Hello all!
So I've reviewed several real estate discussions, but rarely have I seen any mention of these two investing metrics- Cash on Cash Return & Return on Unrealized Capital Gain. Real estate investing is ALL numbers and every single real estate deal can be measured by its cash on cash return and return on unrealized capital gain. That's it. Nothing else is needed.
Just wanted to take a minute to explain these two terms using this example:
3 Bedroom, 2 Bath, 2 Car Garage Purchased with 20% Down, 30 Year Mortgage, 6% Interest
Market Value = $100,000
Repairs= $10,000
Closing Costs = $5,000
Purchase Price= $70,000
Down Payment (20%)= $14,000
Total Cash out of Pocket= Down Payment + Closing Costs + Repairs
Total Cash out of Pocket= $29,000
Rent= $1300
Principal/Interest= $336
Property Taxes (3.5%)= $292
Insurance (1.7%)= $142
Monthly Cash Flow= $530
Cash on Cash Return = Annual Net Cash Flow / Total Cash out of Pocket
Cash on Cash Return= ($530*12) / $29,000
Cash on Cash Return=22%
Unrealized Capital Gain = Market Value - (Purchase Price + Closing Costs + Repairs)
Unrealized Capital Gain = $100,000 - ($70,000 + $5,000 + $10,000)
Unrealized Capital Gain = $15,000
Return on Unrealized Capital Gain = Unrealized Capital Gain / Total Cash out of Pocket
Return on Unrealized Capital Gain = $15,000 / $29,000
Return on Unrealized Capital Gain = 51%
Now this is a great deal. We just used $29,000 to generate an annual return of $21,360, or 73%. That's all legal tax-free income by the way. We nearly doubled our net worth in one year, and more importantly gave ourselves a $6000/year raise, leaping us that much closer to financial freedom.
So, if you need to evaluate a future deal, just break it down by cash on cash return and return on unrealized capital gain. It's much easier to analyze a deal with those two metrics.
Hope this helps! Be sure to check out my site for much more on this topic and others related.
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