It’s not always a good time to invest in real estate.
Investopedia defines investing in real estate as:
Investment real estate is real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence. It is common for investors to own multiple pieces of real estate, one of which serves as a primary residence while the others are used to generate rental income and profits through price appreciation.
With this is my basis, today I’ll focus on the income side of how to invest in real estate.
When you buy a multi-family building (think duplex or 4-plex apartment), your objective is to generate as much cash flow as possible. The higher the rents, the higher net cash you’ll generate from your invested dollars – in theory.
But this depends on factors such as: purchase price, current vs. upside rental amounts, cost of money (loan), expenses (insurance, property taxes, maintenance, utilities…).
I use the cash-on-cash analysis when I invest in real estate. For example, say you buy a duplex for $1.2 million and you invest 360k, or a 30% down payment. That means you have a 70% Loan To Value (LTV) of $840k.
Invest in Real Estate The Right Way – By Using Numbers
Let’s say the current rents are $4000 for each unit, or $8000 in total monthly rent. Your monthly expenses will be $5,600 on a 7% mortgage. Now add $1,800 for property taxes, about $600 for homeowners insurance, landscaping is $200 and you put aside 3% of your annualized rent for monthly maintenance, or $240.
In this (realistic) example above, your monthly expenses are $8,450. So, on your first month of ownership you’re upside-down – or losing – $450 per month.
Now let’s say you increase rents (by getting current tenants to approve, or you need to evict them – added expense) to the market rate of $5,000 per unit. If this takes 90 days, you need to consider months of lost rent, plus expenses to upgrade each unit so you can get the upside amount. (For this example, I put aside $8000 to upgrade both units plus 60 days of lost rent at $4,000 per unit, for a total expense of $24,000).
Four months later you’re collecting $10,000 per month and your expenses are the same $8,450. This generates a positive cash flow of $1,550. Annualized, that is $18,600.
To figure out your cash-on-cash return on $360,000 plus $24,000 in upgrades invested, you divide $18,600 by $384,000 to get 4.8% annualized cash flow (Internal/Annual Rate of Return or IRR).
Be Flexible When You Invest in Real Estate
So, does 4.8% IRR meet your expectations? Would it be easier to put your $384k in a money market fund at 3.8%?
For this IRR to improve, a handful of factors must happen. Either/or:
1. Purchase price must come down
2. Upside rent potential must be higher
3. Mortgage rate must come down
4. Put 40%, 50% or more down to reduce your mortgage expense
5. Pay in cash and opt to not insure your property
When you invest in real estate, you can’t force it. Numbers don’t lie. And based on the numbers, you can make a smart investing decision. Not going through this analysis on every property you may be considering is just not smart.
So invest in real estate using proven, timeless analysis. It’s not rocket science, but too many folks make irrational and un-analyzed decisions. Stop. Invest in real estate like a pro… and watch your wealth grow.
P.S. Right now, prices and rents are easing. Mortgage rates are what they are. So the big questions are: How much cash do you want to put into any particular deal to “make” the numbers work… or, how much leverage are you seeking with your capital?
If you’re seeking leverage with your capital, today is not a good time to invest in real estate as you’ll need to put more money into deals to make them work. But if you’re a cash buyer, your IRR looks a bit more appealing.
P.S.S. I’ve been able to invest in real estate rental property for almost 30 years. If you’d like help running numbers, reach out to me so I can plug them in and assess whether it’s a good or bad time for you to be investing (I’ll give you the spreadsheet my old partner and I created back in 1997).
(Main Photo: The Bermuda High West Townhomes on A1A taken from the Intracoastal)
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*** South Florida Real Estate Inventory is ABOVE 2019***
Last week’s supply was 63,227
Today’s supply is 63,260
Supply was flat last week
*** Supply is UP 9,7118 unit or 18% in 2025 ***
