I know this one sounds ridiculous, but I see it every day. It is normal that you want to invest for the best returns possible and that is admirable. What does not make sense however, is all the people I see skip over one great investment after another in search of unrealistic returns.
What is better? A sustainable single digit return or an unsustainable double digit return?
Again, it sounds ridiculous but I see this ridiculous behavior every day and it frankly is very hard to watch. For some reason a property that is 80 years old in a questionable area that produces a 12% return (on paper) sounds more appealing to someone when a 8-9% return on a 10 year old property in a nice area does not have any appeal.
It is clear that the only focus being looked at is the short term return. A long term return on paper however looks much differently. I always suggest looking at an investment at least for a 5 year hold time and running a pro-forma based on a 5 year projection.
Looking at a true pro-forma report where you look at realistic expenses for holding a property over an extended period of time will create a more clear picture of the returns on the property.
Based on the scenario above, an older property tends to need more repairs and updates. Over a 5 year time frame those repairs can add up and most importantly subtract from positive cash flow. Then consider the difference in annual rent increases. Will a newer property in a nice area and an older property in less desirable area be able to increase rents at the same pace?
How about appreciation
While cash flow is first and foremost, will these two properties increase in value the same?
Investing in a property is much more than just finding a property that has a pro forma that will give you the infamous double digit return. Seasoned investors look more for a long term sustainable ROI that will give them solid returns.
Holding out for unrealistic returns often stops investors from investing and then they are always asking how these seasoned investors keep finding the money makers. The difference, of course, is knowing how to truly evaluate the investment long term.
The key to successful real estate investing starts with identifying your objectives, things like cash flow, growth, lifestyle, etc. Then going with a selection of the location for your BEST investment, selection of the property, quality of the property, exit plan and so on.
Are you letting greed get in the way? All too often people get wrapped up in the greed and let things they keep hearing cloud their objectives.
Some items you often hear are things that new investors spend too much time focusing on, things like…
20 plus percent returns:
High returns like these are not sustainable and therefore really do not exist. These returns are based on a very low acquisition price and these low acquisition prices are only found in areas that are depressed and of a high rental district. These low priced homes typically are older in age with expensive repairs on the horizon. High rental districts typically sell to other investors and therefore your ability to get appreciation is very limited.
Buy for only 20k, 30k:
You get what you pay for. Seasoned investors never believe they can get sustained returns off of such a small investment. They understand these homes are subject to mechanical, plumbing, electrical and roof repairs and their low entry price is suddenly absorbing all their returns.
Always follow up with your own diligence, does the area have a growing population, (I know of 20K properties being promoted that are in areas of massive population shrinkage), this does not bode well for any appreciation and cash flow is in jeopardy if the population decreases and renters are leaving the area.
Do not let your greedy side be responsible for you missing out on the great opportunities that are upon us. We all know that the most important aspect of real estate is location. I totally believe that the second most important aspect (for the real estate investor) is sustainability.
To get sustainability you want to make sure your investments are in great areas of growth, in markets at high concentration of owner occupied homes as your exit strategy for optimum returns is to sell retail to the end user.
The Greed factor:
Finally as the window of opportunity continues to tighten, sitting on the sidelines and holding out for unrealistic returns continues to be the number one thing that stalls out new investors. The greed factor will literally stop any sort of profitability from ever taking off.
Newer homes tend to be in higher concentrated areas of home owners where the rents will be higher, the repairs will be lower and when time to sell can be sold to the retail buyer bringing you optimum returns.
Having a desire to make great returns on your investment is great as long as that same desire is not actually getting in the way of you actually making great investments