Once upon a time, in a neighborhood not so far away, there lived two investors who made different choices. Who fared better? You be the judge.
On every edition of Tales of Two Investments, two different real estate investments will be weighed under the same scale. Let’s call it the “return on investment” scale. It focuses on how much profit one’s invested money is earning. The featured properties are actual properties for sale. Their location and photos will not be mentioned, since they are not relevant to the story we are trying to tell. We hope, in time, this will give you a new look on real estate investments and a new perspective on how to look for investments that are passive and profitable.
Investor X purchased a fully rented three-unit property generating $60,000/year, for $900,000.
The investor put in $180,000 as a down payment to make the purchase possible. At the end of the first year, Mr. X was left with $10,000/y cash flow after all expenses including annual mortgage payments. The return on investment, or Cash on Cash was 5.5 per cent (10K made over 180K invested).
In addition, by the end of year one, Mr. X’s tenants paid the mortgage, of which around 20K is equity.
By end of the second year, Mr. X increased the rents by two per cent and was left with a cash flow of 11K/year.
The average cash flow for the first and second year is 10.5K. The average annual equity on the mortgage is 20K. Mr. X made 30.5K since the purchase, and invested 180K, which gives a rate of return of 17 per cent.
Investor Y purchased a vacant three-unit property generating $25,000/year for $600,000.
The investor put in $120,000 as a down payment to make the purchase possible. At the end of the first year, Miss Y was barely paid all expenses, including the annual mortgage. The return on investment, or Cash on Cash was close to zero per cent (little to no cash flow left).
In addition, by the end of year one, Miss Y’s tenants paid the mortgage, of which around 11K is equity.
By end of the second year, Miss Y renovated the three units for 50K, and covered out of pocket the monthly costs without tenants for six months (17.5K). She rented again after the renovations and increased the total income from 35K to 55K/y. The new cash flow is now 20K/year. Miss Y had to invest 120K + 50K + 17.5K = 187K to make a profit in six to 12 months.
The average cash flow for the first and second year is 10K. The average annual equity on the mortgage is 11K. Miss Y made 21K since the purchase and invested 187K, which gives a rate of return of 11 per cent.