Long term real estate investing has this misconstrued reputation as the Crock-pot of real estate investing strategies: Low and slow, set it and forget it and at some point you end up with something good enough. You don’t have to be a master chef to work it either. You purchase some properties, you let them “simmer” over time and before you know it, they’re paid off.
I have a major problem with that analogy. I happen to believe that when executed properly, a solid long term real estate investing strategy can be more like a Joel Robuchon seven course meal.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
It All Starts with Your Expectations
Henry Ford said: “whether you think you can or think you can’t – you’re right.”
When you start out aiming low and think all you’ll be able to do is purchase “a couple of rentals” and pay them off over time, that’s all you’ll be able to do. So today, I want to show you what a carefully planned and precisely executed long term investment strategy is able to accomplish in a relatively short period of time. My hope is that as you see what’s possible, you’ll avoid stunting your expectations and set them free to accomplish much more important goals.
A Million Dollars in 13 years and 4 months
Let’s take a look at a case study. Mr and Mrs. Smith are a couple in their mid 40s earning a combined annual income of just under $200k with available liquid capital of about $400k in addition to other investments (stock, life insurance, emergency funds etc.). They want to invest this hard earned capital in quality real estate using a long term strategy. Here’s what they would be able to accomplish given current market conditions in Houston, Texas (our home base):
- Purchase 9 investment properties @ $150k per property = $1.35M of Asset Value
- Put down 25% of the purchase price plus an additional 2% for loan costs = $364.5k Capital Invested
- Take out conventional loans for 75% of the asset value purchased = $985.6k Total Debt
- Finance the debt for 15 years at 4% interest fixed over the loan term
- Amount of Principal paid down after first year: $48,699 (this goes up every year)
- Additional positive cashflow generated annually: $8,100
- When this cashflow is used to accelerate the debt payoff, the entire portfolio is free and clear in 13.3 years
- At zero appreciation that’s $1.35M in free and clear real estate, after a capital investment of $364,500!
- At 3% annual appreciation (the current rate of inflation) that’s $2M in free and clear real estate
- Bonus: Each free and clear property also yields $11-12k/year in positive cashflow for a projected income of 100k/year
You’re No Smiths
The biggest pushback I get when I present this to prospective investors is that for one reason or another, the hypothetical investor in this case study isn’t like them. Perhaps you don’t have sufficient capital to purchase nine properties. Or maybe you don’t have 13 years and three months to get there – you need to retire much sooner.
Look, it’s not important that your scenario match the hypothetical. What’s important is is to come to the realization that the “typical” Smiths (yes, even the ones with the resources) aren’t coming close to matching the results I outlined above. That’s because the ones that dabble in real estate investing set their sights too low and end up with the underwhelming “couple of rentals”. And some don’t even dabble because most investment options available are performing in the double digits this year (and it’s not hard to think that you too can pick stocks like a pro). That’s until you experience the cannibalization of your hard earned money for the umpteenth time and keep wondering how you could let it happen again.
Your resources may be just a fraction of the ones I described in the case study. Perhaps they won’t allow you to amass a million dollars of wealth in thirteen years. Here are some more important questions to ponder:
- Are the resources you do have, deployed to deliver maximum results?
- If you keep doing what you’ve been doing, where will your investments be in 13 years?
- Is it possible that there are other resources you possess that could get you to a million in the future (i.e time)?
- How did your investments perform in the last 13 years?
- Why would the performance over the next 13 years be any different?
Those of you reading this that have had outstanding results: Congratulations! By any means, keep doing what’s been working for you. But if not, I want to leave you with this. At some point thirteen years ago you made a decision, consciously or non, to follow a certain path with your money. If that path hasn’t led you to a place worth going, don’t you wish someone had been there to guide you in a different direction.
Well, this is that moment for the next thirteen years.
Photo: Kristina Alexanderson