There are a lot of different terms that get thrown around to measure success as it relates to investing. One of the terms that comes up over and over again is payback period. If you’re not clear on what a payback period is, then stick around! I’m going to answer that coming up.

Hey, there! It’s Billy with KeePon Cashflow, and I’m back once again to share some tips and strategies to help you make more money. They’ll help you have more control over your free time and ultimately live with less stress.

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What I’d like to talk about today is the concept of a payback period. I want to tell you what it is and give you a concrete example so you have a better chance of understanding it. I want you to feel comfortable enough to ask someone what the payback period is on an investment you’re making. Whether you’re doing it actively or passively, this is just another piece of information you can have to help you make your decision.

So you loan them 1000 bucks and they say, well, I need to borrow 1000 bucks, but I’m going to have to pay you back in a hundred dollar installments. Well, if that person pays you back in when they, as soon as you loan them the money, they give you $100 the next month and then $100 the next month, et Cetera, et Cetera, et Cetera, until you get to a thousand well basically it’s taken them $100 a month times 10 months to get to a thousand. So really it’s taken them 10 months to pay you back, which is exactly where payback period comes from. I know it’s a really simple example and however it helps to make the idea as simple as possible and as crystal clear as possible. So what I want to do now is use it in a real estate example because you all know that I love real estate as close to my heart and I love the fact that you can use leverage, meaning that you’re able to borrow money to control a hundred percent of an asset.

Let’s start off with an example everyone can understand. If you have brothers or sisters, or maybe some close friends that feel like siblings, you’ve probably had one of them say, “Hey, listen, can I borrow some money?” Maybe they needed to borrow $1,000 and have told you they’ll pay you back in hundred-dollar installments. Once you loan them the money, they give you $100 the next month, then $100 the month after that, and so on until you get your $1,000 back. Doing it this way means it’s taken them 10 months to pay you back, which is where the term payback period comes from.

That was a pretty easy example to understand, but let’s apply it to real estate, which as you know is close to my heart. I especially love the fact that you can use leverage, which means you’re able to borrow money in order to eventually control 100% of an asset.

For example, imagine there is a property that costs $400,000. To leverage something like this, you would typically take 25% of the total, which in this case would be $100,000, to control the $400,000 asset. Once you subtract the rent and operating expenses, you’ll have your net operating income. You’ll also have to subtract any debt service if you’re using a mortgage or someone else is lending you the money. Eventually, this will get you to your cashflow. Let’s say we’re earning $25,000 in positive cashflow, keeping in mind you’ve used $100,000 of your own money. If the property is creating $25,000 a year, how long would it take to get to $100,000? We’d take $100,000 divided by $25,000, which equals four years. This means it’ll take four years to recuperate your initial investment of $100,000. This is your payback period.
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If you found value in this post about payback periods, feel free to leave a comment, as well as like and share this blog! This is so others can also benefit from the information here. And for those of you who don’t know, I live in Spain and love investing in cashflow assets back in the United States.

I’ve actually written an eBook that talks about this process step by step. You can pick up the eBook at keeponcashflow.com/roadmap. It’s going to add a lot of value to your life, and for those of you who are super serious, there’s also an opportunity to take a deeper dive into this topic.

So, let me know what you think of this explanation of the payback period! If it made sense to you, please share this with someone else you think could benefit from this. I’m Billy Keels with KeePon Cashflow. That’s my two cents for today. As always, hasta la próxima!

You can also check out my latest podcasts and collaborations here keeponcashflow.com/podcasts/