Author Topic: Rate of Return on Real Estate: Long-Run Micro-Level Experience  (Read 3252 times)

SeattleCPA

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Some folks here may remember that I've in past talked lots about the rate of return of everything paper which said that housing has delivered good returns for decades in many countries.

Another research paper I recently read, however, does a deep dive into housing returns for one of the countries in the rate of return of everything paper: the UK. And it comes to a different conclusion.

That paper appears here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3407236

The TLDR summary: Over most of the 20th century, a really careful, property by property accounting of the real estate investments some of the big Oxbridge colleges and universities made returned rental income but no additional appreciation. Real returns in fact ranged from 2.3% to 4.5%.

Mr. Boh

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #1 on: May 24, 2022, 03:43:40 PM »
How much do these findings contradict the rate of return of everything paper? 

clarkfan1979

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #2 on: May 25, 2022, 11:02:48 AM »
Some folks here may remember that I've in past talked lots about the rate of return of everything paper which said that housing has delivered good returns for decades in many countries.

Another research paper I recently read, however, does a deep dive into housing returns for one of the countries in the rate of return of everything paper: the UK. And it comes to a different conclusion.

That paper appears here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3407236

The TLDR summary: Over most of the 20th century, a really careful, property by property accounting of the real estate investments some of the big Oxbridge colleges and universities made returned rental income but no additional appreciation. Real returns in fact ranged from 2.3% to 4.5%.

I have 3 rentals and a primary. Individually, it's not that hard to run the numbers as individual investments. However, they are not really operating individually because I borrowed from house #1 to buy house #3 and I borrowed from house #2 to buy house #4. I also used the cash flow from previous rentals to help with the purchase of additional rentals. 

I bought my first house with 20% down (36K) down and 4K in closing costs in May 2007. I then spent 10K in repairs over 4 years to get it fully repaired (2007 to 2011). It took 50K total to get started with house #1. Cash flow from house #1 was minimal in the very beginning because it was originally a house hack. House #2 cost me 9K to close and then 14K in repairs over the next 3.5 years. I'm going to claim that I got 2K in cash flow and 2K from a refinance from house #1 that I applied to house #2. This means that I need another 5K from my W-2 job to pull it off. Now I'm all in at 55K.
   
From 2012 to 2015, I was able to use the cash flow from house #1 to fully fund the 14K of repairs of for house #2. I even used some extra cash flow from rental #1 to pay extra on my student loans (about 5K). Now that I'm mixing money, it becomes really hard for me to get accurate numbers on specific real estate returns.

In May 2015, my wife transitioned from full-time to part-time work. We didn't make enough money to fully cover our living expenses with just our W-2 money, we started to spend about $1,000/month of cash flow on living expenses and it's now currently around $1,500/month.

In 2017, I did a cash-out re-fi of 145K on house #1 to buy house #3 in 2018. In 2019, I did a cash-out re-fi of 107K on house #2 to buy house #4. 

After vacancy and repairs, we get about $3,000/month in cash flow from 3 rentals and save 50% of it. Starting August 1st, 2022 our rental cash flow is going to $4,000/month due to rent increases. The money fully funds a Roth and the extra goes into a brokerage account. We now have 55% equity on 2.45 million (1.35 million equity). This includes equity on our primary which is around 175K.

I originally started with 40K of capital in 2007, then added 10K (2007 to 2011) and then another 5K in 2012.

Now in August 2022 that original 55K of capital investment has transitioned into 1.35 million of real estate equity, $4,000/month in cash flow and $2,000/month in principle pay down. These numbers could also be much higher if I didn't spend the cash flow on living expenses. That's probably been around 100K of spending from 2015 to 2022.   

This does not include my time. My time was somewhat significant on the first two houses because they were live-in renovations over a period of 3-4 years. They were mostly cosmetic and I did the repairs when it was most convenient for me. My last renovation was only 12 months (2018), but I hired out 75% of the repairs, so my time wasn't that significant. I did not do a renovation for house #4. It was turn-key. 

What is my rate of return?

 



 

SeattleCPA

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #3 on: May 25, 2022, 12:43:24 PM »
How much do these findings contradict the rate of return of everything paper?

Sorry, should have explicitly addressed that. This paper says for UK at least, it looks like the Rate of Return of Everything paper calculates returns for housing that are too high.

BTW I thought (and continue to think) that real estate and real assets like real estate can play a part in small smart portfolio construction. They show low correlation with stocks. And then they do seem to hedge against inflation.

But the referenced report suggests we want to exercise caution.

Edit: Corrected word.
« Last Edit: May 26, 2022, 07:10:37 AM by SeattleCPA »

SeattleCPA

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #4 on: May 25, 2022, 12:49:31 PM »
What is my rate of return?

I've had a CPA firm twice... one before I started writing books and then one after I stopped doing that as my full-time gig.

But the first time, pretty much what I did was model commercial real estate investments, so building schedules of cash flows and then calculating internal rates of return and net present values. It's pretty mechanical to do this. But it may not really generate actionable insights for an owner-operator.

BTW this off the cuff idea: If you can identify the cash you put into the investments, you might be able to use portfolio visualizer to model what would have happened had you put the same cash flows into a standard portfolio. Like 100% stocks, etc.  If that portfolio returns 10% annually over the years and then you compare the net worth value of your real estate holdings with the ending portfolio value, you'll at least know how you did as compared to traditional assets?

Wintergreen78

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #5 on: May 25, 2022, 10:54:29 PM »
What is my rate of return?

I've had a CPA firm twice... one before I started writing books and then one after I stopped doing that as my full-time gig.

But the first time, pretty much what I did was model commercial real estate investments, so building schedules of cash flows and then calculating internal rates of return and net present values. It's pretty mechanical to do this. But it may not really generate actionable insights for an owner-operator.

BTW this off the cuff idea: If you can identify the cash you put into the investments, you might be able to use portfolio visualizer to model what would have happened had you put the same cash flows into a standard portfolio. Like 100% stocks, etc.  If that portfolio returns 10% annually over the years and then you compare the net worth value of your real estate holdings with the ending portfolio value, you'll at least know how you did as compared to traditional assets?

This is kind of how I track my investments. I track total contributions each year in a spreadsheet. Then I make a table using a future value calculation. Each column shows what the value would be at the end of each year with a 7% return every year, 8% return every year, etc. I can just compare the table to the total of all my accounts. Whichever column is closest to the actual total I highlight as my actual total return.

This works pretty well if your contributions or withdrawals are fairly consistent throughout the year (I just track the total for each year then treat it as 12 equal monthly contributions). If you are tracking housing expenses and they can be highly concentrated, you might need something fancier.

PMJL34

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #6 on: May 26, 2022, 08:49:17 AM »
It's not worth it to spend the time calculating Clark's return on investment, nor is it really possible to get a close enough number to matter.

But Clark's claim that he turned 55k into 1.35 million is beyond ridiculous and a clear sign that people suck/biased at math. For starters, there is something called PITI he's been paying on since 2007 (at least the years when the homes were not rented). He also wouldn't have been able to do this without full time job/s to fund this since 2007, plus he put a shit load of hours fixing up the place. Not to mention the time Clark invested into learning about real estate, house hunting, the time it took to purchase, refi, get tenants, etc and (stress) will surely be in the years category.

It's clear you've done well Clark. I think your real estate journey is very unique and to be applauded. I'm personally impressed and proud of you for your real estate holdings and the 4K cashflow (not gonna lie, very skeptical of that number lol). But this is a prime example of why you can't compare apples to oranges (stocks vs real estate). Two very different beasts and can't be compared directly.   

clarkfan1979

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #7 on: May 26, 2022, 10:52:47 AM »
It's not worth it to spend the time calculating Clark's return on investment, nor is it really possible to get a close enough number to matter.

But Clark's claim that he turned 55k into 1.35 million is beyond ridiculous and a clear sign that people suck/biased at math. For starters, there is something called PITI he's been paying on since 2007 (at least the years when the homes were not rented). He also wouldn't have been able to do this without full time job/s to fund this since 2007, plus he put a shit load of hours fixing up the place. Not to mention the time Clark invested into learning about real estate, house hunting, the time it took to purchase, refi, get tenants, etc and (stress) will surely be in the years category.

It's clear you've done well Clark. I think your real estate journey is very unique and to be applauded. I'm personally impressed and proud of you for your real estate holdings and the 4K cashflow (not gonna lie, very skeptical of that number lol). But this is a prime example of why you can't compare apples to oranges (stocks vs real estate). Two very different beasts and can't be compared directly.   

I agree that my story is unique. That is part of the reason why I like sharing it and will continue to share it. I hope that my story can offer a slightly different perspective and help others make better decisions for themselves. Many different people will have many different interpretations that fits their cognitive model regarding how the world operates.

Rent went up 20% over the past 12 months in my markets. I think national rent is up 17%. One set of tenants moved out, so I raised the rent to market value from $1650 to $2140 (30% increase).

For two other units, I offered a $300/month discount and $200/month discount to retain good tenants that make my life easier. Instead of doing 20-25% rent increases consistent with the market rent, I did a 7.8% rent increase and the tenants still got a huge discount.

For the 4th unit, I had tenants move-out and I accidentally under-valued my property. I raised the rent by 4% and now looking back, I should have raised it by 14%. Mostly due to COVID-19, rent was flat for two years. It now looks like that market trend is over and this specific property is in higher demand consistent with previous years. 

In the end, I raised the rent $1000/month this year. If I was a 100% business/cut-throat landlord, market values would have supported a $1750/month rent increase. However, that might have required more work if two tenants moved out as a result of the rent increase. I'm not saying my way is the best way. I'm just clarifying what I did. Individual people can decide for themselves if it was good or bad. 

I expect to see other landlords posting more impressive rent increases in the near future. It's currently a national trend that I expect to continue for the next 2 years. If interest rates continue to rise, home prices will slow down and rents will increase and we will go back to more "normal" rent to price ratios for single family home rentals, in my opinion.   



 

uniwelder

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #8 on: May 26, 2022, 12:06:29 PM »
It's clear you've done well Clark. I think your real estate journey is very unique and to be applauded. I'm personally impressed and proud of you for your real estate holdings and the 4K cashflow (not gonna lie, very skeptical of that number lol). But this is a prime example of why you can't compare apples to oranges (stocks vs real estate). Two very different beasts and can't be compared directly.   

Sorry that this is derailing the original intent of the posting, but I didn't see 4k monthly cashflow as alarming.  I also have 3 rentals, total value and equity about half one quarter of Clarkfan's, bought around a similar timeline, that cashflow 2k per month.  I think the numbers make sense, though I also self manage and perform my own maintenance, so there are costs not accounted for.  My investment hasn't been as spectacular, but still good-- 1) appreciation hasn't been nearly as high where I live, and 2) I'm not as leveraged. 

SeattleCPA, I'll get around to reading the update soon.  I do appreciate your other postings about real estate in the investment portfolio.  I like the diversification that comes from being a small time landlord and expect about half our retirement income to come from the properties.
« Last Edit: May 26, 2022, 12:12:17 PM by uniwelder »

SeattleCPA

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #9 on: May 29, 2022, 07:24:41 AM »
But this is a prime example of why you can't compare apples to oranges (stocks vs real estate). Two very different beasts and can't be compared directly.   

Yes but you can compare them directly if you do the math right. BTW I agree that's tricky. So not sure if we disagree.

But what the above referenced study represents is a really good detailed calculation based on investor records over decades. The Rate of Return of Everything paper didn't get that granular.

LightStache

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #10 on: June 01, 2022, 03:20:48 PM »
Interesting paper! Consider that the owners of these portfolios were ancient academic institutions and they may have been less profit-motivated than the market average during these periods. No study is perfect though.

The results also don't extrapolate to our portfolios. If real estate has outperformed equities for the past 100 years, does that mean you should overweight the class or underweight it?

clarkfan1979

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #11 on: June 07, 2022, 10:12:06 AM »
Some folks here may remember that I've in past talked lots about the rate of return of everything paper which said that housing has delivered good returns for decades in many countries.

Another research paper I recently read, however, does a deep dive into housing returns for one of the countries in the rate of return of everything paper: the UK. And it comes to a different conclusion.

That paper appears here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3407236

The TLDR summary: Over most of the 20th century, a really careful, property by property accounting of the real estate investments some of the big Oxbridge colleges and universities made returned rental income but no additional appreciation. Real returns in fact ranged from 2.3% to 4.5%.

Here are some numbers for appreciation only

Rental #1: 6.2%/annual over 15 years
Rental #2: 12.8%/annual over 10 years
Rental #3: 15%/annual over 4 years
Primary Home: 12.3%/annual over 3 years

If I calculate a weighted average, I get 9.82% annual appreciation.

Rentals 1-3 required renovations, so part of it was forced appreciation. Primary home was turn-key.

soulpatchmike

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #12 on: June 07, 2022, 01:40:36 PM »
I think the clarkfan situation is not uncommon for long term rental real estate investors.  I have taken $7725 and turned it into a real estate net worth of ~$605k without further household W-2 income investment.

1999 - $7725 down payment on $154500 purchase price for 2 unit duplex.  Appraised at $165k at time of purchase with $675/mo tenant on one side and I lived on the other.  By all measures, it is/was a terrible investment at the time, but perfect for a first place for me.  I was making  ~40k/yr at the time.  This property enabled all that came afterwards and from my perspective the return has been darn near infinite.  The one side had an older tenant and his wife who lived there from 1984 to 2018.  He essentially taught me to be a home owner and took care of the place after I married and moved into another home.  Today the property is worth ~$420k and has a ~$155k mortgage for a total current equity of $265k.  Due to a period of 15 years without touching a thing due to long term tenants and repairs organized by the tenant, my avg annual working hours on this property are less than 20 hr/yr, including collecting and processing rent checks, accounting and doing taxes, along with repairs and upgrades.  I have taken cash out refinances of roughly $90k from this property over the years for further investments, primary down payment and household needs.

2004 - $58000 down payment on $232k purchase price(new construction).  Down payment was net profit(1031 exchange) on a 20 month held distressed property purchase.  The original investment for the distressed property came from cash out refinance of the duplex.  Thus this property was net zero investment out of W-2 household income.  I have averaged roughly 40hr/yr on this property due to a couple of poorly chosen tenants.  This property is worth roughly $330k today with a $160k mortgage.  $170k total equity is pretty bad for the $58k invested, but since that money came from borrowed funds the return is infinite.

2005 - $59375 down payment on a $237500 purchase price(new construction).  Down payment was HELOC from primary residence(repaid by the property account, since been paid off).  This property has also been a net zero investment from household earnings.  I have averaged roughly 30hr/yr of time investment for this property.  This property is worth roughly $330k today with a $165k mortgage.  $165k total equity is pretty bad for the ~$60k invested, but since that money came from borrowed funds the return is infinite.

Over the past 2 years, the 4 rental units provide $25k/yr in net cash flow after tax considerations.  I have kept a separate property account since 2001 to make it easy to identify if I need to have a cash injection from my household finances.  There has been one cash injection total back in 2006.  I remember it well as I was nearly broke and needed $1500 to cover a vacancy.  That is the only time I had to transfer money between my household account and the property account.  All other transfers have been draws to the household account.  I estimate total cash flow draws from the property account over 23 years to be about $6000 for the first 15 years and about $60k in the past 8 years due to significant increases(~$1400) in rent and refinances lowering PITI payments.  All of these draws have been used for household consumption including vehicles, campers, vacations and annual personal cash flow shortages.

For appreciation only its pretty bad:
Duplex - 4.52% over 23 yrs
SFR 1 - 2.0% over 18 yrs
SFR 2 - 1.95% over 17 yrs

Considering overall return on $7725 down payment has turned into $605k in net equity(not including primary) for an avg ARR of ~20.7% over 23 years not counting cash flow draw, about the only other thing that would beat it is going all in on AAPL before the iPod was released and right after Jobs returned and was recovering the company from near bankruptcy(wasn't on my radar at the time) roughly ~30% ARR over the same time period.  Can't think of any other stocks that would support >20% ARR over the last 23 years.

I am sure that with more effort I could have purchased or sold and purchased better properties and invested more consistently in the market.  However I am pretty sure, for the limited effort put into being a landlord over the past 23 years, I could not have made a better return while being a single income earner for a family of 7.



PMJL34

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #13 on: June 08, 2022, 03:35:44 AM »
Thank you soulpatchmike for sharing your story. I enjoy reading people's journeys and think your story is awesome. High five to the long-term tenants at your first duplex! I also have a follow up question....Were you not interested in purchasing rentals between 2009-2016?

Makes sense that your appreciation is terrible considering your purchase years and the fact that they were two new constructions. Probably about the worst anyone could do short of buying all 4 new constructions in 2006-2007. It really is the luck of the draw as none of us know what the future holds.

Like I tell Clark, you did NOT turn 7k into 605k. This narrative is highly deceiving and flat out wrong. It was work, it required lots and lots of time, and it was a part time job (between looking for listings, negotiations during the purchase, finding tenants, etc). There is also significant risk associated. I also assume you self-manage. Even at your extremely low estimate of 20 hours/ year per property, that is still 80 hours/year (I can guarantee you it's more than this once you factor in the above mentioned matter) for 23 years for a total of 1840 hours you put in. Even at a measly $20/hour (I'm sure you make a lot more) = 40k. How about from 1999-2004 when you paid PITI on the property when you lived in it? the 675/month of rent from the other unit certainly didn't cover all of that, correct? I could go on and on, but you get the point.

I point this out every time I can because we should not be selling snake oil to this forum and we should be giving out honest experiences to people who are new/wanting to own rentals.   

Still, kudos to you for your 20+ years of experience/journey in rentals and glad to hear that you are getting great profits today!

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #14 on: June 08, 2022, 05:00:12 AM »
Some folks here may remember that I've in past talked lots about the rate of return of everything paper which said that housing has delivered good returns for decades in many countries.

Another research paper I recently read, however, does a deep dive into housing returns for one of the countries in the rate of return of everything paper: the UK. And it comes to a different conclusion.

That paper appears here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3407236

The TLDR summary: Over most of the 20th century, a really careful, property by property accounting of the real estate investments some of the big Oxbridge colleges and universities made returned rental income but no additional appreciation. Real returns in fact ranged from 2.3% to 4.5%.
I suspect that Oxbridge colleges are a bit of a special case: most of them have been around for several hundred years and expect to be around for several hundred more, and their views on the purpose of their property holdings is different from most individual or institutional investors. I'd also note that the period of return studied (1901 to 1983) included two devastating World Wars and a depression, and ends towards the end of a significant recession with record unemployment.  It would be interesting to know why it was decided to end the study in 1983.

LightStache

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #15 on: June 08, 2022, 07:31:00 AM »
Thank you soulpatchmike for sharing your story. I enjoy reading people's journeys and think your story is awesome. High five to the long-term tenants at your first duplex! I also have a follow up question....Were you not interested in purchasing rentals between 2009-2016?

Makes sense that your appreciation is terrible considering your purchase years and the fact that they were two new constructions. Probably about the worst anyone could do short of buying all 4 new constructions in 2006-2007. It really is the luck of the draw as none of us know what the future holds.

Like I tell Clark, you did NOT turn 7k into 605k. This narrative is highly deceiving and flat out wrong. It was work, it required lots and lots of time, and it was a part time job (between looking for listings, negotiations during the purchase, finding tenants, etc). There is also significant risk associated. I also assume you self-manage. Even at your extremely low estimate of 20 hours/ year per property, that is still 80 hours/year (I can guarantee you it's more than this once you factor in the above mentioned matter) for 23 years for a total of 1840 hours you put in. Even at a measly $20/hour (I'm sure you make a lot more) = 40k. How about from 1999-2004 when you paid PITI on the property when you lived in it? the 675/month of rent from the other unit certainly didn't cover all of that, correct? I could go on and on, but you get the point.

I point this out every time I can because we should not be selling snake oil to this forum and we should be giving out honest experiences to people who are new/wanting to own rentals.   

Still, kudos to you for your 20+ years of experience/journey in rentals and glad to hear that you are getting great profits today!

This thread caused me to go back and calculate the IRR of my last rental, which I'd been curious about but too lazy to do.

I bought it in 2014 for $411K in a "transitional" DC neighborhood, using owner-occupied VA financing with $5K invested. Rented it out starting in 2015 and sold in Spring 2021 for $565K.

At first I ran the calculations and got an astounding 46% IRR. That didn't gut check with me so I scrutinized the inputs and realized that I didn't account properly for principal payments.

After rerunning the numbers I ended up with a 9.0% IRR. And that's with 99% leverage plus a ton of time, risk and stress that's not factored in.

My sales proceeds after tax were about $60K, so if I washed over all the details, I could say that I turned $5K into $60K over 6.5 years, an annualized return of 48%! That would be even more extreme if I hadn't sold and still had $135K in equity -- 66% annualized!

But the actual 9% IRR is much more modest ... and much less attention grabbing.

SeattleCPA

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #16 on: June 08, 2022, 07:53:43 AM »
I don't think that sounds right.

Your initial investment, it sounds like, was $5K. So that's your investment. The cash investment.

Just to make the cash flows easy, say you suffered $10,000 a year negative cash flows for next seven years.

And then say at the end of year seven, you sold for $561K but had a $411K mortgage so net $150K.

Note: I'm going to ignore principal payments which reduce the loan balance and selling costs just to keep things simple.

In this case your cash flows look like this

Investment: -$5K
Cash Flow 1: -$10K
Cash Flow 2: -$10K
Cash Flow 3: -$10K
Cash Flow 4: -$10K
Cash Flow 5: -$10K
Cash Flow 6: -$10K
Cash Flow 7: +$140K (the $150K of proceeds minus the -10K negative cash flow)

The calculated IRR here equals 21% annually. That's pretty dang good although you're all leveraged up.

P.S. I have a blog post that explains how to do IRR calculations here: https://evergreensmallbusiness.com/small-business-investment-returns/
« Last Edit: June 08, 2022, 07:55:56 AM by SeattleCPA »

soulpatchmike

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #17 on: June 08, 2022, 08:56:35 AM »
Thank you soulpatchmike for sharing your story. I enjoy reading people's journeys and think your story is awesome. High five to the long-term tenants at your first duplex! I also have a follow up question....Were you not interested in purchasing rentals between 2009-2016?
I was broke between 2009-2016.  I got shingles due to stress twice during this period of time, single income household with 5 kids and a portfolio of real estate that is about 3 months vacancy from it all blowing up.  All my real estate was upside down and my net worth was negative, but I knew that time heals nearly all nominally good investments so I waited impatiently for the market to come around and focused on my paltry 5% 401k contributions with matching. 

Makes sense that your appreciation is terrible considering your purchase years and the fact that they were two new constructions. Probably about the worst anyone could do short of buying all 4 new constructions in 2006-2007. It really is the luck of the draw as none of us know what the future holds.
Very true.  Again time heals most wounds associated with poor timing in investing as long as the investment was nominally good.

Like I tell Clark, you did NOT turn 7k into 605k. This narrative is highly deceiving and flat out wrong. It was work, it required lots and lots of time, and it was a part time job (between looking for listings, negotiations during the purchase, finding tenants, etc). There is also significant risk associated.
I made a choice to become a full time real estate agent and mortgage loan officer 4 months before my DW quit working to care for our newborn first born child in 2002.  This was a huge risk.  I would argue that nothing I did in my real estate investing was as risky as that because the property portfolio I put together always provided cash flow(minus one cash injection for an extended vacancy in 2006).  Sure it ended up heavily leveraged(in the recession) and that is a risk, but I was committed to making it work and positive cash flow was my saving grace.  Keep in mind, it was very very stressful to the point I got shingles when my net worth was negative for a few years, however, I never was cash flow negative so much of the fear and stress was self induced.
Doing real estate full time certainly gave me access and abilities that non-agents might not have, but that doesn't make the narrative deceiving.
For clarification.  I lived in the duplex from 1999 to 2001.  I had to pay rent or a mortgage somewhere, but if you want to count that as investment it was roughly $700/mo over 2 years(~$17k), however, in 2001 when I purchased my first primary residence, I took a cash out refinance of $22k for a down payment from the duplex.  16,800+7725=total investment of 24525.  Minus 22000=2525 of my "investment" was left in the duplex after the first two years.  One thing to consider is that we haven't talked about closing costs because I did no closing fee loans.  The rate is premiumed up and there is a premium that the broker uses to pay the appraisal and closing fees. 

So in reality, I invested ~25k over 2 years while having a place to live and a tenant that taught me to be a home owner and then got out ~22k to purchase my first primary residence.  The property still cash flowed after the refinance.  This was the point where I separated the property account from the household finances.

While I do agree that no one will recreate what I have done with my paltry investment in real estate 23 years ago, what I am sure of is that there are many many stories of people that have had similar experiences to me.  Today there are people who might invest 20-30k and they will turn it into 2-3Million in the next 20 years without additional injection without deception.

I also assume you self-manage. Even at your extremely low estimate of 20 hours/ year per property, that is still 80 hours/year (I can guarantee you it's more than this once you factor in the above mentioned matter) for 23 years for a total of 1840 hours you put in. Even at a measly $20/hour (I'm sure you make a lot more) = 40k.
My wife spends about 300 hours per year reading fiction novels.  I have friends that spend 500+ hours per year between travel and time in youth sports facilities.  If I read about investing(real estate or equity market) 300 hours per year should I really be calculating a monetary figure of how much I put into it in $/hr?  What about helping a friend with a remodel?  People spend time doing the things they value most.  I spent about 300 hours researching and building a custom Nixie Tube Clock over a three month period.  Over the 23 year period, I had a 3 year period when I didn't set foot in any property and there was an 8 year period where I didn't set foot in the duplex.  The time I have spent on rental real estate in the scheme of things has been less than a part time job over 23 years.  If I have spent an average of 8 hours per month over 20+ years, that includes lots and lots of months with ~1 hour going to the post office and depositing checks and a limited few multi-week periods doing heavy turn overs with paint and carpet or other flooring that were intense 40-80 hours over 2-3 weeks.

My experience is my own, however, I have heard many many stories over the years similar to mine.  With that said, I don't recommend real estate investing to other people because it probably wont work for them.  In my experience over the years in real estate investing forums and my sphere of influence, of all the people that research buying rental real estate for income or financial freedom a small fraction(likely 1% or less) actually by a property.  Of those people, about 1% build a small hobby portfolio they keep long term and about 1% of those people build a portfolio that provides financial independence(and being a CEO at minimum)  Said another way, anyone can do it but few are willing to.

How about from 1999-2004 when you paid PITI on the property when you lived in it? the 675/month of rent from the other unit certainly didn't cover all of that, correct? I could go on and on, but you get the point.
I think I covered that above.
I point this out every time I can because we should not be selling snake oil to this forum and we should be giving out honest experiences to people who are new/wanting to own rentals.   

Still, kudos to you for your 20+ years of experience/journey in rentals and glad to hear that you are getting great profits today!
The only magic or snake oil I have experienced is having the intestinal fortitude to hold a portfolio of properties worth $470k in 2011 that I owed $571k on.  I think of myself as a pretty lazy boring person.  However, when I get excited about something I immerse myself in it and spend all my waking hours outside of work doing it.  That is where I find the most joy outside of my family.  Over the years here are most of the things that I have spent hundreds of hours doing.
1987 - Invested hundreds of hours rebuilding a 1978 Suzuki RM100.  Had to take the case apart and had the transmission gears on the floor in the basement to have the case welded.  Had a service manual and no internet.  My parents are not mechanically inclined and gave me a ride to the motor cycle parts store every couple weeks for parts.  It took me all summer to get it back together and my folks happily spent about $300 in parts for me to stay busy while they worked.
91-92 - invested hundreds of hours on car audio.
93-94 - invested hundreds of hours researching stock investing in IPOs and bought a course.  Opened a Waterhouse brokerage account and invested about $4000 I received from my grandmother after selling their cabin.  Lost about $2000 in IPO investing and changed my strategy, then lost interest and let the rest just sit for the next 10 years or so.
94-96 - invested a couple thousand hours over 2 years in a tech school degree also worked 2nd shift full time in my second year.
97-99 - invested hundreds of hours studying real estate including a Carlton sheets no money down course, also invested hundreds of hours taking night classes for 2 years to complete my bachelors degree
99-2000 - purchased first duplex.  Most of my free time this year was split between dating my wife and networking computers for gaming with buddies.  Warcraft 2 FTW!
2000 - invested time in my wife getting married and enjoying our first year of marriage.
2002-2006 - invested all my time in self employment after quitting my w-2 job.  Lots of time spent with my first child and did 6 rental property deals including selling 3 of them and reinvesting.
2007-2008 - invested time in a w-2 job, invested about 500 hours over about 6 months to learn java and develop an online wiring configurator.
2009-2010 - invested hundreds of hours learning to build and fly electric airplanes.
2013 - invested hundreds of hours researching selling on Amazon FBA.  Bought some items from China and sold them on Amazon.  Learned it wasn't for me, but know that there are stories like mine about real estate for people on Amazon.
2012-2016 - invested hundreds of hours learning to solve a rubiks cube and further to solve in an average of 30 seconds with more efficient ways to solve and practice.
2015 - invested about 300 hours researching and building a Nixie Tube Clock
2016 - invested hundreds of hours researching and building a car audio system for my suburban
2018 - invested hundreds of hours researching and converting my zero turn lawn mower to electric power. 
2019 - invested hundreds of hours over 4 months helping a friend gut and remodel his kitchen.
2020 - invested hundreds of hours over about 6 months installing an egress window and building an office in my basement as my permanent workspace.
2018-2019 - invested hundreds of hours taking classes towards my MBA, completed at the end of 2019.
2014-current - invested hundreds of hours in the first year developing an investing philosophy and implementing it.  Spend more time monitoring and reading about investing than I do on all rental real estate tasks these days.
2021-2022 - invested a lot of time supporting my wife through a 12 month treatment process for cancer.  Her last surgery was in May and now I mostly sit and stare at youtube or twitter being disappointing watching humanity degrade in real time.

Everyone that has a 40 hour a week job also has nearly 80 additional awake hours each week to do whatever you like.  Take advantage of them to do things you want to do and don't shame or call it deception or snake oil when people don't use those extra 80 hours the way you do.

waltworks

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #18 on: June 08, 2022, 11:16:06 AM »
It's pretty simple - if you wouldn't do it for free, it's a job.

Now, you might say to me, "but I enjoy managing my properties/painting/laying tile/unclogging toilets/etc!"

Really? How about you manage mine, just for the fun of it?

That's what I thought.

RE outside of REITs is always going to be some amount of work. That's ok, but it's also important not to lie to yourself (or give misleading advice on forums) that implies that investing just a few thousands dollars and sitting back will make you a millionaire.

-W

soulpatchmike

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #19 on: June 08, 2022, 12:04:42 PM »
It's pretty simple - if you wouldn't do it for free, it's a job.

Now, you might say to me, "but I enjoy managing my properties/painting/laying tile/unclogging toilets/etc!"

Really? How about you manage mine, just for the fun of it?

That's what I thought.

RE outside of REITs is always going to be some amount of work. That's ok, but it's also important not to lie to yourself (or give misleading advice on forums) that implies that investing just a few thousands dollars and sitting back will make you a millionaire.

-W
I have done some pretty shitty jobs for free to help people out.  For example, I literally scraped shit out of a pipe when helping a friend replace his toilet.  I have helped friends re-roof their houses for free too a few time and reluctantly turned into the general contractor on a gut and remodel on a kitchen for a very good friend.  Roofing is one of the worst jobs someone could do and I have never done my own roof because it sucks so bad. I am sorry you don't enjoy managing your properties like I do.  A tenant calling me to do something is just as inconvenient as a friend or family member calling for the same kind of support.  Is one a job and the other not?

Life is all about choices.  You get what you get based on those choices as good or crappy as they might be. 

If you read my responses, you will find that no where did I say or imply that I sat back and relaxed after I invested that initial down payment from my household savings.  I did and will continue to say, I never invested another hard penny of my household funds in my portfolio(minus one "loan" I gave during a time of vacancy in 2006).  I have worked the minimum amount necessary to have a stable portfolio of rental properties which could be less than the average person mostly due to many long time tenants, two that lasted 17 or more years, and newer properties.

Last thing I have to say about this, if you think that you get to sit back and relax after investing in market equities or REITs you are lying to yourself.  Just being on this forum and understanding what is in your own portfolio says you have and are willing to do a minimal amount of personal finance research and monitoring that many people would find more repulsive than cleaning a toilet.  Some people would rather do what many call work to keep themselves busy, others would rather read or watch a show.

clarkfan1979

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #20 on: June 08, 2022, 08:41:35 PM »
It's pretty simple - if you wouldn't do it for free, it's a job.

Now, you might say to me, "but I enjoy managing my properties/painting/laying tile/unclogging toilets/etc!"

Really? How about you manage mine, just for the fun of it?

That's what I thought.

RE outside of REITs is always going to be some amount of work. That's ok, but it's also important not to lie to yourself (or give misleading advice on forums) that implies that investing just a few thousands dollars and sitting back will make you a millionaire.

-W
I have done some pretty shitty jobs for free to help people out.  For example, I literally scraped shit out of a pipe when helping a friend replace his toilet.  I have helped friends re-roof their houses for free too a few time and reluctantly turned into the general contractor on a gut and remodel on a kitchen for a very good friend.  Roofing is one of the worst jobs someone could do and I have never done my own roof because it sucks so bad. I am sorry you don't enjoy managing your properties like I do.  A tenant calling me to do something is just as inconvenient as a friend or family member calling for the same kind of support.  Is one a job and the other not?

Life is all about choices.  You get what you get based on those choices as good or crappy as they might be. 

If you read my responses, you will find that no where did I say or imply that I sat back and relaxed after I invested that initial down payment from my household savings.  I did and will continue to say, I never invested another hard penny of my household funds in my portfolio(minus one "loan" I gave during a time of vacancy in 2006).  I have worked the minimum amount necessary to have a stable portfolio of rental properties which could be less than the average person mostly due to many long time tenants, two that lasted 17 or more years, and newer properties.

Last thing I have to say about this, if you think that you get to sit back and relax after investing in market equities or REITs you are lying to yourself.  Just being on this forum and understanding what is in your own portfolio says you have and are willing to do a minimal amount of personal finance research and monitoring that many people would find more repulsive than cleaning a toilet.  Some people would rather do what many call work to keep themselves busy, others would rather read or watch a show.

@soulpatchmike  Thank you for sharing your story. It seems like what we are both trying to say is that it's possible to build a high net worth with leveraged real estate long term on a lower income. If we only contributed to 401K, our net worth would be much less.

I left grad school in August 2011 for my first academic job at age 32. I had 82K of real estate equity and 57K of student loans. I was +25K. My wife was negative 25K with student loans, credit card debt and a leased car. As a result, my wife and I combined had a net worth of zero. Today, mint says our net worth is 1.575 million. However, if we sold all the real estate, we would have to pay 170K in transaction costs, so the true number is closer to 1.4 million.

Our average annual W-2 income (not including rental income) over the past 11 years, has been $82,500. This is a rough estimate based on memory. If you want to bump it up to $85,000/year to be safe, fine.

My wife quit her full-time job and switched to part-time in 2015 because she didn't like her soul crushing job. She had the option to down shift because of our rental income. Since May 2015, we have been drawing from our rental cash flow (1,000-1,500/month) to fund our lifestyle. Yes, real estate is work. However, it's way less work than her previous full-time job. Her W-2 hours immediately went from 2500 hours/year to 1000 hours/year and its currently 500 hours/year. That would not have been possible with a 401K account. It was only possible because of rental income.

Is rental real estate work? Yes, it is. For me personally, it's much less work than a full-time job. My rental real estate hours went up over the past two years because of COVID-19. It went up from like 200 hours/year to 400 hours/year. Just like everyone else who was bored during this time, I decided to tackle a few home renovations that I thought could increase rental income (mostly painting and flooring). My choice was to continue to sit at home or get out of the house and get a change of scenery. I chose to get out of the house.

At the end of the academic year in May, I'm usually heavier than I would like to be. I need to do a better job of staying in shape during the spring semester. Once, the semester is over in May, I love doing yard work. I love being outside (before noon) and I love the physical exercise. However, after a full summer of doing yard work and losing 10 pounds, the interest in doing yard work is much lower. Sometimes I prefer to do it and other times I prefer to hire it out. It depends on the situation.

One of my friends was renting a house in his mid 20's. He complained to me that his landlord paid someone else to mow the lawn. He really wanted to do it himself and was disappointed that he wasn't able to do so. People are weird.     

I really thought @soulpatchmike was being as transparent as possible with his personal story. If you want to argue over semantics, fine. It does help to clarify the comments for everyone so they don't get the wrong idea. However, I personally think calling his story snake oil crossed the line. 


PMJL34

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #21 on: June 09, 2022, 12:55:40 AM »
Soulpatchmike,

I appreciate your reply and like your story even more after you expanded on your journey. Sounds like the great recession hit you extremely hard. Glad you were able to hold tight and be in a much better place today! I also hope your wife/family is doing much better!

It seems like people really care about the "snake oil" mention. I meant no harm or personal attack. Either way I apologize. Let me clarify one last time Soulpatchmike, Clark, or whoever....

the claims/comments of "I have taken $7725 and turned it into a real estate net worth of ~$605k without further household W-2 income investment" is flat out deceiving/false.

No, you and others (myself included) turned our $X real estate investment into $XXX through SIGNIFICANT costs (including, but not limited to: money, time, work, effort, risk, stress, etc.). Furthermore, you wouldn't have been able to buy the first or last property without your W-2 income. You clearly needed to work/have W-2 income for the past 23 years for this real estate investment to work. For newcomers and other readers, it reads as if you put 7k into your first property and never worked again and magically 23 years later you have 600k of real estate.

Soulpatch, you have had a part time job purchasing, renting, repairing, and managing these rentals for the past 23 years and no you can't claim it cost you $0.

Do we like real estate and would we do it all over again? You betcha. But I think it's important for us to call a spade a spade. Real estate ain't index funds. Not even close. 

« Last Edit: June 09, 2022, 12:57:46 AM by PMJL34 »

soulpatchmike

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #22 on: June 09, 2022, 09:29:34 AM »
Soulpatch, you have had a part time job purchasing, renting, repairing, and managing these rentals for the past 23 years and no you can't claim it cost you $0.

Yup, I actually can and do claim it "cost" me zero, nil, nothing, nada.  As I lay out below it has taken up an average of 13 minutes of my precious time per day to purchase, sale, finance, own and operate my rentals.  Here is a breakdown of 277 months of rental property ownership labor hours:

For your benefit lets estimate that I spent 600 hours for finding(6), buying(6), financing and refinancing(25) and selling(3) them.  Hopefully you would agree this is a generous amount of time.  I actually have not looked at very many properties in real life.  I would say that I have only viewed about 4 or 5 properties that I considered buying that I didn't buy.  All other finding was looking online at MLS listings.  Duplex was bought from a local newspaper ad, 4 were purchased of the MLS(3 from the same builder) and 1 was a referral at the title company.  Needless to say 600 hours is generous any might even include all my research on real estate investing in general.

Once owned, I was fortunate enough for a great uncle to provide me all of his rental contracts, forms and guidelines for tenants.  I modified for my own use and have used them ever since.  I have used the same online background check company for nearly 20 years.  The first tenant took all of 5 minutes and an hour long conversation to get to know one another to sign since they already lived there.  After that, between placing an ad on craigslist and now sometimes FB marketplace(30 minutes), showing the property on avg of 3 times(1.5 hours per showing including drive time), processing an application(2 hours), prepping lease signing docs(30 minutes), signing lease including drive time(1.5 hours), final walk through for move out(1.5 hour including drive time) the technical aspect of a tenant turnover takes about 10.5 hours.  Lets just round up to 15 hours per tenant turnover in case I missed something.  I have had a total 23 tenant lease signings and 20 move outs over 7 units.  Lets just call it 15 hours per tenant and say 300 hours for just getting tenants in and out over 277 months of being a rental investor.

Of those 23 move ins, 3 were living in the property when I purchased, 3 were new construction when moved in, 9 were same day move out move in with less than one hour of cleanup time(smoke batteries and any missing bulbs), 8 required some combination of carpet(hired), flooring, paint(hired) and fixtures.  Lets just say that my average time including drive time to organize and do work is roughly 40 hours each time.  I have done no kitchen or bath renovations.  I have replaced 4 water heaters at 6 hours each.  I have also spent roughly 40 hours on outside maintenance including a drain off line replacement and bob cat rental to smooth a gravel driveway a couple times because I thought it would be fun(it was/is, I normally hire that out)  Lawn and snow care are hired out.  That is a total of 9+320+24+40=393 hours, lets say 400 hours. 
I spent about 1 hour per month collecting rent checks and depositing over 277 months, lets call it 300 hours.
I have also spent about 150 hours on 2 evictions including all court visits and rent collection and personal property clean out efforts.

Lets see that is 600+300+400+300+150=1750  Lets call it 1800 hours over 277 months of my time.  That is 6.5 hours per month.  That's about 13 minutes per day of my hard labor on average that I put into being a landlord over 23 years.

I could have a fantastic garden if I spent $7725 and 13 minutes per day on it over 23 years, but I hate gardening so figured I would make money instead of food.  How do people calculate the return on their time invested in a food generating garden? 

My 13 minutes per day and $7725 investment has ultimately given me $25k cash flow per year and $600k in equity.  Where is the deception?  Even if I double the amount of labor time to 26 minutes it is still less time than the average commute to/from an office.  It is not simple and no one will recreate my circumstances, but this is my story and there is no deception in it.

soulpatchmike

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #23 on: June 09, 2022, 09:45:16 AM »
One of my friends was renting a house in his mid 20's. He complained to me that his landlord paid someone else to mow the lawn. He really wanted to do it himself and was disappointed that he wasn't able to do so. People are weird.     
Agree, people are weird...

Just this past winter I got a call from my plow guy that said, if you don't want me to plow the driveway that is ok, just let me know.  I confusedly asked him to clarify and he told me that my tenant had been snow blowing the 150 foot gravel driveway before the plow guy gets there the last couple times.  I didn't even know he had a snow blower.  Needless to say, I will not be renewing the snow contract this winter and save myself a few hundred bucks.  All because I have a tenant that likes to stay busy. 

He ripped out and burned all the buckthorn at the edge of the property line a few months after moving in.  And my son showed up to mow the lawn one day last summer and found it had already been done.  He had a riding lawn mower.  No mention to me, just went and did it.  Then then next time I see him he says, I hope you don't mind I just like to keep myself busy.  My son was working 12-13 hour days last summer with an irrigation company and was elated that he didn't have to mow the lawn anymore.

Humans...

LightStache

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #24 on: June 10, 2022, 06:45:15 AM »
I don't think that sounds right.

Your initial investment, it sounds like, was $5K. So that's your investment. The cash investment.

Just to make the cash flows easy, say you suffered $10,000 a year negative cash flows for next seven years.

And then say at the end of year seven, you sold for $561K but had a $411K mortgage so net $150K.

Note: I'm going to ignore principal payments which reduce the loan balance and selling costs just to keep things simple.

In this case your cash flows look like this

Investment: -$5K
Cash Flow 1: -$10K
Cash Flow 2: -$10K
Cash Flow 3: -$10K
Cash Flow 4: -$10K
Cash Flow 5: -$10K
Cash Flow 6: -$10K
Cash Flow 7: +$140K (the $150K of proceeds minus the -10K negative cash flow)

The calculated IRR here equals 21% annually. That's pretty dang good although you're all leveraged up.

P.S. I have a blog post that explains how to do IRR calculations here: https://evergreensmallbusiness.com/small-business-investment-returns/

Yes, definitely, if I also ignore depreciation recapture and capital gains expense in year 7 then my IRR calc is even better than 21%! Let's go full @soulpatchmike and look at my initial and final equity only -- then I get an IRR of 2,900%! Everyone reading this should max out their credit cards and go all in on rentals in Phoenix!!!

This is another instance of the phenomenon @PMJL34 is harping about. Folks who really love this asset class tend to ignore both tangible and intangible costs to support their thesis of its superiority.

When giving advice, we should paint a more nuanced, balanced picture of the opportunities in real estate. If we exaggerate and people follow this advice, we could cause them to get burned.

swashbucklinstache

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #25 on: June 10, 2022, 12:07:26 PM »
My son was working 12-13 hour days last summer with an irrigation company and was elated that he didn't have to mow the lawn anymore.
Hmmm.

No one has ever been elated they didn't have to ... log in to vanguard for me once a week?

SeattleCPA

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Re: Rate of Return on Real Estate: Long-Run Micro-Level Experience
« Reply #26 on: June 11, 2022, 07:24:54 PM »
Yes, definitely, if I also ignore depreciation recapture and capital gains expense in year 7 then my IRR calc is even better than 21%! Let's go full @soulpatchmike and look at my initial and final equity only -- then I get an IRR of 2,900%! Everyone reading this should max out their credit cards and go all in on rentals in Phoenix!!!


For the record I was trying to keep the example simple enough to illustrate basics. But sure, one could, should include amortization of loan balance, selling costs, any tax benefits or costs enjoyed either over the years property rented or at sale.

BTW, I'd agreed that looking at after-tax IRRs is better. And we'd all do a better job of assessing index funds if we started doing the same thing.

But honestly? It probably doesn't change the analysis enough to pay for the costs of doing the analysis.

Similar, for example, to how someone knowing how Sec 1411, Sec 1202, Sec 1244, Sec 199A work absolutely does help them better analyze typical FIRE investments. But people don't actually need to dig this deep.

This is another instance of the phenomenon @PMJL34 is harping about. Folks who really love this asset class tend to ignore both tangible and intangible costs to support their thesis of its superiority.

That's not fair or accurate. I was trying to illustrate how the OPs math was incomplete and as a result his estimate of the IRR too low.

When giving advice, we should paint a more nuanced, balanced picture of the opportunities in real estate. If we exaggerate and people follow this advice, we could cause them to get burned.

I don't know about more nuanced or balanced. I would say we want to be quantitative. Run the numbers correctly. But unfortunately, people need to learn quite a bit more about the accounting and the financial analysis in order to do that.

If someone is interested, BTW, I've got an old article and Excel spreadsheet that does all the math here for multifamily but you could use it for a single family property:

https://stephenlnelson.com/articles/multifamily-real-estate-investments/


 

Wow, a phone plan for fifteen bucks!