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Category Archives: RIchard and Erik Maryanski

Return on Equity

ROE

In previous blogs we have discussed making money from cash flow, appreciation and potential tax benefits. Today we will look at another attribute of investing in real estate that is sometimes, but not necessarily, researched properly before being executed. The idea is known as Return on Equity.

The equity in a property is the difference between what the loan amount is and the fair market value of that property. This equity, which belongs to the owner, has the potential to be used as investment money for future projects. The question is when the owner of the asset should use the equity to invest in that next project, and when the equity should not be used and just left in the asset. With mortgage rates near record lows and job prospects improving and although we’ve had a cold winter, housing starts are trending upward. Mortgage lenders, such as Wells Fargo, indicate that in the next 12 months there will be an increase in housing prices, activity in sales and in housing starts, even though the U.S. economy is slow to recover.

So the question is: when should the owner consider using the equity in one asset to purchase another asset? When the Return on Equity meets the owner’s criteria.

That means the return they receive on their equity is greater than the return they receive from other types of investments ie. Stocks, bonds, etc… The Return on Equity is calculated when you take the annual cash flow, plus the annual appreciation and divide that by the equity that is left in the asset.

Therefore, first an investor would calculate the return on equity on the asset before they refinance and see what the return is. Second the investor would then do the same return on equity calculation after they refinance to see what that return is. There is one additional piece to the puzzle. The investor will also calculate the return on investment on the money used to invest in the next project. If the return on equity after refinance plus the return on investment added together are greater than the return on equity before the refinance, then that is the time to refinance and move the equity into that investment.

Thank You,
Richard Maryanski and Erik Maryanski
Rich Dad Advanced Trainers and Mentors

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Goal Setting for your Financial Future:

blog

There are four primary ways that you can make money in real estate. You can buy fix and sell a property, you can buy and hold a property, you can take advantage of tax benefits and you can take advantage of principle reduction and appreciation.

When you put a property under contract and sell your contract or you buy fix and sell a property these methods involve forced appreciation. Forced appreciation allows you to make a lump sum profit. You can also buy below market and sell at market for a quick lump sum profit. These are the primary ways to get cash from investing in real estate if quick cash is your primary goal.
If you are looking for income you should purchase a property and hold it while it appreciates. The first thing that you want to verify before you buy an investment property is if it will cash flow. Right now in the U.S., based on the loans that are available, it is easy to figure out if your properties will cash flow. For Example, take a $200,000 property and multiply it by .007 and you get a $1400 a month payment. If you have $1400 per month in rent, then you will break even. If you receive more than $1400 per month then you have cash flow. When you hold a property, you want to make sure that it will pay for itself.

Another way to profit from real estate is through the tax advantages. The following is an example only and any actual tax advice should be sought from your tax advisor. Because this is only a blog, we will not go into great detail on how to take advantage of depreciation.

Here is an example of how depreciation works. Start by taking the purchase price of the building and multiplying by .75%. That is an example of how much the building is worth compared to the land. (This comes from your tax bill that shows the relation between the land and the building.) If we use a $600,000 property the ratio would equal $450,000. If the property is a 1-4 unit you divide by 27.5 years; if the property is 5 units and above you divide by 39 years. We will assume that this is a residential property. Take the $450,000 and divide it by 27.5 years this equals $16,363. Now take this number and multiply by your tax bracket. In our example we are going to use 20%, therefore you would have a tax savings of $3272 for that year. To be clearer on this idea, ask your accountant or CPA. This is just an example and everyone’s situation is different.

Finally, the fourth way a property makes money is from principal reduction.

When you have a loan on the property, a portion of each monthly payment reduces the balance remaining on the loan. Each month you owe less on the property while the property should continue to appreciate in value.

You are making money between what the property is worth at a later date as opposed to what you purchased it for, that’s the appreciation piece. You are also making money between the loan balance when you purchased it and the loan balance when you sell the property. The tenant is paying down the principal mortgage balance for you, which gives you additional profit over time.
Here is an example of principal reduction. A $200,000 property, with an 80% loan to value, results in a $160,000 loan. If we assume that the interest rate is 4.2 % for 30 years then the 1st year of the loan the principal is reduced by $2,721. You can take the combination of the principle reduction and the amount the property increased in value from appreciation and add that into your profit.

Thank You,
Richard Maryanski and Erik Maryanski
Richdad Elite Trainers and Mentors

Additional Comments by Keith Gensor
Director of Education & Student Development

One of the best things about Rick & Erik Maryanski’s Creative Financing class is that you get to rely on their decades of experience & wisdom as successful Real Estate Investors.

With that experience & wisdom comes reason & logic – a systematic way of investing in real estate, that removes the emotion and the preconceived notions of what makes a deal a deal. Instead of having a hypothesis and then skipping the “experiment” so that your conclusion always matches, the experiment (otherwise known as a formula) is presented and always shows what makes a deal a good deal.

Creative financing is all about moving money around and managing your money to ensure that you are getting the best return. The answer to every potential deal is “It depends.”

Is this a good deal, it doesn’t cash flow? It depends.
Is this a good deal, there isn’t any appreciation? It depends.
Is this a good deal, there are no tax benefits? It depends.
Is this a good deal, there isn’t any principle reduction? It depends.

Unless you run the numbers and know exactly what your potential rate of return is, you’re running on feelings & emotions. Feelings & emotions will cost you more money than it will make you.

As Rick & Erik say, “What I like does not matter to making money.” Making money should be the end result of a logical & methodical system. Granted there is a lot of guesswork & speculation, and we all know that hindsight is 20/20. But if you conduct your due diligence, you should be able to minimize your risk & exposure and know (all things being considered) if you have a potential good deal.

What is this formula that I am referring to? Well Rick mentioned it to you in the preceding blog. If you want an in-depth explanation of how this works and how to apply it to your Real Estate Investing, then I highly suggest you enroll in the Creative Financing Class, as this is one of the most eye-opening classes we offer at Rich Dad Education. One that will enable you to look at every – residential or commercial, big or small, foreclosure or retail, & so forth – to determine if this is the highest & best use of your time & money.

Remember, the more ways you know how to make money equals the more potential to earn money. Learn this creative technique and you will forever see all of the investing opportunities in an entirely new way.

Interviewing Potential Partners

Investor Partners can be for: money, credit and/or experience.

There are several questions you need to ask a potential investor partner when you are interviewing them to see how you can create a mutually beneficial relationship. 

One of the first things that you want to find out is how much money they have to invest with you and if that money is liquid or if it is tied up in other projects.  Money that is “liquid” is money that is available to be invested immediately while money that is tied up in other assets, i.e. stocks, bonds, art work or real estate is not “liquid”.  These types of investments have to be sold or refinanced so that the money can be used for other projects.  Many times investors make the mistake of assuming that a potential partner’s assets are liquid assets.  Always ask that important question: “Is the money liquid”?

You also need to find out whether or not the investor would be willing to sign or cosign on a loan that would be used to purchase the investment property.  The advantage here is that if the buyer’s credit is not in very good standing, then the investor can bring their credit to the project.  In other words, the investor can qualify with the bank to get the loan on the property.

If the lender is going to lend you the money are they asking you to make monthly payments?  Are they going to lend you the money for a piece of the deal?  This could be a percentage of the profit, part of the money coming from cash flow, appreciation, tax benefits or principal reduction.  

Another question to ask is if the investor has any experience?  For example if the buyer wants to purchase an investment property and fix it up themselves and either keep the project and rent it out or buy it, fix it, and just sell it to make some cash, many times the buyer tries to do the work themselves to cut down on the cost of rehabbing and therefore increase their profit.   However, if the bank is the entity that is lending the money, they may want you, the buyer, to have someone who has experience rehabbing properties involved in the project or the likelihood that they will lend you the money will diminish. This is where an investor who has rehabbing skills can bring their skill to the table as their investment in the project.

The investor that brings their experience or credit as the investment can be compensated the same way as the investor that brings the money for the project.

 

Thank You,

Richard Maryanski and Erik Maryanski

Elite Creative Finance Instructors and Mentors.

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