It’s Called Buy & Hold Real Estate Investing

Yesterday I addressed those of you who may be stuck in the “No Sell Zone” of real estate investing.  I’m not gonna recap it here other than to say that we were looking at what happens if you are actually losing money on your real estate investments today.  By losing money I mean your yearly outgo is exceeding your yearly income. 

I’ve worked up a scenario below to show you that it’s not all that bad.  You can and will survive.  You may not make as much money as you hoped.  But it’s called investing.  Nothing is guaranteed.  (Keeping in mind that you probably bought on quasi-fundamentals to begin with.)

The Ground Rules
Below is just a worksheet example.  Obviously, you should not misconstrue this to be advice aimed at you or your situation without the competent advice of a real estate investment adviser familiar with your situation, your CPA or your attorney.

Also, we are gonna say that this buyer was thrilled to buy a $170,000 duplex in January of 2006 with 10% down at 6.5%.  His PITI works out to be roughly $1239/mo and he’s thrilled because he collects $1,350/mo in scheduled rents.  (I said scheduled.)  But he nor his REALTOR ever took into account vacancies, utilities when vacant, repairs, cost of handyman, advertising and other miscellaneous costs of owning investment property that totals up to about $2,800/yr. 

We are NOT figuring any rent increases for 5 years and then we lock it in at a 5% increase for the remainder of time.  (Are you still with me?  I’m trying to be ridiculously fair to the most pessimistic of our readers.)

And even though there is still appreciable growth in many areas of KC (no, I’m not kidding) I’m taking a “nuclear winter” approach here.  You’ll note the decrease in values followed by modest growth potential in the last few years of 3% and then 4%.  (Historically KC goes about 4.8%-5% a year.  Do the math.)

Lastly, we are NOT even going to take into account depreciation.  Or the additional tax benefits of owning rental property. 

Value Of Sample Investor’s Duplex
2006          $170,000                          
2007          $170,000
2008          $166,000
2009          $165,000
2010          $169,000
2011          $174,000
2012          $179,000
2013          $186,000

His year 1 through 5’s expenses run $17,668/yr.  ($14,868 in PITI and $2,800 in misc. expenses) and his income is $16,200/yr resulting in a net loss of $1,468/yr.  That’s a net loss of $7,340 over the 5 years.  Remember that.

Now in 2011 his rents increase 5% limiting his losses to $658/yr.  Over the 3 years that totals $1,974 and when added to the $7,340 totals $9,314. 

And since I generally recommend (case by case basis, people) in Kansas City exchanging your real estate investments every 5-8 years lets say sales costs are gonna run 6.5% off the 186,000.  So what do we have?

Sales Price             $186,000
Cost of sale           $ 12,090
Total of losses      $    9,314
Remaining loan balance  $135,645
Original equity       $17,000

Capital Gains        $11,951

See.  It wasn’t all  that bad.  If you had taken that original $17,000 and put it in a CD at your local bank at 5% per year you would have avoided a lot of trouble and headaches and risk but also only incurred a capital gain of about $8,117. 

Keep in mind we didn’t figure all the tax benefits along that way that would more than compensate you for your trouble.

Do I know when this correction period will end?  No.  Can I tell the future?  No.  But I’ve laid out a fairly bleak projection here and you still came out ahead.  And that’s if you bought too high.  What if you bought now when you have some leverage?

2 Comments

Filed under Personal Real Estate Opinions, Real Estate Investing

2 responses to “It’s Called Buy & Hold Real Estate Investing

  1. Joe

    Amen!
    And what about non-traditional approaches to acquiring real estate? The benefits there can be even more powerful as the leverage is totally in your favor! In challenging real estate markets like we are in today, you can swim with the school and get what the school gets or you can take a road less traveled and have significantly greater profit with far less hassle.

  2. There are many, many avenues out there. But this is a time for caution and experience. If you don’t have it you need to work with someone that does!

    Thanks for reading. Don’t be a stranger.

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