I Turned $7,000 into $25,000

What a wild year 2020 was, for so many different reasons. As we enter 2021, instinctively we start to think about our goals and objectives for the year ahead. For me, that process naturally includes looking at my finances, investments, and rental portfolio to identify where my opportunities are in the year ahead. At the beginning of the year, I am reviewing the financials on my rental portfolio for the fourth quarter and year-end. Often this leads me to looking at equity and deciding if this is the year to sell a property or ten.
I was talking with a colleague about Tesla’s stock price, he drives one and I knew he owned some stock, when he said, “I turned $7,000 into $250,000.” I was blown away, that seemed like such a huge return on investment, how exciting! My next thought was, “well you must cash out right? I mean, how much higher can it go, cash it in!” For those of you not paying attention, Tesla’s stock price has been on a tear the last two years and completed a 5:1 split in late 2020 and is up another 60% since then! He went on to explain that he bought 85 shares when it was $85 a share (early 2013). I dug in a bit to see if he would consider selling the stock as the price must be near the peak (except that it has continued to increase). Immediately I felt like every person who comments on the real estate market, without having the specific information to understand why prices are up.
Later it hit me that the huge gain in the stock price was very similar to returns I had seen on rental properties. Using what we used to just call the “buy, fix, fill and refi”, now coined the BRRRR strategy. Back at the time, Tesla’s stock was trading at $85 a share, I was still buying rental properties with little money out of pocket with hard money, refinancing, and holding long term. Quickly I counted multiple properties that were able to turn less than $10,000 into $250,000 in equity over the years! I didn’t have the same kneejerk reaction about needing to cash out the rental property as I did the stock, why is that?
Rental real estate is something I feel like I understand very well, considerably better than the stock market and infinitely better than a battery company that sells cars. in January 2020, Tesla’s market capitalization ($800B) is almost nine times that of Ford ($35.5B) and GM ($61B) combined, while selling almost nine times fewer vehicles in 2020. This is a bit of tangent, but to illustrate that it is difficult to understand. What I can wrap my mind around that you buy a property, select the best debt and equity structure that fits your needs and money comes out the front door. This business has been around far longer than electricity, let alone electric vehicles!
So, what is the difference between the two investments? There are many, but I will focus on two, cash flow and volatility. Cash flow, for simplicity, is the money that comes in after expenses are paid. If a property cash flowed on average $500 per month for the time period of the investment (7 years) it provided $42,000 that you could spend or reinvest. The stock investment did not provide a dividend at that time, but also did not include any backed-up toilets or calls from tenants! Volatility goes both ways, up and down. Real estate has been on an upward trajectory at a rapid pace relative to historical averages over the last 10 years. Tesla, too, has experienced insane growth in market cap, with values dropping and increasing by as much as 15% in as little as one week. Unlike real estate, the stock can also be sold at market price in seconds.
Anytime you consider selling an asset, you must ask what will I do with the money? Save it, spend it, or invest it. Which is the exact conversation we had when I dug in about selling the stock – when you have $250,000 in your pocket, what do you do? Of course, peel some off for taxes, but where do you go get an acceptable return right now? You can go back in the market in hopes of picking another stock or fund that will deliver a similar, or even potentially a more stable return. Search high and low for a real estate deal that might squeeze a 6% cap rate. Buy 2.5 new Tesla’s 😉. The replacement investment is what I believe keeps so many investors from selling assets that they have enjoyed a big upside on, I think partly because we inherently expect the same performance as time goes on.
Switching back to real estate, I am sure many of our readers have experienced strong growth in their portfolios, is it time to cash out of some of these properties? One of the great benefits of real estate is the tax-advantaged gains, whether that is selling and taking the chips off the table or reinvesting the money into a higher basis with a 1031 Exchange. I own rental property for cash flow, building a portfolio that can support the lifestyle, adventures, and dreams of my family. I often look at my portfolio to see if it is time to replace some of the properties with newer or easier to manage units. I don’t see many scenarios where I would be able to get better returns, but that may not be necessary because of the big increases in equity over the years. Because I was able to buy properties with so little money down, and have experienced a huge gain in equity, a replacement property that might be priced high is all relative when my initial investment was so low.
So, I am curious, what are you doing? Are you buying, selling, trading, or sitting still with your investments? [email protected]