Low Interest Rates with High Cap Rates = Wealth Building
High performing yield is in the spread between the interest rates and the cap rates. What an awesome time to be an investor. So many opportunities all wrapped up within one single investment purchase. Today’s incredibly low interest rates on low priced properties with high rents; it is clearly a recipe for wealth building. What makes a great investment?
- A great product at a great price: check
- High demand for rentals: check
- Large positive cash flow: check
- Ability to gain tax deductions that will reduce tax liabilities: check
- Tenants who can literally pay for the investment for you: check
- Ability to gain capital growth for future wealth building: A GREAT BIG CHECK
- The ability to gain positive leverage; another GREAT BIG CHECK
Today's interest rates are indeed low. The ability to get financing, of course, requires more diligence and paper work than in years past, but the rewards are incredible. I have seen interest rates below 5% while I am seeing the average cap rate returning 10%. The cap rate is the rate of return an investment yields after expenses are paid. For example, if a property that you invested $100,000 has an after expense return of $10,000 per year (mortgage debt is not a consideration in the cap rate) then you realize a 10% cap rate or a 10% return on the investment.
Now if your mortgage is only 5% and you return is 10% you have a 5% positive return on your borrowed money. If that is not interesting enough, consider you still have:
- Ability to gain tax deductions that will reduce tax liabilities
- Tenants who can literally pay for the investment for you
- Ability to gain capital growth for future wealth building
- The ability to gain positive leverage
With the rebounding markets you also have the ability to identify the emerging markets. Those markets poised and positioned to create the cash flow, or the markets that are positioned to rebound the strongest providing the best possible appreciation (Capital Growth).
I often get asked about the window of opportunity. Yes, the window of opportunity as it relates to these stellar returns is closing. We probably have two solid years left.
Emerging markets, however, are always around. Markets rise and markets fall. To get ahead of the game you want to invest sooner rather than later to reap the best returns and then keep the momentum of your wealth building by investing in the best markets (the emerging markets).
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