Buying rentals to increase your net worth and/or provide a steady steam of positive cash flow can be a great strategy to becoming rich with real estate, but what is your rental making you in actual case and how much of your “gain” is financial black magic?
I constantly talk about real estate on this blog, because real estate is my passion. I constantly run numbers on rental properties to see how viable they are and usually I am very disappointed. As always I would like to give a real world example.
In Cincinnati there is a neighborhood named Oakley which I think is a desirable place to live. Most people would say that Oakley is an “up-and-coming” neighborhood, but I would argue that most parts of Oakley are already at their peak, based on prices. Oakley is a neighborhood that is adjacent to Hyde Park (a very nice neighborhood which prices through the roof).
In this example I want to look at multi-family properties. I ran across some properties a while back– 4 units per building – asking $195k a building (5 buildings available).
I am going to calculate based off one building, then later take that scenario and multiple by it 5.
Imagine you get the building for $175k with 35k down. Assume a 7% commercial loan. Taking the numbers that the current owner claims to be getting for rent, and assuming 95% occupancy rate – We get the following results (click to enlarge):
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