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Investors are interested
in homes that create
positive cash flow
and that appreciate
in value. These are
the two most basic
reasons for investing
in real estate, and
both are required
for a sensible investment.
However, each investor
has particular balance
they prefer between
cash flow and appreciation.
It is important to
determine the right
balance for you.
Always keep in mine
the direct correlation
between cash flow
and the mortgage
product you select
and the terms of
your loan.
Investments that
generate a large
amount of negative
cash flow are speculative
investments, and
are not something
we would recommend.
Negative cash flow
limits the number
of real estate investments
you can make, and
will put the investor
at the mercy of the
market. However,
the amount of positive
cash flow desired
differs greatly amount
investors.
The two factors
that greatly affect
cash flow are the
particular home purchased
loan product used
to finance the home. The
higher priced investment
homes in the Atlanta
market appreciate
faster than the lower
priced investments. However,
they tend to generate
less cash flow. Investors
who buy in higher
priced homes do so
for the appreciation
and are willing to
sacrifice some cash
flow.
The more money put
down on an investment
the more cash flow
it will generate,
but the over all
return on investment
will be lower. The
example below shows
the total return
on investment for
a 10% down and a
20% down investment
scenario.
Comparison
between 10% and
20%
Cash Down
Investment |
Example
1
10% Down |
Example
2
20% Down |
| Sale
Price |
$175,000 |
$175,000 |
| Cash
Down |
$17,500 |
$35,000 |
| Buyer
Paid Closing
Costs * |
$2,000 |
$2,000 |
| Total
Cash Investment |
$19,500 |
$37,000 |
| |
| Loan
Amount |
$157,500 |
$140,000 |
| Principal
& Interest @
6.825% * |
$896 |
$796 |
| Escrows
for Tax & Insurance |
$200 |
$200 |
| Total
Payment |
$1,096 |
$996 |
| |
| Rent
Amount |
$1,250 |
$1,250 |
| Management
Fees (7.0%) |
$88 |
$88 |
| Net
Rental Income |
$67 |
$166 |
| |
| Net
Cash Flow after
5 Years |
$4,003 |
$9,975 |
| |
| Value
after 5 Years
(at 6%) |
$234,189 |
$234,189 |
| Gain
in Value |
$59,189 |
$59,189 |
| Total
5-Year Gain (Cash+Appreciation) |
$63,193 |
$69,164 |
| |
| Total
Return on Investment |
324% |
187% |
* 5-year
ARM interest-only
loan is used. This
example assumes 100%
occupancy.
Although the 20%
down investment generated
about $6,000 more
cash flow over 5
years, the 10% down
investment shows
a 137% better overall
return on investment.
Another way to look
at it is if the investor
purchased 2 homes
at 10% down instead
of 1 home at 20%,
his cash out of pocket
would be about the
same, but the overall
return on investment
would be approximately
648% verses 187%.
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