Prudent investors focus on Return on Investment (ROI) to guide them in real estate investments. Recently, there has been so much garbage that has sprung up about "flipping" real estate that much of the investment advice is downright harmful, due mostly to the ease at which information can be spread on the internet.
Today's blog is the third and final post in a series discussing real estate investments, starting with How To Place A Value On Your Home and continuing with Friday's post about utilizing a Long-Term Real Estate Strategy. Today, we will look at a real world example using an available listing in the Tallahassee real estate market. This same example format could be used anywhere.
Before we get into the details of our example, I would like to address the reader question that lead to this real estate investment series. A long-time reader asked
Joe, your blog and market reports say that we will see home values drop for 2 more years, but you also say that you think things will be good after all of this passes. What is your advice to somebody who wants to invest in real estate. Should I wait 2 more years until values bottom out?
This question is very typical, and that is why (see post title) I advise that ROI should guide real estate investments. If you think prices are dropping, but will resume rising, you can create a model to determine if investing now makes sense. Think about this, if the ROI you can achieve with a wise real estate investment is significantly higher than any other you can find, what choice do you have? You can choose a lower ROI because (prices are dropping), or you can choose a higher ROI because it is available.
The mistakes being made by those who are waiting center on "the market." Nobody locally is large enough to buy the market, so they should focus on individual opportunities. Not everything is sold at "market value," so if you are a single-property investor, you can find a deal that gets you in and will help you secure a better-than-market return on your investment.
An ROI Real Estate Investment Example
The following example is available today. This is not theory, rather a real-world example of what an investor could choose to do today. The only way one can refute the results at this time by refuting any of the key assumptions used to evaluate the opportunity.
In the example below, I have shown that a $21,600 investment will yield an annualized return exceeding 16% if the investor will hold the property until the property sell strategy (explained below) is attainable.
The sell strategy in a long-term real estate investment requires one to have a specific target in mind before an acquisition is made. My recommendation for investors today is to key in on what it would cost to replace a piece of property once the market resumes growth. Due to the glut of homes on the market today, one can buy a home at a significant discount to cost today, lease the property for a respectable cash flow during the hold cycle, and then sell the property once "cost" is a factor in the market again.
The table below shows the anticipated ROI for this example for hold times of 5 through 17 years. I seriously doubt we will see cost return to the market in less than 5 years, and I suspect 17 is very, very conservative.
An investor who purchases the example above would expect an annualized ROI (Return on Investment) of 18%. Considering all that is going on in the world, I suspect most people would be excited about 18% today!
The example above was just "plucked" from the "what is available" list of homes for sale in Tallahassee. Utilizing our proprietary property selection tools, we could find examples that perform even better. If you want to know more about buying a real estate investment, just drop us a note to schedule an investor goal-setting interview.
Joe Manausa, MBA is a 25 year veteran of real estate brokerage in the State of Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.