Ever done a real estate deal before?
It takes some math.
Before you get turned off, you have to understand you’re not alone.
Lots of people have an aversion to math.
But here’s the thing you need to understand…
MATH EQUALS MONEY!
If you say, “I don’t like math,” you may as well be saying, “I also don’t like money.”
While money isn’t everything it sure helps make things happen.
At the very least, money makes life a bit more comfy, right?It would sure let you stop working your 9-to-5 J.O.B. if you had a lot more money, right?
Don’t think so? Take a look at this…
So, it behooves you to take a minute right now and learn a little math that can make earning more money a lot easier.
Right now you’re hoping this is going to be what the title of this article promised. You want to know how to turn $25 into $300,000.
You first need to learn a couple of formulas that will allow you to make the magic happen. (And, guess what? It’s not really magic.)
You must learn two basic formulas in real estate. They are the two that matter most…
- Income – Expenses = NOI (Net Operating Income)
- NOI / Purchase Price = Cap Rate.
So… what’s a Cap Rate?
Glad you asked, cuz you need to know if you’re gonna earn the income you really want to earn, which is gonna take learning how to do real estate transactions.
Here’s what I mean…
Now back to the Cap Rate…
According to one of the coolest places you can go online to learn what different words and phrases mean in the world of investing, INVESTOPEDIA.com…
“Cap Rate (capitalization rate) is the rate of return on a real estate investment property based on the income that the property is expected to generate. The capitalization rate is used to estimate the investor’s potential return on his or her investment.”
You’d be surprised by what you can learn by spending time on Investopedia! Here’s a link so you can spend some time now.
At the very least, go there and bookmark the site… then come back to finish your math lesson.
In the simplest of terms, the Cap Rate is the return on your investment as if you had no loans.
For example, let’s say you paid 100% cash for a piece of rental property. If the Cap Rate is 7% it means you get a 7% return… assuming you have no loan.
So why are these numbers important?
Well, pretend you have a 100-unit building that rents for $750 per door. That’s $75,000 a month of income at the top or $900,000 a year. (Bet you’re more interested in owning apartment buildings now, huh?)
Keep that math in your head as we move forward.
Now let’s assume that the building has 45% of that money has to go to pay bills (a.k.a., monthly expenses). In this case your “bills” are property management fees, taxes, maintenance costs, insurance costs and other expenses related to operating and maintaining your 100-unit building.
That means in one year you are paying $405,000 toward expenses.
So, now do the math using the Income – Expenses = NOI formula.
How much is left?
You should come up with $495,000.
If you like math a little more now, take a look at this.
Now let’s take the math a bit further using formula #2:
NOI / Purchase Price = Cap Rate
For this example, let’s assume that the Cap Rate in the area is 10%.
The building would have a value of $4.95M!!
So now that you have the formulas down for calculating earnings and market value, let’s get back to turning $25 into $300,000.
You simply find a way to increase the value per door by increasing the rent per door by an additional $25 per month!
This will take a bit more math…
Multiply $25 by 100 (units) multiplied by 12 months and that is an additional
$30,000 extra a year!
To justify the additional $25 per month per door, you would have to do something… like
Add a washer and dryer, trash service, laundry service or something else you know your tenants could use and would appreciate.
Keeping your tenants happy can also save you come tax time as an investor, too. Here’s an example…
So here’s the “secret” you’ve been waiting for…how you turn $25 into $300,000.
It’s really pretty easy.
Now that you’ve increased your rents by $30,000 per year, the resulting value of your property hasincreased by $300,000!!
Pretty cool, huh?
And it only took a little math to understand.
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