Last week, I wrote a “meat and potatoes” post where three Houston investment properties in premium locations were dissected and analyzed thoroughly. (Read that post if you haven’t already. I’ll wait). Their locations were stellar: excellent schools, amenities and access. The numbers were solid: Positive cashflow, cash on cash returns between 8-10% and cap rates north of 7%. But anyone who reads this blog knows where I ultimately stand on this. It’s not about the properties. Real estate investing is all about the strategy. Here’s what I mean.
Real Estate Investing Before Blueprint
Let’s assume you purchased those three properties I analyzed in that post. To make the calculations simpler, we will assume they’re purchased at the same time. Let’s look at what was accomplished. Roughly $100k was invested ($86.5 in down payments + closing costs) to acquire a portfolio worth $432.5k which yields $8,855 in positive cashflow annually. Basically, this translates to a 9% return on investment: beats the hell out of your neighborhood bank’s CD and the stock market minus its bipolar volatility. The investor’s portfolio is expected to be paid off on your Lender’s schedule in 30 years. At that time, it will consist of three paid off 35 year old homes cashflowing at about 7% of whatever the properties are worth then. In the meantime, your cashflow amounts to little more than a nice bonus/part time income that can support your latte budget, a light bill and a couple of dinners out. So one may think: This strategy doesn’t work! To which I reply: What strategy?!
Real Estate Investing After Blueprint
It all begins with addressing The Timing. Any long term real estate investor is ultimately after cash flow but the real question is When. The overwhelming majority of clients with whom I have this conversation quickly realize that they don’t need the cash flow right now but instead, are looking to build enough cashflow when they arrive at destination. If that’s the case, then what could be accomplished by putting current cashflow to work to bring the destination closer and arrive at a paid off portfolio on your schedule? Glad you asked. Take a look at this (click on the image to see full size):
What just happened? I crafted a Blueprint investment strategy with those three featured homes using painfully simple but time tested principles. Since the investor doesn’t need the cashflow at the current time, we apply it to the mortgage balance on one of the properties while making the regular payment on the other two. In addition, I advise my client to add $500 from her monthly income as additional catalyst. The goal is to pour gasoline on the fire and obliterate that mortgage as fast as possible.
The result: The first property is mortgage free in 68 months – that’s a little over 5 and half years! What follows is an imitation of what happens in an avalanche. Since the first property is now paid off, the mortgage payment on that property now gets added to the cashflow with which we attack the mortgage on the second property. Since we are hitting it with even higher principal payments, that property is paid off in just 38 months. Rinse and repeat on the third property and voila: the last property is paid of in 35 months.
Moment of Truth
Let’s examine the difference that a well crafted strategy can make. After executing the Blueprint strategy, the investor would “arrive” at a paid off portfolio of properties worth $432.5k (at a very conservative zero appreciation) in 141 months (under 12 years). At that point, the annual positive cashflow would be $30k/year if rents didn’t go up one penny in 12 years. That folks, translates to a 19% annual return on $157k invested every year thereafter. The investor was able to just about triple that $157k in those 12 years leaving appreciation completely out of the picture. Skeptical about the numbers? Email me and I will send you a spreadsheet to look over.
The above analysis assumes perfect execution. But circumstances aren’t always perfect. Don’t want to invest the extra $500/mo? It will extend the journey by three years but lower your capital invested by 40%. So it’s a matter of what’s most important to you, time or money? Want to hold on to the cashflow for a month to ride through a temporary vacancy? You can totally do that. Cashflow of $30k/year is nice but won’t quite cut it? We can increase the asset value from which that cashflow is drawn by acquiring one or two additional properties. This concept is so powerful that detours may change it’s variables, but if you commit to execution, you will look back and won’t be able to stop smiling.
I can craft a Blueprint investment strategy for you, too. Give me a call at 713-922-2702 and I will get to work. Make this a great week!