Posted by: Dexter and Pamela Montgomery | March 3, 2013

Real Estate Investing: Knowing Your Numbers

Do you know your numbers? In any real estate investment you must know your numbers. Your numbers tells the story of (1) where you have been; (2) where you are currently; and (3) where you are going. Your numbers represent the scorecard of how well you are doing with your investment. In real estate investing, knowing your numbers can mean the difference between profit and loss.

In real estate investment the key number concepts that you should understand include cash on cash return, cash flow, appreciation, depreciation, tax service and debt service. Having the knowledge of these terms will give The Savvy Investor™ the confidence to know when you are making a good deal. Knowing your numbers helps you minimize your risk and maximize your returns.

Measuring the return on a real estate investment is one of the keys to becoming a successful real estate investor. In this post, we will talk about one of the key measurements in assessing your prospective investment.

Cash On Cash Return

The cash on cash return is the ratio between a property’s cash flow in a particular year (before taxes) and the amount of the initial capital investment. It is expressed as a percentage. The cash on cash return tool is used as a quick read on an income property because it can be easily compared to other types of investments such as stocks. For example, one can easily compare the investment in a rental house that has a 10% cash return in the first year versus a CD or paper instrument that has a 2% cash on cash return during that same year.

How to calculate Cash on Cash Return

The formula calculating for cash on cash return is

    Annual Cash Flow / Cash Invested.

For example, you buy a property for $50,000 in cash. The property can rent for $1,000 per month. So the annual cash flow is $12,000($1,000 X 12 months). You divide the $12,000 in annual cash flow by the $50,000 in cash you invested. The Cash on Cash Return is 24%. Although there are other factors to consider in deciding whether to invest in a particular property (e.g. taxes, debt service, repairs), an analysis of cash on cash return is one extremely help way of assessing the strength of one prospective investment as compared to another.

Conclusion

In The Savvy Investor Program™, we teach you real estate investing concepts that take you from being a novice to being an experienced investor. One key component of your success is to know your numbers. Remember that with real estate investing as one part of your financial plan, you can create the life of your dreams by following a few time-proven strategies and techniques. Today, get your free copy of The Book on Investing at: http://tinyurl.com/TheBookOnInvesting. Share this post and link with your friends so that they can get a free copy of the book also.
Let us know about other topics that you would like for us to discuss.

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