Rental Property Investor · Radnor, PA · Member since 2015 · 178 posts · 125 votes
At least once a week I get told by someone that they are thinking about investing (whether passively or actively), but they are not ready to start yet. The majority of people I talk to are actually pretty knowledgeable and are in a position to invest. So why are they not investing? I think the answer is for multiple reasons: analysis paralysis, bandwidth, or just simply failure to pull the trigger. Regardless of the reason, the delay in investing actually creates a compounding effect impacting one’s potential ability to reach the full investing benefit.
The easiest way to understand this is by looking at the Rule oF 72. The Rule of 72 calculates the time it takes to double your investment. Mathematically, you take the expected interest rate and divide it by 72 to get the number of years for your investment to double. For example, if you expect to get an 8% return, you would take 72/8 which equals 9, meaning it will take 9 years for your investment to double.
So let’s say you invest $50,000 when you are 20, with an investment kicking off 8% interest, at 38 your investment will grow to $200,000, at 47 $400,000, at 56 $800,000, and 65 $1,600,000 (as long as you reinvest your initial investment’s returns). Whereas, if you wait to start at 30, and let’s say you have a better rate of return at 9%, starting with the same initial investment of $50,000, at 38 you have $100,000, at 46 $200,000, at 54 $400,000, at 62 $800,000 an at 68 $1,600,000. In other words, even with a better rate of return, starting later can influence when you achieve the same end result.
I recognize this is an extreme situation, and one can easily find investments that yield higher returns. My response to this is if the individuals are hesitant to invest in the first place, the likelihood of that same individual waiting to invest later and then pick an investment with a higher risk profile (which often comes with investments that yield higher returns) is possible, but maybe not as likely. Thus, if someone wants to invest in a more conservative investment, but still be able to grow significant wealth, investing early is the solution!
What were your hangups when you first started, or from getting started, in investing?
At least once a week I get told by someone that they are thinking about investing (whether passively or actively), but they are not ready to start yet. The majority of people I talk to are actually pretty knowledgeable and are in a position to invest. So why are they not investing? I think the answer is for multiple reasons: analysis paralysis, bandwidth, or just simply failure to pull the trigger. Regardless of the reason, the delay in investing actually creates a compounding effect impacting one’s potential ability to reach the full investing benefit.
The easiest way to understand this is by looking at the Rule oF 72. The Rule of 72 calculates the time it takes to double your investment. Mathematically, you take the expected interest rate and divide it by 72 to get the number of years for your investment to double. For example, if you expect to get an 8% return, you would take 72/8 which equals 9, meaning it will take 9 years for your investment to double.
So let’s say you invest $50,000 when you are 20, with an investment kicking off 8% interest, at 38 your investment will grow to $200,000, at 47 $400,000, at 56 $800,000, and 65 $1,600,000 (as long as you reinvest your initial investment’s returns). Whereas, if you wait to start at 30, and let’s say you have a better rate of return at 9%, starting with the same initial investment of $50,000, at 38 you have $100,000, at 46 $200,000, at 54 $400,000, at 62 $800,000 an at 68 $1,600,000. In other words, even with a better rate of return, starting later can influence when you achieve the same end result.
I recognize this is an extreme situation, and one can easily find investments that yield higher returns. My response to this is if the individuals are hesitant to invest in the first place, the likelihood of that same individual waiting to invest later and then pick an investment with a higher risk profile (which often comes with investments that yield higher returns) is possible, but maybe not as likely. Thus, if someone wants to invest in a more conservative investment, but still be able to grow significant wealth, investing early is the solution!
What were your hangups when you first started, or from getting started, in investing?
I don't argue your 'compounding effect' premise. There was no hesitation on our part... we own 37 doors (bought between 2018-2021) and managing our real estate is our full time job; but I want to offer you a corollary as to your "why does everyone wait" question... which is to say, "Maybe SOMETIMES they should be waiting..."
The same rate of return in your investment example works inversely when it is your interest rate on the buying side. I would venture to say that 95% of properties listed today on the market will not cash-flow at a 7-8% investment interest rate once you factor in principle, interest, taxes, insurance, and a maintenance / capex reserve. I get the concept of analysis paralysis - but maybe it is 'analysis-not-making-sense-icus"... to invent a new term.
I think beginners need to realize that the real estate market is cyclic. 3-5 years ago both properties and money were cheap. I could swing my mouse on a screen and find dozens of properties that would easily cash-flow $300/door and more after all expenses. When we started off - we were averaging that $300/door cash flow. Five years in, our cash-flow per door is over $750! This is after rent appreciation, as well as selling 5 doors and taking some great profits from market appreciation and paying off other properties to lower our debt - which significantly boosted our cash flow.
Today though, we are in a high priced environment with expensive money. Telling newbies that "Now is the best time", and "the longer you wait, the worse off you will be" I don't think tells the whole story given the marketplace. If I tried to start today with the same funds I had back in 2018 I would probably own about 10 doors.
In my opinion, it is really not a great time to be getting real estate (broadly speaking) - which when you think about it is the whole reason why the Fed cranked up rates - to slow down the economy, inflation, housing sales & price increases, etc. My suggestion to new buyers is to only do the deal if it makes sense. It's a pretty easy concept. Can you still buy a cash-flowing property in todays economy... yes... but it isn't easy... they are few and far between where I'm at in Florida! Rent prices need to adjust to what seems to be the new norm for housing prices. But you have a plethora of existing landlords that are doing just fine from their previous purchases (myself included) that might somewhat stand in the way of that equalization.
At my investor meetups the new buzz word seems to be "Creative Financing"... subject to deals, seller financing, etc. For us, we haven't bought a property in 2 years because the market is saying that it is smarter to sit still and let our money earn 5% in a high yield savings account. I would recommend that in the short term you include that comparison against any real estate investment you consider. The savings account does not require repairs, property taxes, insurance, evictions, etc. $50,000 sitting in a 5% account yields $208/month - before compounding. If you aren't getting that cash flow on a similar real estate investment, you have to ask yourself which is the better investment given the effort & expenses required? As those savings rates begin to come down, mortgage rates should also, and the number of properties that will cash flow will hopefully increase. Some people say, "No, all the investors will flood back in".. which is true, but so will all the sellers... and I think it will more or less balance each other out. That's what economies do... they come to an equilibrium. I think we will see modest price increases in the single digits (say 3-4%) as the Fed eases back on rates.
There are basically two long term plays in real estate - investing for cash-flow, and investing for appreciation. I'm a cash-flow investor. Almost every property will appreciate when the housing market is going up; but not every property will also cash-flow. Investing for appreciation only gives you returns when you sell the property - typically years down the line. This is usually not a good play for a beginner with limited funds. Cash-flow is your reward for a good purchase - and for us, our entire paycheck as managing our properties is our full time job! That cash flow hopefully (mostly) represents profit - but it also acts like a buffer when things go bad and you run into expenses with the property. If you have limited funds, owning non-cash flowing real estate can become a burden! Every expense is cash out of your pocket.
As an example - I have a friend who just bought a duplex. His payment is $3,000/month presently. Before he bought it, I asked him, "How much can you get for each door?" He said, "$1,500." He said, "I know it doesn't cash flow - but I just want in the game!" Before he closed on the property I pointed out that his property taxes will significantly increase after a year when the property appraiser registers the new sale, and that insurance in Florida is going up by 20-30% a year right now. He still bought the property. To me this was a bad choice by a rookie investor.
Hopefully market and rent appreciation will come along to help him out. He can also refi down the road to lower his interest rate... but that comes at a fairly significant cost (say $3,000 - $5,000) - which will totally negate any mortgage pay down from owning the property in the first couple of years. His variable expenses (taxes, insurance, repairs, etc) are only going to go up! He's pretty much in it for market appreciation - which, at 3% per year could be $30,000 in 3 years(?) - so all in all it will probably work out. But between now and then he has to manage to hold onto the property. If the AC needs to be replaced (to which there are 2 on the property) - that's a $5,000 bill with no cash-flow to help offset it. Hot water heater? $1,000... and that list never really stops! The take-away here is that it is hard to be motivated to do any activity when it isn't providing a positive tangible return. Every property expense becomes cash out of your pocket - because the rent isn't covering it if you are cash-flow neutral.
While I subscribe to the concept of investing early in life... if you are running the numbers and they are upside down, that should be telling you something! It's not analysis paralysis when the numbers go negative... It's "That's not a good investment... I should keep looking!"