Real Estate Investors Often Confuse These Investment Terms

Are you interested in investing in real estate? Do not confuse income, net profit, equity and return on equity.  

  • Today’s Market for Rental Property: Rental income across Fairfield County ranges from $15K per year (studios) to hundreds of thousands for single family homes, the highest in the nation outside of Los Angeles. Vacancy rates on investment properties in Fairfield County can average less than .5%.
  • Income: Regardless of market value swings, the property generates income as long as the property is rented, similar to a stock with dividends.  Investors in Fairfield County generally put down 20%-50% to minimize their cost to borrow and great rental properties with low vacancies start at purchase price of $120K.
  • Net Profit:  If your annual income exceeds expenses, you have a net profit that is taxable. In Fairfield County rents tend to go up when market values goes down, leading to higher net profits. Your taxable income is calculated by deducting mortgage interest, depreciation, rental commissions and amortized loan fees from your Net Operating Income (NOI).
  • Cap Rate: Investors tend to look for a 10 year cap rate. This means net profit is equal to the purchase price in 10 years. However, your initial investment can actually be recovered even faster due to the interest tax deduction (if you have a mortgage) and depreciation on the structure which is about 3% per year of cash recovery.
  • Equity: If you purchased in cash, you have 100% equity of an income producing asset from day one. If you have a 40% mortgage, you have a 60% equity share in the property and will have 100% equity when you pay off your debt.
  • Return on Equity: Compare a stock with a rental property, both bought for $100k and owned for 10 years. The property with a 10 cap rate produces $10k per year on income, a total of $100k in ten years. However, for a stock investor to recover the initial investment in 10 years, not including any growth in the stock price per share, an investor would need a 10 percent dividend on this stock, which is a difficult assignment in today’s market.

 Consider Real Estate investing as part of any portfolio that diversifies risk. If you want to start investing in real estate and you need a coach, call Patricia Rattray at 203-570-2096.

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