We’re continuing our series on investment with a topic we’ve been teasing for a while: How to analyze your investment. There are three key metrics of investment we’ll be looking at today:
1. Cash flow. This is your income, minus expenses, which gives you your net operating income. After subtracting debt service from your net operating income, you now have an idea of how much money is flowing in from your investment property.
2. Paid down. This is when you use your tenants’ rent money to pay down your property’s mortgage. Over time, the tenants will help you recapture your equity in the property.
3. Appreciation. You need to factor this into your return. From 1970 to 2010, home prices in the United States have appreciated at around 4.4% each year.
When you combine cash flow, paid down, and appreciation, you should be looking for a combined rate of return between 17% to 20%. If you hit this point, you’re doubling your money every four years.
I have a spreadsheet that calculates returns over time, and I’d be more than happy to go over it with you. If you have any questions or need any information, feel free to reach out to me. I look forward to hearing from you.