Many books have been written about how to profit from real estate investing. Some of these publications are quite technical and others are very simplistic. But, the bottom line message of all of them is…the numbers don’t lie. In other words, with a good deal, the numbers work. With a bad deal, they don’t.
Investing in real estate is all about the numbers. Emotion has nothing to do with the process, such as when a couple is trying to decide which house to buy, live in and raise a family, or retire. That’s not what investing is about.
Investing in real estate contemplates a number of factors in order to arrive at a conclusion regarding what is a good deal and what is a bad deal. But, fundamentally, it can be boiled down to “cash flow” or cash-on-cash returns.
Now, the nice thing about investing with a Self Directed IRA or 401(k) is that profits are tax-exempt, just like stock investing. Calculating cash flow is really quite simple – it’s the flow of money…income in, expenses out: Rental income – Expenses = Cash Flow.
To determine the yield, or return on investment (ROI), annual cash flow is divided by the amount of cash invested into a property. As an example: If cash flow on a $100,000 investment is $9,000, ROI would be 9%. Or, if cash flow on a $65,000 investment is $7,800, the ROI would be 12%.
(The purpose here is to keep things as simple as possible. Obviously, there are a number of factors that come into play in terms of finding the right property, acquiring the property, rehabbing if necessary, finding a tenant and employing a property manager that you can trust, or managing the property yourself.)