Are You Thinking the Right Way About the Returns on Your Real Estate Investments

Today’s topic comes from a conversation that I had with someone yesterday. The question they were asking: why wouldn’t I just leave my money in the stock market with the returns that I’m getting there when real estate is only going up at the current rate of around 4% per year?

Maybe there is some validity to that. To be clear: I am not saying that people shouldn’t put money into the stock market. What I want to do in this video is to make sure that you are thinking right about your returns on real estate.

Let’s Break Down the Numbers

Let’s say that real estate goes up by 4% per year. That means that if I buy a house today for $800k and it goes up by 4%, then in a year it will be worth $832k which means I profited $32k. But you don’t make anything until you sell it.

Is this an exciting return? If it’s only a 4% return, you might be able to do better in the S&P index. But the thing is: you didn’t pay cash for this house. Let’s say you put 10% down ($80k), and you get $32k back, it works out to be a 45% return on actual cash. That’s just the first year.

Focus on the Long-Term Strategy

I say this all the time: the real magic in real estate happens over time. Here’s a scenario: one of my clients bought a house at the beginning of 2019. The house was roughly $500k and he put 10% down (so about $50k out of pocket up front). Yes, he had closing costs, etc. But to keep it simple, we are just looking at the purchase numbers.

Today, model matches for that house are selling in the $800k range! So there is $300k in equity gain theoretically against a $50k investment. Of course it is going to cost money if you want to sell it, which is very different between stocks and real estate. Stocks are liquid, where you can sell whenever you want (while real estate takes time to sell).

Let’s say $300k in equity and it costs $50k to sell it, resulting in only $250k in equity that the homeowner takes. That is still a 500% return on the money since 2019. That’s a pretty good return after expenses!

Look at the Cash Investment vs. Equity Return

Of course, the numbers are different depending on how much you put down and the value of the property. But it’s the leverage that I want to emphasize. Even though 4% isn’t an exciting return, but it makes a big difference when you look at the actual cash-on-cash return. Especially if you have an investment property that is bringing in an actual monthly cash flow with rental income.

My opinion is that real estate is a great way to go! Of course, it’s not for everyone. Different people have different strategies. But I wanted to share this video to make sure that people are thinking about it right by looking at the leveraged return on investment (not the full equity of the property). Remember that the property is going to appreciate at the same rate, regardless of the amount that you put down at the time of purchase.