Two Books For Understanding Financial Calculations – Without an MBA

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Without a doubt, investing in real estate is best done with a firm grasp of the financials involved. Financial calculations can appear daunting to say the least. With a quick look at the HP-12C financial calculator shown above you’ll quickly begin to wonder what the heck all those buttons do. While I don’t use all of them, using a similar calculator to quickly and accurately assess your costs and returns involved in real estate can help you immensely when evaluating investment opportunities. Is it better to invest in a vehicle that returns 16% annually but compounds only every three years, or an investment that returns 12% but can be compounded every two?

I recently did calculations for this example above & found, though compounding interest periods are a vital component of assessing how your money will grow or shrink overtime, the 16% return that compounds every three years is indeed a better investment for my 18 year horizon. In order to do this I had to use both my HP-12C and an excel spread sheet. Excel has many of the calculations the 12C does built right into it, but I’ve been really enjoying using the HP after reading a book that is basically half education on how money works, and half instruction manual to the HP-12c. This book relies heavily on the use of this exact calculator to illustrate it’s figures & if you’re looking for a solution you can carry around in your pocket without needing to lug your laptop around, I’d highly recommend reading it. The title is “Taking The Mystery Out Of Money” by Lonnie Scruggs, a now deceased investor who focused on flipping mobile homes. You don’t need to be interested in mobile home investment to benefit from his knowledge about how money works, and the material is so beneficial I’m left wondering why this book isn’t required reading somewhere along the education cycle of a high school senior.

The second book is definitely more real estate focused in-depth, but uses Microsoft Excel Read More

The Four Pillars of Real Estate Investment

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Hopefully, you’re someone who owns not only their own home, but also another asset that generates cash flow.  If you are a real estate investor, you’ll realize many benefits when done correctly.  The four pillars of real estate as an investment vehicle are:

  1. Cash flow:  Simply put, if you can rent the home or apartment out for more than it costs to pay the mortgage, keep it in good repair, and account for vacancy (months with no income, but still expenses) you have an asset that is making you money while you sleep.  If you want to invest in rental property, having an agent like myself who personally invests & understands the costs are more than (rent) minus (mortgage, taxes & insurance) is vital!  Things like vacancy, repair, capital expenditures, and management are important to consider, even if it’s a new home and you plan on self-managing.
  2. Mortgage pay-down:  Simply put, if you’ve answered yes to the previous criteria, your tenants are paying off your property a little bit every month.  If you’re on a 30 year fixed mortgage, your payment is the same every month.  Initially, most of that dollar amount is going to interest, but as time goes on, more of it pays down the amount you borrowed, called principle which by the end of year 30 will have a balance of zero.
  3. Tax-favored investment environment:  Residential improvement on property is calculated by the IRS to depreciate to nothing in 27.5 years (though the value of the land does not depreciate).  That means every year you can write off 1/27.5th of the amount you purchased the home for (minus the cost of the land), as well as the mortgage interest, property taxes, insurance and repairs.  Due to new tax law changes, the first 20% of your income is tax free.  Meaning if you made $10,000.00 in one year, the basis for taxation begins at $8,000.00 before those other benefits.
  4. Appreciation: We suggest buying for cash flow not speculative appreciation like so many did in the early to mid 2000’s (especially on Adjustable Rate Mortgages!).  However let’s dig a little deeper into how this works, as it is a potential benefit of Real Estate investment.  Let’s say you buy an investment property for 25% down; you’re into it for 1/4 of the cost and the rest is financed (with tax-deductible interest). If the property appreciates 5% in one year, the appreciation applies to the entire purchase price, not just the 1/4 of that you paid for in cash.  So this means your actual return on cash put down would be four times that.  For simple math, lets say your bought something for $100,000.00, put $25,000.00 down, and it appreciated 5% in one year; or $5,000.00.  Now that $5,000 is 5% of $100,000.00, but it’s a 20% return (or 4 times that) on the $25,000.00 you put down.

Understand that there is so much more to all of this, and this brief synopsis is only meant to start you thinking.  In no way are we offering legal, tax, or investment advice.  Please consult your professionals in those areas for specific advice as it applies to your situation.  If you’d like to speak with me directly about these or any other real estate related ideas, we’re happy to share more of our personal experience, contacts for professionals, resources & real estate sales experience with you. Reach me directly on our Contact page & let’s speak soon.