Real estate investing has long been reserved for the ultra-wealthy due to complexity and high barriers to entry. We believe this is unfair as single family rentals provide the best risk-adjusted returns combined with passive, reliable income.
The average rental home on the Doorvest platform is $175,000 and is typically purchased with a downpayment of $35,000, which represents 20% of the purchase price. Our investors can expect returns of $68,833 (197%) in 5 years. After 30 years, the expected return is $553,750 (1,582%), in addition to a fully paid off rental home that continues to generate passive income.
|Mortgage @ 3.875%||$658 /month|
|Property Tax||$328 / month|
|Home Insurance||$80 / month|
|Doorvest servicing fee||$160 / month|
|Tax advantages||$982 / year|
|Home Appreciation||3% annually|
Projections reflect expected cashflow returns, expected home appreciation, equity buildup, and some tax benefits. Based on a purchase price of $175,000. Customer obtained 30-year fixed mortgage at 3.875% interest rate. Rent, property tax, insurance, and Doorvest servicing fee amounts are projects that may differ for an actual investment home. Home is assumed to conservatively appreciate 3% per year. Actual investment home may vary. Past performance is not an indicator of future success.
Investing in single family rentals provides four awesome benefits: cashflow (aka passive income), equity buildup, tax advantages, and appreciation.
Income - Expenses = Cashflow
Cashflow is simplified as the income you’re generating minus your total expenses. For rental homes, an investor generates rental income and the most common expenses are mortgage payments, taxes, homeowner’s insurance, HOA dues, and servicing fees.
Mortgage @ 3.875%/yr
As you’ll notice in the cashflow breakdown, cashflow is net of mortgage payments. However, an individual’s total return includes equity buildup aka your residents helping to pay down your mortgage principal.
Mortgages typically consist of both principal and interest and are amortized, which is how the loan is paid down over 30 years. Though the monthly payments are equal throughout the duration of the loan, the breakdown of principal and interest shifts. This is because the interest is assessed on the total loan balance which decreases over time. We often recommend our investors to pay an additional small sum towards their principal balance each month - this quickly shrinks the 30-year timeline.
In our example:
One of the many advantages of owning a rental home is the tax deductions. Oftentimes, Doorvest customers are able to generate cashflow while entirely sheltering gains from taxes due to the deductions highlighted in this post.
Upon sale of the investment home, owners are also able to defer capital gains taxes by using a 1031 exchange.
Home appreciation is the most widely understood benefit of owning real estate and is defined as the value of the home increasing over a time period. Experts accept 3% as a conservative estimate for the entire US housing market however this actual number varies depending on localized markets.
Most investors on the Doorvest platform purchase rental homes with a mortgage which is considered leverage, boosting expected returns from appreciation.
In our example, the purchase price is $175,000 and the expected appreciation in the first year is $5,250, equal to 3% of the home value. That said, the investor’s initial investment (downpayment) is $35,000 and therefore the effective return due to appreciation is 15% ($5,250 appreciation / $35,000 initial investment). This is known as a levered return.
Lastly, the appreciation is compounded as the holding period increases. This leads to a higher effective return with each additional year.
Combining the four advantages to owning rental homes, here are the expected returns over various holding periods.
|1 Year||5 Years||10 Years||30 Years|
|Cash on Cash||$4,484||$22,420||$44,840||$134,521|
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Historical returns, expected returns, and probability projections are provided for informational and illustrative purposes, and may not reflect actual future performance.