The Amazing Power of Income Property Math
Published on: Friday, December 18th, 2015
If I had the power to make schools teach one thing, it would be this: Trading time for money is the least effective way to earn income. JOB truly does stand for “Just Over Broke.”
If I had the power to make schools teach two things, the second would be: Don’t spend 40 years saving and investing to retire, just BUY an already existing passive income stream and retire NOW.
I bought my third mobile home park three weeks ago and within one week, I had increased its value by $60,000. By the end of the year, I’ll have increased its value by $60,000 more. This doesn’t include the $4,000 income I’ll receive every month after paying all park expenses, two mortgages, and a manager to run it.
In just six months, I’ll have earned $120,000 in increased equity and $24,000 in income. From then on, I’ll earn over $50,000 in annual income and another $80,000+ every year in increased equity. Just from this one park!
Everything I’m doing is moral and legal. This type of math is normal in the mobile home park world. I pay my managers a fair salary, and I only ask my tenants to pay fair market rents. I have my managers respond quickly to tenant needs. I don’t work any schedule and only manage my managers. The income is 95% passive.
These gains are not unusual. Income property math is far more favorable than paycheck math, small business math, and especially savings & paper investment math.
Put on a Cap, so Your Head Doesn’t Explode
I specialize in one type of income property – mobile home parks. In this world, mobile home parks under 100 lots usually sell for 8 to 12 times annual net operating income (NOI).
A loose average is 10 times. This means that for every dollar you increase park income, the park is worth $10 more.
This 10X multiplier turns normal math into mind-blowing math when talking about rent increases.
If you own a park with 50 mobile home lots, a $10 per month, per lot, rent increase adds $500 profit per month (assuming your expenses stay the same). $500 a month X 12 months = $6,000 more profit per year.
That’s a nice increase in income, but here comes the magic math. Because parks are valued about 10 times annual NOI, that $6,000 increase suddenly adds $60,000 to the value of your park!
That little $10 rent increase just earned you more than most people earn in a year slaving away fulltime at some job. Over time, even without rent increases, income property math gets better.
When your tenants pay their rent, you use some of that money to make your mortgage payment(s) which increases your equity month after month. The longer you own the property, the bigger your equity gains each month.
When your equity grows large enough, you can borrow enough of it tax-free to purchase another park, multiplying your returns even more.
Income Property Sprays Money At You in How Many Ways?
So let’s review. Income properties’ magic math is paying you from three different directions.
1.Monthly Income. The money left after paying all park expenses, the mortgage(s), and the manager is yours to keep and spend as you wish.
2. Equity. Every time you make a mortgage payment (your tenants are actually making this just by paying their rent), you are reducing the amount owed on your mortgage which increases the value of your equity.
3. Appreciation. When you increase profits by rent increases or expense reductions, each $1 of increased profit is worth $10 in increased park value.
This is amazing! But wait, there’s more!
The tax laws were written by the rich and more people have gotten rich over the centuries by real estate than any other way. So of course, owning income property real estate has…
4. Favorable Tax Deductions. Depending on the property, you can legally deduct enough depreciation that you may erase most if not all of the taxable income you earn from the property.
Net result? Most income property earnings can be tax free! Less taxes = more income for you. So now there are FOUR income streams coming at you from one property.
Now Do the Math on Your Time
Now consider that owning this type of income can be 95% passive. It takes good systems and a good manager. I’m fortunate to have both in my parks. So thanks to the magic of income property math, I’m able to have financial freedom and time freedom.
Income property math is amazing. Once you truly get your head around it, you’ll quickly realize that jobs, self employment, business and stock market income streams fall woefully short. The conventional wisdom of working decades to save a retirement nest egg is exposed as an unnecessary waste of time and effort.
When you consider all the ways to earn income from a time, effort, and mathematical perspective, income property truly is the vehicle that gets you to the finish line faster and easier than anything else.