How To Turn A 25K Investment Into 120K In A Few Short Years

Today I was discussing with John, my client, a summary of how to use real estate mortgages as leverage in purchasing a rental property.

See John is very young but he is also a very ambitious young professional, and at the age of only 22 he is well on his way to a wealthy retirement.

John see’s the benefits in leverage and now you will too.

Right now, me and John are looking for his first rental property, a small 2 bedroom condo somewhere in the west suburbs of Chicago. We have seen several places so far but we are holding out for the right one not the first one.

Within a short 10 years, if John sticks with it and is a good landlord he will have made a ton in returns.

So lets get too it then…

Year One:

John buys his first property for 125k (25k down)

Approximate Income: 1,350.00 monthly Rent

14,850.00 per year (11 months instead of 12 accounting for roughly 1 month of vacancy)

Approximate Operating Expenses:

-1,812.00 approximate taxes annually

-3,876.00 Homeowners Association annually (323.00 per month)

-813.00 Approximate Homeowners Insurance

-600.00 Utilities (Water)

-6,080.22 Approximate yearly mortgage payments (4.5%, 30 year, 125k price, 20% down 25000.00)

Approximate Annual Cash Flow: 1,668.78 or 6.68% return on your 25k investment

So at this point you might be thinking wow, 1,668.78 is not much and you would be correct, but...but...but...

During this year John's property appreciated on the low side at 2% (2,500.00 in equity) and due to his mortgage payments, that were mostly paid by his tenants, roughly 2,640.00 went to principle, John actually made 1,668.78 in cash flow as well as 5,140.00 in equity!

Ok from here let's assume these numbers continue but instead of keeping the 1,668.78 annually, John puts it aside as a rainy day fund for potential repairs and unforeseen circumstances.

Years 2, 3, 4 and 5:

Same cash flow, 1,668.78, same low 2% appreciation (compounded on the previous years appreciation) and 2,640.00 equity annually in mortgage principal payments paid mostly by his tenants.

End Of Year 5:

By the end of year 5 John decides it's time take it up a notch and wants to buy a second rental property, let's assume for argument sake property number 2 has all the original numbers as property 1.

With the low appreciation of 2% compounded annually Johns property 1 is now worth 138,010.10 of which he holds 26,210.10 of new equity (Not including his original 25k down payment)

John decides to pull all of that new equity out for another 25k down payment on property 2 putting the additional 1,210.10 dollars in the rainy day fund.

(In This Scenario we are assuming property 1’s rental income has increased equally with the increase in appreciation so his monthly cash flow has remained the same despite John pulling 26,210.10 equity out of the property, but due to the higher monthly mortgage payment John is now gaining 2915.00 annually in equity through mortgage principal payments moving forward)

Year 6-10:

John now has 2 properties producing for him:

Property 1:

Same cash flow, 1,668.78, same low 2% appreciation (compounded on the previous years appreciation) and 2,915.00 equity annually in mortgage principal payments paid mostly by his tenants.

Property 2:

Same cash flow, 1,668.78, same low 2% appreciation (compounded on the previous years appreciation) and 2,640.00 equity annually in mortgage principal payments paid mostly by his tenants.

End Of Year 10:

Here is where is it gets good!

John’s 2 properties have produced consistent cash flow, appreciation and equity through mortgage principal payments.

Property 1 is now valued at 152,374.30 of which 53,939.20 John now holds in equity

Property 2 is now valued at 138,010.10 of which 51,210.00 John now holds in equity

The Icing on the cake! John’s rainy day fund took a few hits, a new furnace for Property 1 (5,000.00), new carpets for property 1 (4,000.00) and newish appliances for Property 2 (1,500.00) but John still came out on top because over the last 10 years John’s rainy day fund grew to a whopping 26,214.80 leaving him with 15,741.80 in total cash flow over the 10 years.

John’s a smart cookie, he knows he’s in this for the long haul, at 32 years old he decides it is time to join the big leagues and proceeds to sell both of his rentals using the 120,891.00 as a down payment for a 620k 6 unit multi-family property.

Johns new property is producing almost 59k a year income, and John gets to keep much more of it now.

You might be asking why? Well it’s because he is no longer paying an association and his taxes are now lower, relatively speaking, because there are 6 units in this 1 building.

John is now off to bigger and better things!

-Shout out to the real John, Akhil Thuthika, who is working hard to make a better future for himself!-

Just a note for all you soon to be investors, this situation assumes John only invest the 25k once, had he instead invested 25k each year, pulling from his day job as an IT Professional these numbers would be astronomically higher. Yeah 25k per year is a lot, but it is an investment for your future, most of us want to be millionaires one day, this is one way to do it!

I hope this article has been insightful and for all of those naysayers, saying “Well you forgot about Blank!” Please realize this is not a perfect example, maybe there are much larger repairs that come up, maybe another market crash or maybe on the brighter side, the properties appreciate even better like 3%, regardless this is just to get you in the mindset of asking “How can I get into Real Estate?” instead of the lazy mindset of “I can’t get into Real Estate.” All investments are a risk and proper precautions should always be taken to be safe.

Joshua Cherian

Real Estate Broker | EXP Realty

(630) 776-3741

[email protected]

Joshuacherian.com

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