The Wealth Building Power of Leverage/Inflation/Time/Tenants & Scale
For the projections below and for illustration purposes we're going to use a home selling for $220,000.00 with a 20% down payment of $44,000.00. The rent it will collect each month is $1650.00. The graphs below show you the potential cash flow positive wealth building potential at 1 year, 10 years, and 20 years. I think you'll agree the potential is incredible.
Year 1 starting assumptions |
$$ Figures |
Annual Free cashflow after all mortgage payments and overheads |
$4800 |
Annual Mortgage Principal Payments |
$3169 |
Inflation at 2% assumed |
$4400 |
Depreciation/Deduction |
$1500 |
Total Wealth created year one |
$13,869 |
*This is a potential annualized return of 31% on your down payment*
Year 1 through 10 accumulated gains: |
$$ Figures |
Annual Free cash flow after all mortgage payments and overheads |
$45,982 |
Annual Mortgage Principal Payments |
$35,019 |
Inflation at 2% assumed |
$84,000 |
Depreciation/Deduction |
$15,000 |
Total Wealth created year 1 to 10 |
$166,501 |
*A potential total annualized return of 378% on your $ 44,000 down payment*
Year 1 through 20 accumulated gains: |
$$ Figures |
Annual Free cashflow after all mortgage payments and overheads |
$101,621 |
Annual Mortgage Principal Payments |
$91,953 |
Inflation at 2% assumed |
$117,690 |
Depreciation/Deduction |
$30,000 |
Total Wealth created year 1 to 20 |
$341,264 |
*A potential total annualized return of 756% on your $ 44,000 down payment*
Notes and assumptions regarding projections above:
- Annual Free cash flow - I used actual CPI inflation 2000-2010/20 data to calculate this figure
- Tax depreciation - For ease I'll make a general allowance.
- Mortgage Principal - 30 yr. Fixed at 4% amortization schedule used to calculate.
- Inflation - 2% assumed - CPI inflation 2000-2010 data to calculate this figure
*Please note:
- This is simply for illustration purposes to highlight the true mechanics of a well purchased new build home making inflation assumptions from the CPI 2000 to 2020. I made these assumptions on the rental amount and value of the home. I have factored in actual amortized gains from principal payments and not factored in appreciation gains.
- Tax calculations for depreciation on Real Estate can be complex so please consult a professional accountant to garner a professional opinion.
- I have not allowed for maintenance and turnover costs; new homes generally experience less maintenance that older homes but still have moving parts and tenants.
- *This is a simple Macro analysis and I am sure numerous other line items could be included. This breakdown is a useful personal observation and should be used as such.