There are many ways to get rich quickly. You might win the lottery, rob a bank, or inherit money. But those are transfers of wealth... from the state to a gambler, savers to thieves, the dead to the living. To create wealth takes a good premise, time, skill, and persistence. Real estate investors transfer and create wealth in many different ways.
At the same time they offer people a good place to live, work, or conduct other activities at a competitive price, which is a valuable service and endeavor that you can be proud of.
Passive real estate investing does not require any business experience. As long as you’re blessed with reasonable intelligence and moderate common sense, it’s obvious the concept of owning income-producing properties in many markets today is a strong one.
Let’s take a quick look at the most compelling reasons why real estate today is a sound proposition and offers an exceptional opportunity:
Returns in Real Estate as an Asset Class Remain Strong Comparatively
A, B, and C category properties in many markets throughout the country are trading at low cap rates (are more expensive) but cash on cash yields of 6%-10%, IRR’s in the mid to upper teens and equity multiples of 2-3x are still possible in some value and growth markets.
Historically, these yields are attractive. But when you compare them with yields available elsewhere, they’re insanely good. Banks pay nothing, government bonds yield practically nothing, blue-chip bonds yield next to nothing, and stocks are likely in for a volatile ride.
Interest Rates at an All-Time Low
Interest rates on commercial and residential real estate loans are the lowest they’ve been. With that kind of leverage, your “cash on cash yield” (the amount of money you get back for the amount you put in) can reach double what we mentioned above – sometimes more.
No End to the Great Demand in Rental Apartments, Homes and other Commercial Real Estate
In the wake of the real estate bust of a decade ago, the current pandemic, and the escalating prices of homes, 10’s of millions of people have become renters. Add to that the continued migration to the Southeast and the rising costs of construction, demand for rental housing will outstrip the supply for many years to come.
Incredible Amounts of Money in Circulation Driving Value Up
The Fed is printing money at a rate never before seen in modern U.S. history. If it leads to inflation, real estate is the best asset class you can own. It’s even better than gold since gold doesn’t pay a yield, and you can’t buy it with positive leverage.
If, on the other hand, the economy slows into a recession and rates remain low despite all the monetary easing… that will give you more time to put low-rate, amortizing loans on high-yield, income producing properties.
These policies could have disastrous long-term effects for the economy. Real estate investors are not immune to the consequences of these actions, but they probably have the highest level of ‘immunity,’ as real estate has historically more than kept up with rising price levels.
If we avoid inflation because we miraculously soak up all that liquidity, you’re still left with a portfolio of income producing assets you bought at good prices on which you have loans locked in at low rates. The real estate investor could do well or hold his own either way.
Historical High Consistent Returns
Real estate is the only major asset class I know of where you can make consistent, exceptional returns, even if we have zero appreciation. Here’s a thumbnail example. Let’s take a small apartment complex for a total cost of $1.2 million, including purchase price, closing costs, repairs, and reserves. When you’re done with your work, your gross potential rents are $200,000.
Your expenses and vacancy eat up half your gross, so your Net Operating Income (NOI) is $100,000. That’s 8.3% of your total investment. But you buy it with positive leverage, so it gets better. Say you borrow $800,000, fixed for 10 years, at 4.5% on a 25-year amortization schedule. Your debt service will be just over $44,000 a year, so your cash flow will now be a little less than $56,000. Against your $400,000 cash investment, that’s about a 14% cash-on-cash yield. And here is an extraordinary kicker to the deal: after 10 years, your tenants have paid down your loan by a little more than $216,000. That’s an average of almost $22,000 a year or about 5.4% of your $400,000 cash invested.
What other investment do you know of where you can enter a deal with a realistic expectation of making 19%-20% total returns annually even if you see zero appreciation?
“Rental real estate, bought right and financed right, is one of the
few investments that truly gets better with age.”
Tax Breaks Like No Other
Federal, state and county officials have incentivized housing developers for decades. Why? Because it drives a massive portion of the GDP while providing one of the basic necessities of life, shelter. Investors can enjoy the benefits of depreciation that can significantly offset other gains.
The CAP Factors
We have discussed our successful investment philosophy in more detail elsewhere. Real estate provides steady cash flow that can be ‘turbocharged’ with the right amortizing loan and positive leverage.
We could go on and on. There are many more secondary benefits, ranging from diversification and the ability to (responsibly) leverage up from past successes.
Read more about The CAP Strategy and the CAP Plus Diversified Income Fund.