Tuesday, August 26, 2014
Byline: Michael Dominguez
We have a unique investment opportunity as real estate professionals. We have seen the real estate pricing trends over the last few years. We are also market experts in our local communities. We have the ability to view way more homes than most investors. Heck, we have even been instrumental in helping many of our clients build a lot of wealth through real estate.
So why is every sales rep and broker not investing in real estate? The most common answers I hear are:
- I don’t want to take the risk.
- I don’t have the time to do what I’m already doing. I know I don’t have time to manage a property as well.
- I’ve seen my share of bad tenants. I have no interest in being a landlord.
Let me try to answer each of these concerns.
Risk? Any time you put your money into any investment vehicle, there is an element of risk. In my case, I owned a pet food franchise for many years. I’ve also invested in mutual funds and stocks with mixed results. For years I had negative returns (I lost money). I took silly risks. I invested in tech stocks that flopped. I invested in various mineral stocks that never went anywhere. It wasn’t until much more recently that I changed my focus to blue chip companies that I understand and researched prior to investing.
More recently, I’ve taken a page out of my investment property strategy, looking for “cash flow” paying dividend stocks. The thing is, there really are not any leveraging opportunities for the stock market. Yes, there are options, but, although I can feel pretty good about a particular company, I can’t personally control their short-term successes or failures. The thought of rolling the dice with leveraging in the stock market feels like too much of a gamble for me.
But when it comes to real estate, we know what we are talking about. We can choose investments in good areas, in reasonable condition and help mitigate the risk. I’m confident that at least once over the past month, you’ve helped one buyer “off the fence” by explaining how the values in that area have appreciated steadily over the past number of years. Now is the time to take your own advice.
Time? I obviously don’t know your schedule, but I can bet that the wealth you can generate with one investment property can outperform multiple real estate transactions over the course of a year. With proper leveraging, a solid investment should see some monthly cash flow and mortgage pay down. But the big prize is the appreciation. A property valued at $300,000 needs a $60,000 capital investment. But appreciation is on the full value of the asset. A five-per-cent growth brings the value to $315,000. With mortgage pay down and cash flow, you are looking at a return of $20,000 to $30,000 on the first year alone on an investment of $60,000. Now multiply that return over 10 years. Even if the appreciation is a very conservative two per cent, the profit is outstanding. On my typical property I manage, I spend about three to five hours a month. I say, make the time.
Tenants? I’m not going to lie to you, dealing with tenants can be a royal pain. But, by making the properties as nice as you can, you should improve the tenant profile. Remember your end goal is to build wealth. The tenants are your clients. They are paying your expenses while your asset is appreciating. Besides, if it was too easy, everyone would do it.
If you are determined not to deal with tenants, consider a joint venture partner or property manager. The partner can do all the day-to-day work and all it costs you is half of the profits. If you believe in real estate, but just don’t want to be hassled by the tenant’s concerns, there is always a solution.
As real estate professionals, we have insider knowledge to probably the greatest investment vehicle known. We have all seen the returns some of our clients have experienced. If you are looking to build wealth, go with the vehicle you know the best.
If your office has any sales reps who took action and bought properties 20 years ago, ask them about the wealth they have generated (assuming they haven’t retired and are living off their cash flow). I’ll wager they likely own the properties free and clear, or have used the proceeds for other investments or personal enjoyment. Either way, they are better off for having done the purchases. Now is your chance to invest in what you sell. Let’s see where you are in 20 years.