We all know that income-producing real estate (think rental properties) can be a lucrative investment.  But one of the big advantages of owning rental properties over other types of investments is that it allows you to receive a return (or make money) from a variety of sources.  Let’s look at three of them.

 

Three Ways to Make Money

1. Cash Flow

Let’s say you own a single-family home and rent it out.  What’s the first thing that comes to mind as your moneymaker?  Of course, you would think, “Well, the rent money.”  But while the rent money provides income, in order to make a profit on the rental, you need to maintain a positive cash flow after expenses.  So, your moneymaker isn’t the rent. It’s your net cash flow.

If you do it right, you can make a nice profit investing in income-producing properties.

2. Appreciation

Most people think about appreciation as a moneymaker when buying and selling property, but unless you have a crystal ball, you never know the true value of your home until you sell it.  Knowing your property has appreciated might make you feel good prior to the sale, but for all practical purposes, appreciation is irrelevant until you sell the property.  A lot of money has been made and lost on speculation of appreciation.  As with anything in life, it is all about the timing.  There are things you can do to protect yourself against a loss, but ultimately, if you get lucky by selling at the right time and are able to enjoy a lot of appreciation, consider it a bonus.

3. Principal Paydown

Using the monthly principal paydown on your loan as a moneymaker isn’t always apparent to investors, but it needs to be factored into your overall return.  If you purchase your property by leveraging it with a minimal amount of money down, you will increase your return on investment, and you will further benefit from having a renter pay down your loan every month.

 

Three Ways to Measure Your Money

Now that we have talked about the three ways to make money, let’s look at three ways to measure what you make.

1. Cash on Cash Return (CoC)

If you have $100,000 of your hard-earned cash invested in the property and you net $10,000 in cash flow at the end of the year, you have a 10% cash on cash (CoC) return.  It’s a simple annual calculation based on your net cash flow divided by your total cash invested.

2. Internal Rate of Return (IRR)

Your internal rate of return (IRR), which tracks the annual growth rate of an investment, is more complicated than a cash on cash return and is not as obvious, but it is a lot more accurate.  However, like appreciation, your IRR is always going to be an estimated return until you sell the property.  IRR is one of the best overall measurements because it takes into account the timing of your cash flows throughout your ownership, your outlays of cash (buying of the property), and your inputs of cash (selling of the property).  This is especially important since cash flows are usually not very consistent.

3. Return on Equity (ROE)

Return on equity (ROE) measures your return based on the equity in your property.  This is the “forgotten” indicator that most investors fail to utilize, yet it could be the most important as far as maximizing the overall efficiencies in your portfolio, particularly in real estate.  ROE can be calculated as either a yearly return or an overall return when the property is sold.  To measure your annual return, simply divide your current equity by your annual net profits.  (Your equity consists of the value of the property less any debt owed. Hopefully, your equity will have increased every year through monthly principal pay downs on your debt and your estimated appreciation.)  The more your equity grows, the lower your ROE.  This is because investments generally build equity over time, but net profits don’t grow at the same pace.  Eventually, when your equity has grown way beyond the ratio of your profits, you’ll need to reevaluate your investment to decide if you are okay with it not being an efficient investment or if you want to restructure it somehow to gain those efficiencies.  We are seeing this almost daily with investors doing a 1031 Exchange with us.  They have built up a lot equity over the years that is no longer producing the returns that it should.  By doing a 1031 Exchange in our Equity Edge investment program, 100% of their equity is put to work, usually more than doubling their net profits.

 

Putting It into Action

I want to point out a few ways that Hughes Capital is using these real estate moneymaking basics to help our investors profit in real estate in the form of steady, predictable, recession-resistant returns.  First, we don’t bet on appreciation with the homes in our portfolio to make a profit.  It’s a 100% cash flow-based model with income-producing properties that are set up to weather long downturns in the real estate cycle.  Instead of gambling with our investors’ money through speculation on appreciation, our cash flow model keeps pumping out steady monthly investor profits, making appreciation just a bonus down the road.

Second, for investors who own rental property, we’re able to “supercharge” their often-underutilized equity with our 1031 Exchange passive investment option.  (Through this option, we help investors set up a 1031 Exchange account so they can sell their investment properties on the open market tax free, then we use the equity to purchase fully managed and maintained properties from within our robust portfolio of homes.)  We use the word “supercharge” when referring to this program because every dollar of equity goes to work, generating a superior monthly rent, from the very first month.  Our average 1031 Exchange investor is able to at least double or triple their monthly net rental income, because the equity is no longer just sitting there — it’s genuinely working the way it should be!

 

Real Estate Investing: A Love-Hate Relationship

Reap the rewards without the hassle and hard work of being a landlord.  We will do the work for you.

This brings me to something I think is important to talk about here.  Being the owners of a real estate investment company, my partner, Steve, and I need to understand what our investors love and hate about real estate investing, so we can best serve them.  (We want them to make money, and we also want them to be happy.)  Now, “hate” is a strong word, but if you own investment property, you can probably relate. Investors love having real estate in their portfolio and the income it can generate, but they’re not so crazy about landlord hassles, managing and maintaining their properties, or thinking about paying taxes when they go to sell.  We’ve addressed all of these potential issues with our 1031 Exchange investment option:

  • Through a 1031 Exchange, they can release properties that have been tying them down financially or eating up their precious time, and they can sell them completely tax free.
  • Since the properties our investors purchase through the exchange are fully managed and maintained by us, they don’t have to worry about what needs to be done.  In fact, they won’t even be notified if a water heater breaks or a tenant leaves, because we take care of every last detail on a completely independent basis.
  • We also pay for repairs and rehabs, so our investors don’t have to worry about how it will affect their net cash flow, because it doesn’tThey receive a fixed rental income every month, regardless of the performance of the property.

Whether or not you’re able to do a 1031 Exchange with us, if you own investment property, just remember to err on the safe side.  Buy properties that are income-producing from day one, and if the economy takes a cycle downward, make sure those same properties can continue to produce income even if you net a small loss.  You have to be able to survive downturns to live to invest another day.

We all know that income-producing real estate (think rental properties) can be a lucrative investment.  But one of the big advantages of owning rental properties over other types of investments is that it allows you to receive a return (or make money) from a variety of sources.  Let’s look at three of them.

 

Three Ways to Make Money

1. Cash Flow

Let’s say you own a single-family home and rent it out.  What’s the first thing that comes to mind as your moneymaker?  Of course, you would think, “Well, the rent money.”  But while the rent money provides income, in order to make a profit on the rental, you need to maintain a positive cash flow after expenses.  So, your moneymaker isn’t the rent. It’s your net cash flow.

If you do it right, you can make a nice profit investing in income-producing properties.

2. Appreciation

Most people think about appreciation as a moneymaker when buying and selling property, but unless you have a crystal ball, you never know the true value of your home until you sell it.  Knowing your property has appreciated might make you feel good prior to the sale, but for all practical purposes, appreciation is irrelevant until you sell the property.  A lot of money has been made and lost on speculation of appreciation.  As with anything in life, it is all about the timing.  There are things you can do to protect yourself against a loss, but ultimately, if you get lucky by selling at the right time and are able to enjoy a lot of appreciation, consider it a bonus.

3. Principal Paydown

Using the monthly principal paydown on your loan as a moneymaker isn’t always apparent to investors, but it needs to be factored into your overall return.  If you purchase your property by leveraging it with a minimal amount of money down, you will increase your return on investment, and you will further benefit from having a renter pay down your loan every month.

 

Three Ways to Measure Your Money

Now that we have talked about the three ways to make money, let’s look at three ways to measure what you make.

1. Cash on Cash Return (CoC)

If you have $100,000 of your hard-earned cash invested in the property and you net $10,000 in cash flow at the end of the year, you have a 10% cash on cash (CoC) return.  It’s a simple annual calculation based on your net cash flow divided by your total cash invested.

2. Internal Rate of Return (IRR)

Your internal rate of return (IRR), which tracks the annual growth rate of an investment, is more complicated than a cash on cash return and is not as obvious, but it is a lot more accurate.  However, like appreciation, your IRR is always going to be an estimated return until you sell the property.  IRR is one of the best overall measurements because it takes into account the timing of your cash flows throughout your ownership, your outlays of cash (buying of the property), and your inputs of cash (selling of the property).  This is especially important since cash flows are usually not very consistent.

3. Return on Equity (ROE)

Return on equity (ROE) measures your return based on the equity in your property.  This is the “forgotten” indicator that most investors fail to utilize, yet it could be the most important as far as maximizing the overall efficiencies in your portfolio, particularly in real estate.  ROE can be calculated as either a yearly return or an overall return when the property is sold.  To measure your annual return, simply divide your current equity by your annual net profits.  (Your equity consists of the value of the property less any debt owed. Hopefully, your equity will have increased every year through monthly principal pay downs on your debt and your estimated appreciation.)  The more your equity grows, the lower your ROE.  This is because investments generally build equity over time, but net profits don’t grow at the same pace.  Eventually, when your equity has grown way beyond the ratio of your profits, you’ll need to reevaluate your investment to decide if you are okay with it not being an efficient investment or if you want to restructure it somehow to gain those efficiencies.  We are seeing this almost daily with investors doing a 1031 Exchange with us.  They have built up a lot equity over the years that is no longer producing the returns that it should.  By doing a 1031 Exchange in our Equity Edge investment program, 100% of their equity is put to work, usually more than doubling their net profits.

 

Putting It into Action

I want to point out a few ways that Hughes Capital is using these real estate moneymaking basics to help our investors profit in real estate in the form of steady, predictable, recession-resistant returns.  First, we don’t bet on appreciation with the homes in our portfolio to make a profit.  It’s a 100% cash flow-based model with income-producing properties that are set up to weather long downturns in the real estate cycle.  Instead of gambling with our investors’ money through speculation on appreciation, our cash flow model keeps pumping out steady monthly investor profits, making appreciation just a bonus down the road.

Second, for investors who own rental property, we’re able to “supercharge” their often-underutilized equity with our 1031 Exchange passive investment option.  (Through this option, we help investors set up a 1031 Exchange account so they can sell their investment properties on the open market tax free, then we use the equity to purchase fully managed and maintained properties from within our robust portfolio of homes.)  We use the word “supercharge” when referring to this program because every dollar of equity goes to work, generating a superior monthly rent, from the very first month.  Our average 1031 Exchange investor is able to at least double or triple their monthly net rental income, because the equity is no longer just sitting there — it’s genuinely working the way it should be!

 

Real Estate Investing: A Love-Hate Relationship

Reap the rewards without the hassle and hard work of being a landlord.  We will do the work for you.

This brings me to something I think is important to talk about here.  Being the owners of a real estate investment company, my partner, Steve, and I need to understand what our investors love and hate about real estate investing, so we can best serve them.  (We want them to make money, and we also want them to be happy.)  Now, “hate” is a strong word, but if you own investment property, you can probably relate. Investors love having real estate in their portfolio and the income it can generate, but they’re not so crazy about landlord hassles, managing and maintaining their properties, or thinking about paying taxes when they go to sell.  We’ve addressed all of these potential issues with our 1031 Exchange investment option:

  • Through a 1031 Exchange, they can release properties that have been tying them down financially or eating up their precious time, and they can sell them completely tax free.
  • Since the properties our investors purchase through the exchange are fully managed and maintained by us, they don’t have to worry about what needs to be done.  In fact, they won’t even be notified if a water heater breaks or a tenant leaves, because we take care of every last detail on a completely independent basis.
  • We also pay for repairs and rehabs, so our investors don’t have to worry about how it will affect their net cash flow, because it doesn’tThey receive a fixed rental income every month, regardless of the performance of the property.

Whether or not you’re able to do a 1031 Exchange with us, if you own investment property, just remember to err on the safe side.  Buy properties that are income-producing from day one, and if the economy takes a cycle downward, make sure those same properties can continue to produce income even if you net a small loss.  You have to be able to survive downturns to live to invest another day.