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How Much is Your Rate of Return?

Let’s say you bought a property for $100,000 put $20,000 down  (we’ll ignore costs to buy). You have rented it out for 10 years at an average net income of $300 a month.

We’ll assume you have had no repairs, or vacancy or advertising costs.

This “Piggie Bank” brought you $3600 ($300 times 12) a year on an investment of $20,000 or an 18% return on investment (ROI) (This was a good deal)

Today this property is worth $200,000 and you owe $100,000 on the loan and the rent has increased so that you are now netting $500 a month

You now have $100,000 (ignoring less costs to sell) in Equity

So your Piggie Bank is now returning $6000 a year ($500 times 12)

However… you are now only getting a 6.00% Return on EQUITY ($6000/100000) 

Because the Equity you have is so big… EVEN though rent is higher

It may be time to 1031 Exchange This Property!

If you Sold property for $200,000 and netted $80,000 after paying off all loans, commissions etc. You could pay capitals gains taxes of approximately $15,000 (talk w/ your accountant) And walk away with $65,000

Or

You could conduct a 1031 Exchange and buy three properties for $100,000 each (a bit more than 25% downpayment on each from your $80K equity)

Assume each property rents for $1000 and you net $320 each after all expenses

Your Piggie Bank now looks like this:

$80,000 in Equity is now generating $960 a month ($320 time 3)

More than Doubling your rate of return from 6.0%  to 14.40%

And if property values go up you will gain more from appreciation too!

LOOK at your ROE so you can have your Equity make you a better return!

Your Quick Rate of Return
(Just a Rule of Thumb)

Let me know if we can help you!

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From Sandy’s Blog

  • What about City Housing Inspections during the Coronavirus Pandemic? June 4, 2020
  • Can You Say “NO” to Someone Who Receives Section 8? June 3, 2020
  • Building Ordinance Insurance Coverage October 14, 2019

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