What if you bought a rental property in 2023 and, even with conservative underwriting, you were still able to beat the average return of the stock market?
Let’s assume you acquire a rental property and, over 30 years, experience no appreciation, no rent growth, and no cash flow. What would your return on investment be if you bought that property with a fixed interest rate conventional mortgage putting 20% down?
The answer may surprise you: it is BETTER than the average return from the stock market! How is this possible? Two words, principal paydown.
The Power of Principal Paydown
When you own a rental property purchased with a mortgage, the tenant pays the rent, which in turn pays your mortgage. A mortgage consists of two components: principal and interest. The interest is the fee paid to the bank for lending you the money, while the principal payment increases your equity or ownership in the home. This increase in ownership represents a positive return on investment because each mortgage payment increases your net worth.
Understanding the Numbers
Let’s break down the math. Assume you acquire a $200,000 rental property, put 20% down, and secure a fixed 30-year mortgage on the remaining 80%.
- Down payment: $40,000
- Loan amount: $160,000
After 30 years of the tenant paying rent, your mortgage is fully paid off, and you own 100% of the home worth $200,000. This $160,000 return on investment over 30 years translates to an average of just over $5,000 in equity each year ($160,000/30 years).
If you divide your annual return of $5,000 by your initial investment of $40,000, you get a 12.5% average annual return, which exceeds the average annual return of the stock market at 10%.
The Benefits of Principal Paydown
Principal paydown is my favorite real estate return because, as long as you invest in a quality market, house, and property manager, this return is very low risk. Additionally, when you consider other benefits such as cash flow, leveraged appreciation, tax benefits, and a hedge against inflation, the attractiveness of real estate investment becomes even more apparent.
Learn More
If you’d like to learn more about how you can invest in Turnkey rental properties, please visit our website at: www.MemphisInvestmentProperties.net
or schedule a call with a member of our team www.calendly.com/alexmip
Investing in real estate can provide a stable, low-risk return that not only matches but often exceeds traditional stock market investments. Start your journey to financial independence today!