Written 3/14/2019 Author: Brian McHone
Simply put, investing in real estate is one of the best ways to grow your wealth. Knowing what to buy, when to buy it, what to pay, and what return to expect are just some of the considerations that you must make before investing in the real estate market.
I would venture to say that becoming a real estate investor is simple, but not easy. That may sound tongue and cheek, but it's true. With the right help, the right approach, a clear understanding of the process, and adequately managed expectations, investing in real estate is simple. Why I say not "easy" is because there are inherent risks involved when you put your hard-earned money on the line.
Just like the real estate market itself, investing is highly, and I mean HIGHLY localized. The metrics we consider when investing in a college town like Blacksburg WILL NOT BE TRUE for everyone reading this article. However, the vast majority of my audience will be parking their cash in Montgomery County.
I'll keep it simple and provide a roadmap for growing your wealth. Now bear in mind, there are details, and you know what they say about "the devil being in the details," but let's look at this from a thirty-thousand-foot view if you will.
Step one is to locate an income-producing property with meager vacancy rates. Generally, anything found within a 24060 zip code will fit neatly into this category. Next, we need to determine the potential cash flow by multiplying the gross monthly income by twelve months. Then we subtract all annual expenses such as taxes, insurance, HOA dues if applicable, any utilities paid by the owner, management fees if you're not going to self manage, and routine maintenance. You should use 5% as a margin to build a coffer for repairs as well.
Once you have this number figured out, we can then begin to determine a value using the cash flow. Most single unit properties in and around the Blacksburg area will have cash-on-cash ROI margins in the 10%-13% range. That's not a total return on your investment, that's just the liquid return weighed against your out of pocket expenses to purchase the property. The total return when you consider property appreciation and principal pay-down is substantially higher.
I'll give you an example, one of the townhomes I purchased last year in January of 2018; I bought it for $160K. Those same units are now selling for $220K. That's a 37% increase in 14 months. That's not the norm for sure, but to expect an appreciation in value is a given. That $60K increase in value is real. You can realize that margin by either selling the unit or tapping into the equity to purchase more properties. I chose the latter.
So let's take the above example and relate that to wealth generation. If you buy that same townhome today at $220K, you will need roughly $50K down. That should cover your 20% down payment and closing costs. If the investment is earning $6000 per year in positive cash flow ( $1800 rent minus PITI and HOA fees leaves $500 mo.), it will take 8.3 years to earn back your $50K upfront investment. That's a 12% cash return on your investment. Not too shabby, eh?
Now let's look at some ancillary benefits. In those 8.3 years, the property should increase in value by $85K at a conservative rate, and the payoff will be roughly $150,000. So let's add all that up.
$50,000 in positive cash flow + $26,000 in principal paid down by tenants + $85K in appreciation....drumroll please! ----------------------------------------------------------------
That equates to $161,000 in wealth generated. That's staggering when you consider it costs you $50K to do it. That's more than tripling your money in 8 years.
Another exciting aspect of buying investments in a college town is rental demand and how it affects ongoing rent increases. Right now, there are more students to shelter than we have bedrooms to put them. This imbalance puts supply/demand upside down and creates upward pressure on rental rates. Where do they stop? Who knows. As long as VT continues to increase its student population, this problem will remain intact. One might not consider it a problem when you own the properties that are growing in value because of the increase in housing demand. That's a perspective issue, and this article is bent towards the investor.
Again, there are more details to consider, and I'd be happy to tease them all out for you, but blog posts are supposed to be short and informative.
Investing in your future is a must, and in my honest opinion, there's no better place to do it than Blacksburg, VA.
If you're interested in learning more, please give me a call.
Update: As of December 2019, that $160K townhome is now selling at $265K. That's a 65% increase in value!