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Does it Make Sense to Keep your Property as an Investment?
Dated: February 15 2019
Most first-time real estate investors start out as accidental investors, meaning they buy a new home and keep their previous home as a rental. But does keeping your existing home make sense? In this article, we will dig deeper, and run some numbers to show whether keeping your first home makes financial sense.
Robert Kiyosaki famously points out in the book Rich Dad Poor Dad, that if you own a home, you own a liability. Home ownership is technically a liability on your balance sheet if you do not receive a monthly income from rent. This is clearly not true for some people who choose to rent out rooms via Airbnb, but is true for most home owners with a hefty mortgage and zero rental income. But what happens when you move out and rent your property out? Your liability is now an asset that is paying you rent. But is it a good investment?
Many investors think about ROI, Return On Investment, when considering a property.
Learn about ROI in the video below.
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
But how do you measure “Gain from Investment” if the future value is unknown? Most long term “buy and hold” investors must consider other metrics when deciding to buy an investment, metrics such as Cap Rate (Capitalization Rate).
Capitalization Rate = Net Operating Income / Current Market Value
Once and investor understands Cap Rate, they can get bogged down in Analysis Paralysis, watch the video below, which simplifies analyzing a deal!
Four Major Metrics you should consider when analyzing a deal:
3) Cash Flow
4) Cash on Cash Return (COC)
Calculating the COC Return
Cash-on-cash return = (annual before-tax cash flow)/(total cash invested)
Calculating the COC return helps determine how your money is performing in your real estate investment and allows you to compare to other investments, such as the stock market. Adjusted for inflation, the historical average annual return of the S&P 500 is right around 7%. So many real estate investors will look for a COC return greater than 7% when investing in real estate.
So should you Sell or Hold you current home as an investment? That depends, an investor should consider the COC return, the total equity in the deal and possible tax liabilities in the future. Whatever you decide, we can help you analyze your home as a potential investment!
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