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Predictions are Futile: Why You Should Invest in Real Estate Based on the Numbers ALONE!

by Engelo Rumora on June 21, 2014 · 15 comments

  
Why You Should Invest in Real Estate Based on the Numbers ALONE!

Shouldn’t investing be about making enough cashflow every month so your family, friends, and you can enjoy in a lifestyle that you all desire?

My Story:

In early 2012, when I first began investing in Real Estate, I followed a strategy that many novice property investors practiced here in the US (mostly before the financial crisis), and which is still heavily applied back home in Australia, were I’m from.

Unfortunately this particular way of investing has in my opinion caused a lot of heartache for many investors and is also one of the main reasons why property prices have declined as much as they did.

The strategy consisted of buying properties at “below market” value, renovating them and refinancing the existing mortgages. The mortgage would be refinanced at a 80-90% LTV and the equity would be used to put down a deposit and fund the renovation as well as other costs associated with the deal. This process would be repeated over and over again.

Although I had success and built a substantial portfolio consisting of 10 properties valued at over $1,000,000 in a very short amount of time (6 months), I quickly realized that using this method of investing was not a sustainable way moving forward, and it was going to prevent me from getting to where I wanted and needed to be. I also realized that I was buying based on “hope” that the properties would appreciate at a quicker rate than what my mortgage short falls where.

Due to my youth and lack of experience at the time, I was more focused on adding a quantity of properties to my portfolio- and using it as a trophy to show off to family and friends what a “successful” property investor I was.

Lessons to Learn:

Investing in real estate should be based on the numbers in the deal and not predictions of capital appreciation.

Related: Expecting Appreciation is a Game For Speculators, Not Long-Term Investors

Once you have a figure in mind of your monthly cash flow requirements, that figure can then be used as a platform when estimating returns on the individual deals you plan on purchasing. If the numbers in a property your evaluating make sense and suit your end goal- it might be worth pursuing further.

Unless you have a crystal ball… DO NOT include predictions of capital growth when calculating your return on investment. “Hoping” a property will appreciate in value is not a strategy and if appreciation does occur it should just be considered as a bonus.

Over the years I’ve seen numerous novice investors post deals of properties they are interested in purchasing were there is NO buying criteria or it is obvious that they are just eager to jump on board and call themselves a “property investor”.

I encourage everyone that is just starting their journey or that already owns investment properties to be more patient and wait for the “right” deal to come along. The numbers in this particular deal need to complement other properties in your portfolio with the end goal of reaching your monthly cashflow requirement asap.

Related: Patience: It’s Not What You Wanted To Hear as a Real Estate Investor

By staying active via this forum, phone, email, attending seminars, expo’s, and networking on all social media platforms- I can comfortably say that over the year you will come across at least 3-4 deals requiring a $50,000 investment which can in return earn you between a $25,000-$50,000 profit if buying and selling or an equity gain of the same amount if buying and holding.

Final Word:

Although I was fortunate enough to not experience a direct financial loss during my early days, I have estimated that the opportunity cost equated to hundreds of thousand of dollars in equity and cash flow gains that I missed out on by not being able to purchase the right deals when they came up.

I’m also happy to announce that I have since sold out of all of my leveraged properties and have continued building my portfolio with cash only.

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{ 15 comments… read them below or add one }

kris June 21, 2014 at 9:43 am

suggest buy NNN property, instead od with cash. Zero headache, and all benefits too!!!

Reply

Engelo Rumora June 21, 2014 at 9:45 am

Hi Kris,

Thanks for reading my blog and your comment.

I am always happy to hear new ideas and learn new strategies.

Have a great day.

Reply

James Pratt June 21, 2014 at 10:56 am

Engelo, very well put. Positive monthly cash flow at 1.5 times of what you need to live on should be the number one goal. Rents always keeps up with inflation and then some.

The only difference I have is “The strategy consisted of buying properties at “below market” value, renovating them and refinancing the existing mortgages. The mortgage would be refinanced at a 80-90% LTV and the equity would be used to put down a deposit and fund the renovation as well as other costs associated with the deal. This process would be repeated over and over again”.

I did this with a lot of properties that I bought. Bought at 50% with all cash, rehab and refinance to get all my money back and getting at least $300 positive monthly cash flow. I have an average of 69% equity on my properties.

Reply

Engelo Rumora June 21, 2014 at 3:13 pm

Hi James,

Thanks for your comment.

Your strategy sounds much more sustainable then mine was.

What city were you buying in and what was the entry price?

The average price of the properties that I started with was between $200,000 – $300,000 which at the time made it difficult to put down any substantial deposit.

Thanks and have a great day.

Reply

James Pratt June 21, 2014 at 5:02 pm

Grays Harbor, WA. Believe it or not- REO’s-3b/2b 1500+ square feet, all corner lots for $50-70,000 (50%) with average rent of $900. Used a HELOC loan to buy them for all cash, if it weren’t for Mortgage restrictions would still be buying.

Reply

Engelo Rumora June 21, 2014 at 5:09 pm

Thanks James,

Those numbers look very decent.

Unfortunately the numbers I was buying before were nowhere near as good as yours.

Thanks and have a great day.

Bob Bowling June 21, 2014 at 7:09 pm

You posted, ” Lessons to Learn:

Investing in real estate should be based on the numbers in the deal and not predictions of capital appreciation.”

What number are you using? vacancy and collection based on historic figures. Rents based on historic figures. expenses based on historic figures. Why wouldn’t you use ALL numbers like rent growth AND appreciation? All your numbers are based on PREDICTIONS of income and expenses. Why would you exclude other predictions?

Reply

Engelo Rumora June 22, 2014 at 8:57 am

Hi Bob,

Thanks for taking the time to read the blog and for your comment. I also appreciated the points raised so please see my answers below:

The numbers used are all actual figures from my existing portfolio containing similar properties located in the area and if buying out of state the numbers used would be from a trusted source on the ground that can provide the current rental figures based on what other similar properties are currently rented for in the area.

In my opinion estimating the potential rent growth and appreciation is too much of an uncertainty.

On the other hand once you have agreed on a certain price to purchase a property and a signed lease with a the rental figure, the price is a fact and the agreed rent is more of a certainty due to the lease in place.

There are many different ways of crunching numbers and this blog post was composed based on my previous experience and a strategy that I now implement moving forward.

Thanks for reading and have a great day.

Reply

Bob Bowling June 22, 2014 at 6:50 pm

Hi Engelo, you said.
In my opinion estimating the potential rent growth and appreciation is too much of an uncertainty.

On the other hand once you have agreed on a certain price to purchase a property and a signed lease with a the rental figure, the price is a fact and the agreed rent is more of a certainty due to the lease in place.

Investors should understand that at the time of purchase there is an appreciation rate and a rent growth rate IN PLACE. The fact that you are oblivious to it does NOT mean it is not a FACT just like your purchase price and your rent. If I know the historic rent growth rate I would have more certainty in it remaining about the same than I would have that the current renter is going to continue to pay rent as agreed. Wouldn’t you pay less for a property that has seen rents decrease 3% a year over the last 10 years vs. a property that has seen rent increases of 3% a year? Yet you are advocating to completely ignore that information because….? Can you agree that that would not be prudent?

Reply

Engelo Rumora June 23, 2014 at 5:28 am

Hi Bob,

Once again thanks for comment but this will be my last reply as I don’t know the reason behind your provocative remarks or what your true intentions are.

As I already mentioned there are many different strategies used and perceptions that investors develop.

This blog post was not intended as an exercise to argue if I’m right or wrong but simply to share how I invest based on my past experiences.

I wish you all the best with your future real estate endeavors.

Lisa Phillips June 22, 2014 at 12:16 pm

Rent grows? Hmm.
Great article Engelo! Its through learning what you did in the past, and what you’ve learned from, that we can all grow. In this case, I agree 100% that speculation can get you in a lot of trouble when you’re leveraging a property. If its all cash, its a different story. Thank you for sharing, and I am looking more to reading your future articles :-)

Reply

Engelo Rumora June 23, 2014 at 5:33 am

Hi Lisa,

Thanks for your kind words.

Every investor will eventually develop their own preferred method of crunching the numbers and a strategy that best suits their comfort level.

Thanks again and have a great week :)

Reply

Alex Craig June 23, 2014 at 8:11 am

I see what you are trying to say, don’t invest on the hope of appreciation, rather focus on the current #’s. I agree 100% with that (although I am guilty of it on 1 property). That is good advice as hedge funds have pushed up values in some markets. I like to educate my buyers on not focusing solely on the #’s and pay a lot of attention to area and condition of property. I see a lot of investors buy homes with 30 year loans in my market in areas that I feel are very questionable relative to the price they pay. I have always said (within certain boundaries) that area is more important then house. This is especially true in areas where funds have bought up neighborhoods. If there are a bunch of rentals on the area now, then that neighborhood will be driven by investors. If the area declines, so will rent and that Pro Forma at the time of purchase will be grossly inaccurate. Also, buying in investor driven areas will limit a exit strategy to selling only to investors instead of owner occupants.

Bottom line — pay close attention to the #’s, but area, not because of appreciation, but for sustainability of rent at the time of purchase is (if not more) important then the #’s.

Reply

Engelo Rumora June 23, 2014 at 9:35 am

Thanks Alex,

You mention some great points.

Something that I would always look for when buying is to have a Home Depot or Walmart within close proximity of the target property. These companies invest hundreds of millions of $$$ into research every year. I am sure they would not open up shop in a declining area where they wouldn’t get enough demand.

Shopping, schools, ease of access to major HWY’s, healthcare centers or hospitals are some other things to look for.

Also, once you get to familiarize yourself with a particular city there will be certain zip codes or locations that everyone always talks about as being desirable. We have the Washington Local here in Toledo, Ohio. Located in a great school zone and mostly owner occupied.

Thanks for reading and have a great day.

Reply

Ziv Magen July 26, 2014 at 6:05 am

Good to see you here, Engelo – great Writeup and I agree, appreciation, whether of rent or value, should be a bonus (whether expected or unexpected), not a strategy – while there may be historic trends of both, things can turn around in a heartbeat, as they may be based at least partly on the economy, a particular market sector in that area, and a great many other factors that can fluctuate on a yearly basis.

As far as rent is concerned, you may not be able to guarantee the same tenant will keep paying, but chances are, you’ll know what rent to expect next, within reason, even if they’re gone tomorrow – these are the numbers I like to base my spreadsheets on (with ample allowance for deviations, of course – always look at “worst case scenarios” too).

Looking forward to your next instalments!

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