.61%

$6,367

8.35%

5

$350,958

$257,781

$93,176

26.55%

$6,495

6.97%

6

$364,996

$254,155

$110,841

30.37%

$6,624

5.98%

7

$379,596

$250,267

$129,329

34.07%

$6,757

5.22%

8

$394,780

$246,098

$148,682

37.66%

$6,892

4.64%

9

$410,571

$241,627

$168,943

41.15%

$7,030

4.16%

10

$426,994

$236,834

$190,160

44.53%

$7,171

3.77%

As evidenced in the chart above, the investor’s return on equity starts diminishing significantly after about 7 years of ownership. In order to obtaining a better return on invested equity, an investor should consider exchanging this property after 5-7 years.

How long have you held your investment properties?



Is your money still working for you, or has it gotten lazy?

Call me to request a free analysis of your income property

(310) 902-0109