Too often we are approached by investors looking to acquire bargain priced properties to fit rigid formulas they have developed to provide specific returns on their investment (ROI). These formulas usually call for acquisition prices to be in the area of $35,000 to $40,000 per door in order to “guarantee” the investor around a 20% ROI.
From our experience there are two huge potential flaws in investing in real estate this way:
- There are no guarantees and while basic expenses like taxes, insurance, and moderate maintenance are usually accounted for, there are still always surprises. As we sit 10 months into a global pandemic, I wonder who factored this into their formula? Show me the investor savvy enough to plan their ROI around record unemployment and a moratorium on evictions, and I will show them to their new office in the executive wing of our company.
- When you become too focused on the instant gratification of your monthly ROI, you run the risk of missing the true long-term way to get rich in real estate. Property appreciation. By concentrating too much on low acquisition prices that fuel ROI’s, investors often lock themselves into areas where sales prices stay stagnant. Simply put the houses in the Detroit market that were selling for 35-40k four years ago are still selling for about the same amount. In the same time period, we have seen properties in more attractive areas balloon in value. Fueled by a resurgent mortgage market, areas like Rosedale Park, The University District, and Bagley have appreciated sharply in the last year and a half. The homes that sold to investors as rentals for $60-70,000 five years ago are now being dressed up and sold to home owners for upwards of $150,000. While they may not have always performed as well on a monthly basis, they still showed healthy returns (usually about 12%) while growing significantly in value.
Investors need to envision their properties more in line with how they would a stock. The ROI equates to the dividend. It is nice and important, but not necessarily the real beauty of the investment. That comes from the growth in the value of the stock, or in this case the property. ROI’s are still very important but, in the end, buying investment real estate is very similar to buying a home for your family. It’s all about location, location, location.