Finally Someone Is Talking Some Sense!

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Finally Someone Is Talking Some Sense!

Collin HaysBusiness Member
Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes

I was contacted by a potential investor in the Smoky Mountains asking my opinion on the earnings potential of a cabin.  One of the keys in any investment is "What are your goals?"  I was delighted to hear that this investor said "Break even."  Whoa!  That doesn't sound very appealing, now does it?   Well let's think about that...

Let's say you buy a $500,000 property, put 20% down, and only "break even" in the early years.  You've spent $100K on the deal.  But in a decade, that property is now worth $1 million for your $100K investment, even if you never made a dime on monthly cashflow!  Your money has doubled more than THREE TIMES in 10 years, or about a 24 percent annual return.  And even if you never make a dime and the cabin doesn't go up a dime in value, you still will have a $500,000 asset in 10 years for your $100K investment.  That's still a 14% annual return!  

THAT is the beauty of real estate my friends!  

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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y

@Collin Hays, that's the beauty of Vegas my friend! lol

You mentioned NOTHING about why or how someone could choose a property they felt confident would appreciate in value at a rate that exceeds inflation.

So, in order to really "invest" in real estate for appreciation without VERY good ways to vet investments for appreciation, you would need to buy LOTS of real estate in different markets and of different types to diversify more like buying a mutual fund of stocks. Otherwise, it sounds more like gambling than investing.

In addition keep in mind there are 3 basic ways you make money with real estate investing:


1) Cashflow : Something you can vet well, work to maximize, and costs nothing to put in your pocket other than taxes and its tax advantaged (depreciation, etc).

2) Mortgage paydown : Something you have some control of because you can shop loans, refinance, etc BUT its expensive to put your hands on through a sale or refinance. It can also disappear if the market softens.

3) Appreciation (forced or market) : With forced appreciation you have some control over the ROI but with market appreciation you have none. The money isn't tax advantaged but you can defer taxes (1031 exchange). The money is expensive to put your hands on and it can disappear if values drop.

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  • Nathan M kiefer
    Rental Property Investor · south carolina and michigan · Member since 2023 · 348 posts · 226 votes
    2y
    Quote from @Jon Martin:
    Quote from @Kevin Sobilo:

    @Collin Hays, that's the beauty of Vegas my friend! lol

    So, in order to really "invest" in real estate for appreciation without VERY good ways to vet investments for appreciation, you would need to buy LOTS of real estate in different markets and of different types to diversify more like buying a mutual fund of stocks. Otherwise, it sounds more like gambling than investing.

    I strongly disagree with this. It's not rocket surgery to pay attention to demographic trends, economic signals, and basic human behavior to figure out what areas are a safer bet for investing. 

    Areas close to coastlines, universities, rivers, major highways, large employers, hospitals, airports etc are likely to keep growing. Especially if there is already a decent sized population center. Areas in the middle of nowhere that lack opportunities tend to stay that way. 

    With a bit more research you can really dial in areas that are likely to do better than others. That is hardly "gambling" where you at best have a 48-50% chance of winning.

    This is great, totally agree!
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  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    2y
    Quote from @Dan H.:

     Is your loan a 10 year loan? If 30 year financing, at year 10 you have a lot less than $500k equity if there is no appreciation. You also have achieved a return far lower than 14%. 


     10 year loan

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  • Collin HaysBusiness Member
    OP
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    2y
    Quote from @Kevin Sobilo:

    @Jon Martin, you didn't disagree with me! I didn't say those things didn't exist but the poster was completely unaware of them. So, apparently IT IS "rocket surgery" as you say.

    I "was completely unaware of them"?  Thanks for the continued votes of confidence.

    P.S.  I've been at this for a bit.
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  • Derrick Brusseau
    Member since 2015 · 8 posts · 1 vote
    2y

    Am I missing something? That would true if it were a stock investment. Are you including the cost of servicing the debt, taxes, insurance, maintenance? Those are all cash outlays. It's not a $100k investment after 10 years.

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    2y
    Quote from @Derrick Brusseau:

    Am I missing something? That would true if it were a stock investment. Are you including the cost of servicing the debt, taxes, insurance, maintenance? Those are all cash outlays. It's not a $100k investment after 10 years.


    > Am I missing something?

    In the described scenario, the property is cash neutral after all expenses.   So the guests are paying the mortgage, maintenance, cap ex, insurance, prior tax etc.  

    On a 10 year term, I personally think it would be challenging (but not impossible) in this high rate market to be cash neutral with a 10 year term. In addition, why would you choose 10 year over the 30 year if the return is mostly derived from appreciation. The higher the LTV, the greater the return from appreciation. Why reduce the return by accelerating the debt payoff which would reduce the return?

    Each investor makes their own investment choices.  OP has done exceptional as he has invested in a vacation market that until recently been outstanding for many years.  However, it appears his return could have been greater with more leverage (longer term loans, extracting money from property when it had significant equity to re-leverage, etc).  

    Best wishes

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Collin Hays:
    Quote from @Jeremy Horton:

    @Collin H.

    Wow 10x in 10 years

    Maybe a little optimistic there

    Point is, even if the property doesn't go up in value one dime, you are still at 14% annual return, with zero monthly cash flow.   And that's pretty pessimistic!


    This is the same argument that has been going on with BP  Cash flow is the only thing appreciation is gambling crowds.. and tended to be West coast against mid west.. Since we know nothing basically cash flows with 20% down out west to start with.. And 20% down in the mid west generally at 200k and under always throws off some cash flow.. Both are good.. but True wealth is created with pay down and appreciation. Cash flow is not necessary as long as your 100 plus or a few hundred negative or break even. its a long game so point well taken
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  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    2y

    I have noticed a similar trend that the new breed of buyers/investors are not the get rich quick types.  This is good as it is sustainable and realistic and those folks are in it for the long haul.

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  • Alan F.
    Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes
    2y
    Quote from @Jay Hinrichs:
    Quote from @Collin Hays:
    Quote from @Jeremy Horton:

    @Collin H.

    Wow 10x in 10 years

    Maybe a little optimistic there

    Point is, even if the property doesn't go up in value one dime, you are still at 14% annual return, with zero monthly cash flow.   And that's pretty pessimistic!


    This is the same argument that has been going on with BP  Cash flow is the only thing appreciation is gambling crowds.. and tended to be West coast against mid west.. Since we know nothing basically cash flows with 20% down out west to start with.. And 20% down in the mid west generally at 200k and under always throws off some cash flow.. Both are good.. but True wealth is created with pay down and appreciation. Cash flow is not necessary as long as your 100 plus or a few hundred negative or break even. its a long game so point well taken

     Jay, sometimes I don't understand these threads. Do these investors have w2 jobs which are better for obtaining loans? Then the tax deductions are better as in SALT deductions? 

    1Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    2y

    Increased equity and appreciation are what really matters to me. However, without positive cash flow I wouldn't be able to get financing for additional rentals.

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  • Nathan M kiefer
    Rental Property Investor · south carolina and michigan · Member since 2023 · 348 posts · 226 votes
    2y
    Quote from @Collin Hays:
    Quote from @Kevin Sobilo:

    @Jon Martin, you didn't disagree with me! I didn't say those things didn't exist but the poster was completely unaware of them. So, apparently IT IS "rocket surgery" as you say.

    I "was completely unaware of them"?  Thanks for the continued votes of confidence.

    P.S.  I've been at this for a bit.

     @Collin H.

    Great initial post, I always find some of the assumptions on these forums interesting regarding what people do and do not know. I appreciate the original post and it got some good thoughts provoked. Thanks for sharing! 

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