From brokerage account to landlord.

[Bryce Deeney]

Hello everyone. I apologize if this post is more self-serving than helping the community, but I am new to RE investing. I over-analyze every decision I make in regards to where I put my money, and am working on understanding of basic ROI principles with SFH properties. My (current) plan is to purchase 1 SFH per year over a 20 year span, and potentially 1031'ing each property at year 5 into something larger... My plan over the past few years has been very easy. Simply put $50,000 into a brokerage account and watch the 8% compounding interest do its' thing.

This may sound odd to many, but I've worked in finance for the first decade of my career, and have continuously poured money into my brokerage accounts, building my nest egg (I'm currently 32). A friend of mine, also in his mid 30's mentioned that he just acquired his 10th rental property. I was in shock. I thought I would retire earlier than him, and clearly he is on pace to retire way ahead of me (I'm very competitive). So naturally I immediately went on Amazon and bought a bunch of books on real estate investing so I could win, too. I just finished reading @Brandon Turner's book on "Rental Property Investing" (all 350+ pages in a few hours... it's a fantastic book and I'll reread it again next week!). 

Since I've been a EFT/stock/dividend guy since I entered my working years, I wanted to try to do a comparison to see just how much value switching to real estate would propel me to be able to 1. retire earlier, and 2. retire wealthier. To do this, I'm using a flat amount that I invest each year into my brokerage account: $50,000. 

With $50,000 going into my account on an annual basis, over a 20 year period at 8% compounding, I'll have roughly $2.7m saved, or $6.6m if I decide to work until I'm 62... all of this is pretty basic to understand, takes a few seconds to calculate, and takes literally zero effort on my part. Once I retire (whether at 52 or 62), I'll know how much money I have, move it to bonds/cash/HYSA, collect SS, pay off the house(s), and live a decent life. I likely won't be able to provide anything to my kids and/or grand kids when I die, besides maybe a house or two. 

Here's where it gets tricky; investing in properties is a lot more complicated to calculate long-term ROI (as all of you know! this is just new to me), so I'm using very basic a very basic formula for each non-static item as "averages". Let's assume I take the same 50K, and purchase the same type of SFH every year.

Home Listed at $210,000 - offer accepted at a 10% discount ($189,000). 20% down (37,800), closing costs ($5,000), and light renovation costs on carpet, paint, minor fixes, etc. ($7,200). Voila, my 50k investment is now placed! Now let's assume my cash flow is $300 per month on this home for 5 years. I'll be able to pocket $18,000 in cash flow over 60 months. Let's also assume the property value (which started at 210K + $7,200 in reno costs, so I'll assume it's 220K to start) increase 3.5% each year for 5 years, bringing the value to $252,455. I owe $138,845 (based on 60 payments on a $151,200 30 year fixed at 5% interest). Assuming my total cost of the sale is 8% (agent commission, cleaning up the property, paint, staging if required, concessions, etc). I'm left with $93,413.60 to roll into my next property. Oops, I forgot to include my cash flow! I actually now have $111,413.60 (18k CF + $93.4k Sale) after 5 years, from my initial $50k investment. 

Compare this to my brokerage account life, where I would on average have $73,466 at 8% interest over 5 years. I've just added $37,947.60 to my 5 year investment! It's actually greater than that though - I paid 15% capital gains tax on the $23,466 in interest gains on my brokerage account (at my current income level), bringing my take home gains to $19,946.10. On the other hand ,the $61,413.60 I earned with the real estate exit can be rolled tax free (with a $600'ish 1031 fee) into my second phase, 5-year property. 

So where my mind wants to go with this real estate option is this: what would be the equivalent return in a brokerage account? In a 5 year period, in order for $50,000 to turn into $111,413.60, it would need to average a 17.3% return! If we add the capital gains tax cost (subtracting 15% of whatever was gained during that 5 year period), we would actually need to have an average return of 19.75% to achieve the same results. Wow. 

Okay, so here is my question to the investors who deploy my strategy laid out of only purchasing at a 10% discount on average, and selling after a 5 year (or so) period to roll into larger properties on average... Is this possible? Is it expected? I'm sure a lawsuit here, a natural disaster there... throw in a bad tenant or a downturn in the market, etc. these will make 'averages' skew downward drastically when the investor is just starting out and only has a few properties. Is it possible to average these kinds of returns over a 20-30 year time period? I am really hoping the answer is yes. I am in love with the idea of purchasing property every year for the foreseeable future! I just want to make sure that this is realistic for those who know how to find a great deal, understand how to properly run a business, and have the money to accomplish it.

If you've read this entire post, please provide your feedback! I won't be hurt if you think my calculations on ROI are insane; I'm new and eager to learn as much as possible. If you have personally or know of others who are solid investors who have a 20-year track record, what ROI's did you/they see?

Cheers,

Bryce

I have no idea if this is expected (if you have lots of experience, please let me know if this is average for a savvy investor, too high, or not high enough on each point)! 

[Bryce Deeney]

@Nathan Gesner thank you for replying, even if it was an insane amount of math to drudge through early in the AM (:

My calculations definitely don't take in the "X" factor of REI; which you nailed it... understanding how to manage the property effectively, and to grow the cash returns inside each property year over year. I know this is something that I will likely be better at year ten on my journey compared to right away, and that is awesome! That's icing on the cake of my initial analysis, which I am doing to make sure I feel comfortable with the expected returns compared to my brokerage account approach.

Thanks again!