Originally posted by @Nnabuenyi Anigbogu:
Originally posted by @Michael Williams:
PLEASE help me understand this. Please!
Go here and download the BP Renal Analysis spreadsheet.
Do your best to enter in numbers for the Albany Park 4-Unit. (the OP didn't really give us enough into to fill this out completely, such as Interest Rate, etc) I put in numbers until it worked.
Look at the first image below, it shows the numbers pretty much identical to the OP, right down to NOI.
Now look at the second image. This is what you get when you slide all the way to the right and evaluate this property after a full 30 years. On his $100,000 investment he made a Total Return, including Equity Accrued, of $761,181.
Now whip open your handy compound interest calculator and dial in 100,00 for 30 years, and here's the important bit -- 7% interest -- and you get $761,226 -- basically the same number.
I must be missing something!
Yes I know he can rent out one more unit and make some more money, but it does not make much difference in the end. Because from everything I can tell, if you invest extremely conservatively in the stock market for 30 years you will achieve at least a 7% return, and almost certainly higher, and you did not have to spend 30 years of your life being a landlord, plunging toilets, evicting tenants, doing rehabs, financing properties, etc., etc. Now maybe you like doing all that stuff -- but if you had the choice between 30 years of work, or 30 years of literally no work at all PLUS MORE MONEY which would you choose? Would anyone actually prefer to make less money and do lots of work?!
Again, perhaps I am missing something entirely. Please let me know!
You make some good points Micheal. However there are plenty of things that are not factored here that can challenge what you said.
First of all as you stated cash flow is increasing. I am moving out next month which adds over 1k a month (12K a year) into the cash flow category. That right there drastically increases the total return over time (an extra 360K at the minimum). Second the rents on one are going up over 200 a month in about 4 months (originally rented in winter) and rents on another are going up about 100. 300 more a month is quite a bit and can really move the ROI meter.
Another very important aspect you did not consider, while living there i am saving 1000-1500 a month in rent. If i put 100K in the stock market i still have to go pay 1000-1500 (based on my area for a 1-2 bed) in rent. so if you want to compare it to that you should subtract 1000-1500 every month from the money you put in the stock market at 7% for 30 years. I bet your returns are now much lower. (minimum of 360K subtracted from your return plus all the compounding that would have come with it)
Another aspect not factored is depreciation. This year i am taking about 12K or so in depreciation which lowers my taxable income by 12K. That is another bucket that cannot be gotten from stocks and increases ROI by decreasing the amount you have to pay the Gov.
Another great one, appreciation. My building i bought last year for 500K was appraised at 645K when i went to get a heloc a couple of months ago. So i have made 145K in equity in less than a year due to the area gentrifying. I pulled out 50K of my initial investment that i am using to flip so technically i no longer have 100K in the building. Redo your analysis with 50K and i guarantee you get a different ROI also. I would have pulled out all 100K but did not know the building would appraise for that much. I will pull out the rest of the 100K (maybe more) in about 4-5 months and at that time my cash on cash return is infinite because i have no money in the building (and the rents cover all of it and still pays me cash every month). Try doing that in the stock market. If you buy in a good area and wait 30 years you will always get appreciation. However i bought in an area that is rapidly gentrifying so that i can be sure it appreciates quickly
So in the end i fail to see how the stock market can beat this unless you consistently return 30%+ a year. In which case i need to park some money with you and you need to start a hedge fund asap.
@Nnabuenyi Anigbogu -- I *really* want to invest in real estate! I like the work, and I assumed it would make me more money than just investing in the market. But I really don't see the numbers working out.
I took that spreadsheet, upped your Income by $1000/month and it brings your total return after 30 years to 1,159,804. To get that in the market you would have to earn a rate of 8.5%, and never work a day in your life. If you increase the rent some more, that just means you need a few more fractions of points more in the market.
I totally get that we all have to live somewhere, so it seems like paying yourself in a mortgage is better than paying a landlord in rent. But again, every penny you have in the market is compounding over 30 years. But every penny you pay on your mortgage is NOT going to you -- much of it goes to interest, of course. You really have to run all the numbers to get the complete comparison.
We could go back and forth on numbers all day -- but all I see is the bottom line. Do I really want to work really hard for 30 years and earn the same amount as I would have earned if I did nothing at all? That's why I look at the bottom-line number on that spreadsheet -- THAT indicates what your true return was, or will be, after 30 years.
And I really think we have to run some numbers at 30% return to see if that is actually realistic. There are lots of guys with $1 million, right? Any number of them could take their $1 million, invest in real estate for 30 years at 30%, and -- what would they end up with? $2,619,995,643! Try it here. That's $2.6 Billion! I really don't think there are many guys who do that! I think you quickly run into economies-of-scale, mortgage rates and down payments are higher for Commercial loans, etc. If you leave your $1 million in the market, every penny is working every single day for you, with no effort on your part, even if you have $2.6 Billion!
I don't want to get off-topic, or into politics at all! But there is one guy who fancied himself a great real estate developer, but it turns out if he had never worked a day in his life he would have BILLIONS more dollars. One could argue that his entire lifetime of work was wasted. Check this out.
I don't want to be that guy! At the end of 30 years you can look back at all your numbers and see exactly what your rate of return was on all your money, and you will be able to see exactly what you would have earned in the market. What if it didn't work out?! Again, I have invested in real estate in the past, and I am all geared up to do it again -- but I did some hard-analysis of some real numbers, and I just don't see them working out. This is SO not what I expected!
