Most people get involved in Real Estate Investing because they would like to eventually have a different lifestyle that permits them more freedom in their lives and gives them the independence to eventually say good bye to that J-O-B. If I were to guess, my guess would be that is a motivator in 75%+ of all people entering real estate investing.
The neat thing about Real Estate Investing is that if you have a solid plan that you input in a disciplined manner, freedom and independence will be yours. The challenge facing most Real Estate Investors is they do not approach Real Estate Investing as a business. They do not develop plans that they follow in a disciplined manner.
The second challenge among many Real Estate Investors is they believe they can make big bucks over night. Every late night TV guru that comes to town selling a seminar suggests that is reality. If that is the case, why are they spending their entire time presenting seminars. Wouldn’t investing in real estate be a lot more profitable and a lot less hassle?
Real Estate Investing is done best with at least a 5-10 year time horizon. Longer is better. If you can take that longer term perspective, you can take advantage of benefits of real estate that the quick turn devotees miss out on.
Appreciation is an obvious benefit they do not capture that you can and will with a long term perspective. When you look at the Front Range of Colorado the key time period appears to be five years. If you look at the history of appreciation in Colorado, you will discover that in the past 34 years, the worst 5 year period had an average annual appreciation of more than 4%. The average was around 7%. The quick turn people simply miss out on this.
You say, so what – what’s the big deal about 7% annual appreciation? That brings to surface the next huge benefit of Real Estate Investing. It is the ability to “leverage” your investment. The average home in America is purchased with less than 10% of the purchase price in cash. The balanced is financed. This is leveraging. It is controlling a large asset (like a house) with a much smaller asset (10% or less in cash).
Assuming a 10 to 1 leverage (10% cash in the deal), that 7% average annual appreciation actually becomes a 70% return on your cash investment. I refer to this as “cash on cash” return on investment. I will argue that in most cases this is the critical point of evaluation.
Another benefit they miss out on is the tax benefits of owning real estate – especially investment real estate. Depreciation is one of these. When you use it in a long term – never sell strategy, it is HUGE!
So, my approach to real estate is the same as the quick turn guys as it relates to buying low. You want to get the absolute best purchase price that you can. I advise most of my clients to avoid getting into repairs, rehab, fix up, etc. I think that takes you from the very profitable role of investor to the very low paying role of handyman.
In today’s market in Colorado, you should be able to buy 10-20% below market value. I would be suspicious of a discount greater than that. If it is there and your due diligence indicates it is real – fantastic. Caveat Emptor (let the buyer beware) certainly applies when you see gigantic discounts.
Now, the secret is to acquire the real estate at the best deal (price and terms) that you can. Then you want to let appreciation, leverage, and taxes do their thing. Working with a competent and forward thinking mortgage guy, you want to refinance whenever the cost benefit analysis makes sense. You will discover annual returns approaching 100% (cash on cash) when you consider all aspects of your investment. Those returns will change your life very quickly.
