Another way of thinking of returns on real estate?

2 Replies

I know a lot of the popular blogs on REI talk about how important cash flow is, but I've seen some investors that talk about equity plays as long as there is SOME positive cash flow, etc.

The reason I ask is because while I paid 64K cash for a old house 5 years ago and make about $700 a month after expenses, not counting appreciation, I make considerably more on a 300K house I bought a year ago, even though it is mortgaged and doesn't have the same amount of cash flow. After ALL expenses (repairs, maintenance, vacancies), there is about $300 in cash flow, but another $350 in principal payment which is still going to my asset column. When you factor that in, it brings me up to $650 in money that goes to my asset column every month.

Furthermore, this doesn't count appreciation or depreciation. I live in a high appreciation area, so I could consider it, but for this example, let's pretend that it's not being taken into account that I get far more appreciation returns on a 300K house than I do on a house that is worth 150K now. For 70K invested, my house went up 35K last year. On the paid off house that is worth about half, I saw about 10K.

However; lets take into account that the depreciation benefit is better on the expensive house, and that more of the income is shielded from taxes due to the tax benefits of the expenses and the depreciation. That brings me up to $819, once I factor in depreciation.

But wait, I'm not done. Although the majority of a monthly rental payment on this house goes to pay the mortgage and expenses, once it is paid off courtesy of my tenants, the profits sky rocket. And I'm still in for 70K (use tenants money from rents to pay for upkeep). And all that time they've been adding money into the savings account called a house for me, but once it is paid off, it is mostly spendable (read that investable) cash rather than money going to principal, etc.

Point is, even if the returns on a property are only 11 or 12 % in my area on a house such as this with the current prices and interest rates, it is still a better return than in the market using a relatively safe index fund, and is not even taking into account depreciation or appreciation, not to mention the fact that over time, more money goes to my asset column, and eventually it will be paid off. It's still a good thing to buy for the long run, even if it doesn't provide AS MUCH benefit to me now as some of those cash flow cities in the Midwest where you can buy a house for the price of a VCR and rent it out for $1,500 dollars...

I live in the same area as you and we're picking up fixer houses under $100 k that after the rehab cash for $400 to $500/month. Been purchasing 4 of these type houses a month and will be ramping up to 8 of these type of acquisitions in January 2016. I am hoping to pick up 60 to 70 cash flow rentals locally in 2016.  It is possible to have both cash flow and appreciation in the Greater Seattle. area.

Before I thought it wasn't possible to do this in the Seattle area. I purchased rentals in Phoenix, Houston, Memphis, Birmingham and Kansas City. Those out-of-state deals were 10% cap deals with 18% to 24% cash-on-cash with a 20% assumption. The thing was that I had to put 20% on every rental with cash.

The numbers out-of-state will beat Greater Seattle every day. 2% rule out of state. We go for the 1% rule, but have found some value adds that get the rents closer to the 1.5% rule. Even though the cap rates and cash-on-cash is higher out-of-state than locally here, locally we can leverage our construction company with 3 project managers (and growing), our own real estate team, our direct mail campaigns to motivated sellers, private money investors, hard money, and credit partners.  

@Jack B. , have you considered the situation where you finance your 64k property and run your numbers? Then you can buy 5 of them not just one. 

With all cash purchase, you miss the benefits of leveraging and some tax benefits.