When you were a kid, did you ever try to burn something with a magnifying glass? I used to try it with a piece of paper. There were also those messed up kids who would burn ants to death – if that’s you, stop reading right now and go find a therapist.
It takes time to see results. You sit there and focus the beam of light on a specific point. At first nothing happens and you think about going to ride your bike off the 5 inch ramp you built instead. But after a while you see the first tuft of smoke. That small sign of progress hooks you and is all the motivation you need to see your efforts all the way to the end.
The Long Game of Rental Property Investing
Rental properties are the absolute best investment you can make over a decade or two. You might not notice much progress at first, but just like the piece of paper under the magnifying glass, the results are on their way.
Back in 2011 I purchased my first rental property. It took a solid four years for me to see the first tuft of smoke that the plan is working. Now I am past the tough beginning period and hooked – not just to keep going myself, but to also help others get started.
Finally Running the Numbers
It took four years for me to sit down and calculate my return on investment for those properties. That might sound crazy to a typical investor, but I knew I was in it for the long haul. Worrying about the numbers every month, or even every year, would not help. For some people, calculating their ROI can be difficult, so they may use additional resources such as UiPath Automation Hub, and similar others, for ROI help if they are in need.
What difference does it make if I had a 20% return per year or a 30% return? Yes, that will give drastically different results over time, but either way, it beats the alternative investment options. I knew that my out of state rental properties were a better investment than the stock market, and that’s all I needed to remember to keep with the plan for the first few years.
My Actual Results – $33,000 of Passive Profit
The Atlanta property I purchased in July 2011 with $19,936 for down payment and closing costs. The cash return is $7,627 including the yearly tax benefits. Even more impressive is the equity return of $23,245 from paying down the mortgage and appreciation. Overall this is a 155% return on investment in just four and a half years!
Note: the equity return is a paper return right now. There are ways to access that money by refinancing or selling the property. Refinancing gives a chunk of cash tax-free that can be invested in another property – I will be going through this for the first time later this year.
The Memphis property is slightly different – it should produce a higher cash flow and less appreciation. The initial investment was $24,030 and it has a $4,063 cash return including the tax benefits. The equity return is $1,735 from paying down the mortgage and appreciation. Overall this is a 24% return on investment in just a year and a half.
More In Depth Analysis
I created a spreadsheet to calculate the return on investment. It has the numbers for each property broken down by cash value, tax savings, mortgage pay down, and appreciation. It also has more advanced discounted cash flow, compounded annual growth rate, and internal rate of return calculations for the overall portfolio. Plus exterior photos of the properties.
Note: These are useful calculations because a dollar today is worth more than a dollar a year from now. The total profit of $33,000 takes this into account rather than just simply adding up the numbers in the section above.
The overall compounded rate of return is 29% – try getting that in the stock market!
What do you think, how am I doing so far?
Brian, so far so good. I’d be curious to see a breakdown of the cash return #’s (rental income, types of expenses, etc).
I’ll have to do a breakdown of 1 year for 1 of the properties. That will definitely help shed some light on how I got to those numbers.