$900 a Month for 20 Years...

[Dominique]

$900 a Month for 20 Years...

By Ray Reuter

So, interesting story...stick with me for 5 minutes, you'll like this. I'm sitting around the REIN lunch room chatting about real estate (weird) and it was as if the sky opened up, the fog lifted and I had this epiphany...

"My worst case scenario... if I buy the way REIN teaches... is a free and clear asset... some years down the road... that my tenants bought for me."

I think I can live with that! Here is some super simple math showing exactly why residential real estate is so cool.

Let's say you go out and buy a single property TODAY for $300,000 (call it a suited house) and based on your conservative numbers, this property does nothing more than break even every month (and we're buying in a stable, well-performing market based on the fundamentals). No cash flow - just break even.


Then we're going to assume that the market will stay flat forever. We both know the market will go up, it will go down, but assume that over the next 20 years those ups and downs equate to a FLAT market...it's still worth $300,000 in 2033.

Still with me? Good.

Now over that 20 years the property just breaks even, nothing more, nothing less. Sure we've been up some months, but we've had some repairs & maintenance, some vacancy...so, over those 20 years we just break even. Some would call this a boring piece of real estate... even a 'non-performing' piece of real estate.

Call me crazy, but guess what, I call that a $900 a month savings plan that someone else (called my tenants) paid for.

That's right - after 20 years of holding this 'non-performing' piece of real estate I'm left with the equivalent of someone giving me $900 every single month for 20 years...I call that one heck of a savings plan.

Tell me, do you put $900 away every month right now? Maybe...but that's still YOUR money, money you had to work hard for! I'm talking about $900/month that someone gave me for the last 20 years, and it's mine...all from an unexciting, 'non-performing', piece of residential real estate. Want the math?

Here it is. I purchased for $300,000, I put 20% down plus closing costs, so roughly $65,000. In 2035, 20 years from now, I sell it for the exact same price...$300,000. I get my $65,000 investment back. I pay the Realtor and closing costs and I'm left with roughly $215,000.

That's with no cash flow, that's with no appreciation, that's simply my tenants paying down my mortgage (both principle and interest) for the last 20 years and leaving me with a free and clear property.

So $215,000 divided by 20 years = $10,750 per year. Divide that by 12 months = $896/month... that someone else gave me.

Sure we can calculate opportunity cost for your $65,000 investment, but tell me, would you be even mildly happy if someone, some stranger, was contributing even $500 a month into a savings plan for YOU & YOUR FAMILY for the next 20 years????

That's like someone else contributing to your RSP fund every month. You OK with that?? Of course! Go ahead and poke holes in it if you want...

"Ray, no one gets a 20 year mortgage!" OK, do you think with some strategic planning you can have this property paid off after 20 years...especially if you bank on no cash flow? I say of course!

"Ray, what about the roof, the furnace, etc???"

You're absolutely right. But let's be serious - over the next 20 years do you think my rent is going to go up or down? Do you think my property will be worth more or less in 20 years buying in a fundamentally strong area? Heck, even WHEN interest rates go up, guess what? So will my rent! This is a no-brainer.

Maybe...just maybe, this makes sense. Bottom line - real estate is simple...it's just not easy! And we're not talking get rich quick, we're not talking some 'sexy' investment strategy that 0.1% of investors ever pull off, just a simple old piece of real estate that you rent out and maintain for 20 years that YOU have 100% control over!

IT'S SIMPLE - I invest $65,000 to make $215,000 (before tax)...I'll take that all day long, and that's ONE PROPERTY. Now imagine if you bought 10 properties just like that over the next few years (which isn't rocket surgery).

It's the power of leverage, the power of having control of your investments, and the power of being in the business of putting a roof over someone's head (a business that ain't going anywhere any time soon!!!)

Think about it, read this a few times - this stuff works.

 

[GaryW]

rent out and maintain for 20 years that YOU have 100% control over

And most people worry about having to maintain a property! Well , hopefully this excellent article you have written puts the next ride to the rental suite for maintenance in perspective!

 

[Matt Crowley]

This is a no-brainer.

Maybe...just maybe, this makes sense. Bottom line - real estate is simple...it's just not easy! And we're not talking get rich quick, we're not talking some 'sexy' investment strategy that 0.1% of investors ever pull off, just a simple old piece of real estate that you rent out and maintain for 20 years that YOU have 100% control over!

Quite simply, investing in real estate is not a no-brainer. I really do appreciate how exciting it is to see that when a business has revenue greater than expenses it is going to make money. But make no mistake, investing in real estate does not create "special" money any different than an owner of a plumbing or insurance company. Lots of people lose EVERYTHING THEY HAVE investing in real estate because the downside risk is larger than with almost any other start up business.

I am 100% invested in real estate and have been doing it profitably for years. However, I've seen lots of failures and hyper investors lose their life savings.

The #1 problem with this post: you do NOT have 100% control over the asset!

You are SELLING control of the property to the tenant and they have enormous rights:

• the right to normal wear and tear (and what exactly is that anyway, judges disagree: damaging a countertop with burns in it may be normal wear and tear? Not a big deal but now you have several weeks of maintenance after a tenant leaves just to make the fixes and can't collect a dime for lost rent because its normal wear and tear)
• The right to smoke in the property: unless it is marijuana smoke or something really toxic, the RTA doesn't really have the teeth to evict someone for smoking
• The right to bring a pet into the property: pets can cause a lot of damage. This is not usually enough to evict a tenant over either according to the RTA.
• You can only fix what you know about and depending on the tenant, they may have much of a clue on what is really a concern and what isn’t

Downside risk investing in real estate is LARGER than UPSIDE profit

When you sign a mortgage contract, you are tying all of your assets to the payment performance of that one property. Annually, an average lease for us offers about $300 a month in “cash flow” which is only a meager $3,600 a year. That often gets eaten up by replacing a furnace or a roof or something like that. So the upside is practically nil. The downside is that this one property’s performance can bankrupt you and you lose all of your property. You will not be able to buy another piece of real estate for seven years. Your credit will be destroyed and it will be nearly unaffordable to take on any form of commercial debt for years. Here we have an upside of pennies and a downside risk of everything you own.
You do NOT have control over the asset. You have sold most of those privileges to the tenant. Most of my tenants have a net worth somewhere between -$20,000 to $10,000. So there is literally nothing to go after if they damaged the property. They have enormous influence on the property. They are so crucially important to the business and its operation. They have the power and control, not me. I have the specific rights given to me by the RTA. They are in that property every day.
When you are playing with hundreds of thousands of dollars it is downright foolish to be talking like this is a no-brainer. It isn’t. It is not easy. Tenants are not all reasonable. There are many professional tenants who pride themselves on making your life miserable and manipulating the RTA to get whatever they want. Hyper investors are not going to make it through these storms. You are dealing the largest monthly purchase these folks make and they are in your product at their full privileged access 24-hours a day. This isn’t like a restaurant where you have to keep them happy for the 3 or 4 hours they are guests. They are guests around the clock. And who knows when they will have a bad day and you will just have to deal with unreasonableness?

Investing in real estate is like any other business. The payoffs seem extremely small for the amount of work you dedicate. Your clients do not appreciate the amount of work you put in. It is twice as much work as you imagined and things take twice as long to accomplish as you hoped. It is not any more valiant than any other business and takes a LIFETIME of dedication to be truly successful…and even then, you have had to make a bundle of money for other people and have taken a small part of that for your services. There is no need to be hyper. You have not found anything special in real estate that is not potentially present in any other form of business.

 

[Thomas Beyer]

• You have not found anything special in real estate that is not potentially present in any other form of business.

What is special is that you can borrow money at 2-3%. No other business let's you do that. That is why unlevered real estate makes no sense, as the yield is very low compared to many other business, say a UPS or McDonald's franchise, a restaurant or a plumbing business. Only if you combine the leverage potential up t0 80%, i.e. borrowing at today's 2% range and investing that at 5-7% makes is very profitable !

As to the rest of your comments: indeed real estate can be very profitable, but it is a lot of work and there is a degree of risk if you use 75-80% mortgages if market dips or tenants cause damage.

 

[bb2]

$900 a Month for 20 Years...

By Ray Reuter

So, interesting story...stick with me for 5 minutes, you'll like this. I'm sitting around the REIN lunch room chatting about real estate (weird) and it was as if the sky opened up, the fog lifted and I had this epiphany...

"My worst case scenario... if I buy the way REIN teaches... is a free and clear asset... some years down the road... that my tenants bought for me."

I think I can live with that! Here is some super simple math showing exactly why residential real estate is so cool.

Let's say you go out and buy a single property TODAY for $300,000 (call it a suited house) and based on your conservative numbers, this property does nothing more than break even every month (and we're buying in a stable, well-performing market based on the fundamentals). No cash flow - just break even.


Then we're going to assume that the market will stay flat forever. We both know the market will go up, it will go down, but assume that over the next 20 years those ups and downs equate to a FLAT market...it's still worth $300,000 in 2033.

Still with me? Good.

Now over that 20 years the property just breaks even, nothing more, nothing less. Sure we've been up some months, but we've had some repairs & maintenance, some vacancy...so, over those 20 years we just break even. Some would call this a boring piece of real estate... even a 'non-performing' piece of real estate.

Call me crazy, but guess what, I call that a $900 a month savings plan that someone else (called my tenants) paid for.

That's right - after 20 years of holding this 'non-performing' piece of real estate I'm left with the equivalent of someone giving me $900 every single month for 20 years...I call that one heck of a savings plan.

Tell me, do you put $900 away every month right now? Maybe...but that's still YOUR money, money you had to work hard for! I'm talking about $900/month that someone gave me for the last 20 years, and it's mine...all from an unexciting, 'non-performing', piece of residential real estate. Want the math?

Here it is. I purchased for $300,000, I put 20% down plus closing costs, so roughly $65,000. In 2035, 20 years from now, I sell it for the exact same price...$300,000. I get my $65,000 investment back. I pay the Realtor and closing costs and I'm left with roughly $215,000.

That's with no cash flow, that's with no appreciation, that's simply my tenants paying down my mortgage (both principle and interest) for the last 20 years and leaving me with a free and clear property.

So $215,000 divided by 20 years = $10,750 per year. Divide that by 12 months = $896/month... that someone else gave me.

Sure we can calculate opportunity cost for your $65,000 investment, but tell me, would you be even mildly happy if someone, some stranger, was contributing even $500 a month into a savings plan for YOU & YOUR FAMILY for the next 20 years????

That's like someone else contributing to your RSP fund every month. You OK with that?? Of course! Go ahead and poke holes in it if you want...

"Ray, no one gets a 20 year mortgage!" OK, do you think with some strategic planning you can have this property paid off after 20 years...especially if you bank on no cash flow? I say of course!

"Ray, what about the roof, the furnace, etc???"

You're absolutely right. But let's be serious - over the next 20 years do you think my rent is going to go up or down? Do you think my property will be worth more or less in 20 years buying in a fundamentally strong area? Heck, even WHEN interest rates go up, guess what? So will my rent! This is a no-brainer.

Maybe...just maybe, this makes sense. Bottom line - real estate is simple...it's just not easy! And we're not talking get rich quick, we're not talking some 'sexy' investment strategy that 0.1% of investors ever pull off, just a simple old piece of real estate that you rent out and maintain for 20 years that YOU have 100% control over!

IT'S SIMPLE - I invest $65,000 to make $215,000 (before tax)...I'll take that all day long, and that's ONE PROPERTY. Now imagine if you bought 10 properties just like that over the next few years (which isn't rocket surgery).

It's the power of leverage, the power of having control of your investments, and the power of being in the business of putting a roof over someone's head (a business that ain't going anywhere any time soon!!!)

Think about it, read this a few times - this stuff works.

Excellent article and I can attest to the fact that it works!
I bought my first property in 1982. Remember the 80's? It was a crazy time. Interest rates were high.
My interest rate was around 14%. I was in my 20's at the time and made that work. I just sold that house a few years ago for 275,000. I paid 52,000. I refinanced that house twice to buy other houses. Over the years I surprisingly did not have to put in a lot of money to maintain it. It was a small 800 sq.ft wartime semi bungalow by NAIT in Edmonton. I saw a lot of ups and downs in the market during those years. As long as you have a long term outlook and do your due diligence the power of real estate is astounding.
In the first 10 years of owning that house there was not a lot of appreciation, but at that time I wasn't buying for that. The tenant was paying down my mortgage and that was enough for me at the time.
I also saw buying real estate as a forced savings plan. I knew that if I held it long enough, managed it well and eventually paid off the mortgage I would have some nice cash flow every month.

 

[Thomas Beyer]

... I just sold that house a few years ago for 275,000. I paid 52,000. I refinanced that house twice to buy other houses.

Indeed that made it a great investment. Real estate is like a THREE COURSE MEAL: the appetizer ( cash-flow ), the main course (mortgage paydown) and the dessert (equity upside). All three make a great combo, but just one main course is OK, too, as the original article by Ray Reuter indicated.