Here’s why the math behind real estate investing makes sense.

Today I want to talk about how you can become a successful real estate investor. I’ll discuss why you shouldn’t listen to hotel or online salesmen and explain the math behind investing.

When it comes to real estate investing, I always caution people not to listen to hotel speakers. This issue was more common before the pandemic, but whenever there was a convention at the local Marriott, I would receive tons of calls from people claiming to be real estate investors. It seems harsh, but I like to compare these speakers to snake oil salesmen; they’re just trying to scam you. This goes for most speakers who work exclusively on the internet as well. You’ll hear them talk about OPM—other people’s money. Where do you think that money is coming from? If you guessed your pocket, you’d be correct.

For you to understand how real estate investing works, I need to dive into the math. How can you pay $29 million more than the last person who owned the property and still come out a winner? In real estate investing, I like to look for a cash-on-cash return.

“This is a great time to invest in real estate.”

When people want a cash-on-cash return, they want to put $100,000 into an investment and get out more than $100,000. Seems simple, right? It turns out real estate investing is a great way to achieve this. If you want to buy a $500,000 home, you only need to pay $100,000 for a standard 20% down payment. You’ve just secured a huge asset for a fraction of its total cost.

It doesn’t stop there, because your asset is also bringing in cash flow in the form of rent. Using this, you can calculate your capitalization rate. If you pay for a $500,000 property in cash, you would take your monthly income from the investment, subtract your expenses, and divide that number by $500,000. Generally, investors want to see at least a 1% cap rate.

One thing to keep in mind is that money is cheap right now because of low interest rates. Some investors are getting into properties with lower down payments because their expenses will be less than normal. This is a great time to invest in real estate, so do your research and find something that can work for you.

If you have questions about today’s topic, please call or email me. I am always willing to help.