Worcester-Why you should buy LOW CAP RATE for your first Investment
With Multi-Family investment, I always hear all my clients looking for a 10 CAP or the 1% Rule. They think this is the HOLY GRAIL. Solid Real Estate investment is based on long-term growth through appreciation of a leveraged investment. Don't get me wrong, cash flow is great. Cash flow gets you the ability to scale and move into real estate full-time. However, most people have other jobs and are looking for a solid annuity investment backed by real estate that they can see and show their friends. Most people own a home that they live in, and this is an investment. We have lots of investment opportunities, but most are making the choice between the stock market and real estate.
Comparing Stock Market and Real Estate Investments
If I put $100k in the stock market and do very well, getting 10%, I make $10k a year. There are few transaction costs, and I am mostly liquid. In real estate investments, there are transaction costs, closing costs on the way in, and broker costs on the way out. And I am not as liquid. That being said, the key is leverage. When I take $100k and buy a $400k multifamily that covers my mortgage costs and pays me a decent return on my $100k investment, I actually win in three ways.
Ways to Win with Real Estate Investment
1. I get a cash flow return on my $100k: $626/month or $7,512/year (almost as good as the stock market). 2. I get to depreciate the property over 27.5 years: $14,545/year or another $5,090/year in tax savings if you are at a 35% tax bracket. 3. I get leveraged appreciation: If the property goes up 5%, that is $20k in equity. Typically, the good places have lower cash flow and lower CAP rates, but don't shy away from these properties if they provide any cash flow and will provide appreciation over the long run.
Reasons for Low Cash Flow
1. Low Rents - those go up over time. 2. High Price - it is better to overpay for a good place with good tenants than to underpay for junk with bad tenants. 3. The property works, so you don't have to spend money fixing things. If I take the same property and add $225/month or $75/door in property management, I go to a 5.5% CAP rate.
Conclusion
If you can get a good property you can manage yourself with limited effort, you save a lot of money. The moral of the story is: If you buy a good property that will appreciate over time and that you can self-manage, it may perform as well as a property with great cash flow that needs work and management. Posted
Comments