Most investors buy rental properties because they want to earn money. They expect to earn cash flow in the short term through consistent rental income and they expect to earn long term ROI as their property increases in value.
You need to realize that to really earn money on an investment property, you need to hold that asset for as long as you can. You won’t see a profit in the first year or two. You may not even get to a break-even point.
Here’s how to calculate investment value, even if it seems like you’re not earning anything on your property.
When Do You Start Earning Money?
If you’re wondering when you’ll begin turning a profit with your property, the simple answer is this: you’re making money as soon as you buy it.
The payback period may seem long, especially in a market as competitive and highly priced as Long Beach. Earning positive cash flow may take a few years. That doesn’t mean you aren’t earning high returns. Your investment continues to increase in value rather than decrease. It’s not like when you drive a car off the lot at the dealership, where you own something that’s less valuable than it was before you bought it.
Long Beach Tenants are Supporting your Investment
Maybe you’re earning $2,500 per month in rent but your mortgage and expenses add up to nearly $3,000 a month. Does this mean you’re losing money?
No, not if your property is occupied and your tenants are paying rent on time. It’s easy to look at that negative cash flow as a loss. But remember that you own a valuable piece of real estate. If you are paying $500 a month to support that asset, you’re not really losing money when you consider overall gains. You don’t think of the $500 investment you make in stocks and bonds as a loss, do you?
As tenants consistently pay rent, you continue to earn more ROI. Don’t put all of your attention on what you’re earning in rent every month. Every dollar that comes in contributes to the value of your property and its overall worth.
Increasing Equity and Financing Rental Homes
There are a lot of variables when it comes to the time period for earning ROI and breaking even. The way you finance your investment is a huge indicator of how quickly you’ll be turning a profit. If you paid in cash, your earnings and ROI will look different than if you had leveraged the purchase of your property with a mortgage.
Equity is the market value of your Long Beach rental property minus the total loan amount that is still due. You won’t access that equity until you sell the property. Even though it’s not cash in hand, it’s still a promising contribution to your ROI.
Take a look at how much equity you’ve built in your investment property by reviewing your mortgage amortization schedule and determining how much you still owe versus what the property is worth.
Every property is unique, and the payback period for you will be different than it is for other investors. We can help you calculate your earnings and project your ROI. For all of your Long Beach property management and real estate investing needs, please contact us at HCM Property Management.