On Monday I did a post titled Real Life Olathe Investment Property Story: Part I. It will be helpful for you to go back and read that. But what we found was that through using the Buy & Hold Forever theory of real estate investing that you could turn an initial investment of $21,200 into about $102,149 in about 11 years.
Not too shabby.
But what if, as it appears the original owner of said duplex might have done, the real estate investor had sold those properties in the winter of 2001 and rolled the proceeds over into other Olathe duplexes that would have been for sale at the time?
Well, I’m glad you asked. It’s important to note that now I move into the hypothetical because I do not know this real estate investor from Olathe nor do I know what he did or didn’t do. But if he had been my client I would have probably recommend what follows.
Let’s say he sold the duplex, as he did, one side at a time. Seeing that the duplex was liquidated by 12/2001 I know that his net proceeds at closing would have been right about $76,500 after sales costs, including probable buyer closing costs paid by seller.
Now, remember that $21,200 of that was part of the original investment capital used to purchase the duplex. But what I would have recommended was staying in Olathe, since I see growth here for quite sometime to come. In 2001, the investor could have put 15% down on a rental duplex priced $160,000 and it would, from there, completely pay for itself each year.
15% down on $160,000 would be $24,000. (We’ll multiply all this by 3 when we get to the end.) So;
Purchase Price $160,000
2008 Sales Price $197,500
Sales Costs $ 13,825
Net Appreciation $23,675
Now let’s figure he financed on a 30 year amortized loan at 7.0% interest.
Loan balance at origination $136,000
Loan balance at sale $125,891
Net Principal Reduction $10,109
Now keep in mind that all of this is x’s 3! So let’s figure this out. Appreciation to today’s sales prices plus principal reduction after sales costs of all 4 units (the original duplex and now these three duplexes) plus the down payments totaling about $75,000 nets us a new equity position of about $174,000.
Did you read that right? Yes, I said $174,000.
Now, with your original $21,200 you could have done a lot of things. Including making a nice little profit by using the Buy & Hold Forever strategy. $102,000 or so if I remember correctly. But by keeping your money leveraged on Olathe real estate you have turned that $21,200 into $174,000.
Now tell me what your annual return is!
Again, we haven’t calculated miscellaneous and property upkeep expenses. But as I mentioned above, at 15% down those properties should have maintained themselves. And we have also NOT calculated Depreciation or Cash Flow Before Taxes.
Of course I would always recommend you calculate these numbers yourself. These appreciation rates I have used are actual, not hypothetical. And they include whatever “correction” you think Olathe may or may not have gone through.
Real estate investing in Olathe, Kansas City or wherever is not for everyone. Some would rather park their money in a money market account or mutual fund or something of the like. But for the life of me I cannot figure out why you wouldn’t want at least one or two rental properties working for you. Can you?
It looks to me like real estate investing can be a little like finding the goose that laid the golden egg. Now that will help you to fund that Retirement Worth Having.