Earlier this week I had a meeting with one of the local startups that I am mentoring. Over the last year his company’s bank account has been reaping the rewards of their hard work and so he has been considering his best option to invest the returns from his compounding successes.
Knowing that I am an active real estate investor he wanted to learn about how real estate makes money. He had performed a number of cashflow analyses, but, was failing to find lucrative returns. I could sense his frustration mounting in each additional word that he was saying. “The best cashflow I’ve been able to find is approximately 8% on a real estate investment and that’s just… well average”. He frowned. I smiled and excitedly said “That’s fantastic, you should put in an offer, do your due diligence and buy this property if everything checks out.”
He stopped what he was saying, looked up at me and said, “Clearly there’s something I’m missing.” I stopped him dead in his tracks, he went from exasperated to attentive almost instantly. He knew he was missing something. What he didn’t know was that what I was about to show him was going to change his point of view on real estate forever.
For those of you who know me and have met with me before, you know that I always carry around my real estate cashflow assessments in my leather binder. Today one of these was going to come in handy. I brought out a cashflow assessment for a property that I bought nearly 5 years ago that was very similar to the property he was considering and I proceeded to explain…
Currently I am in the 5th year of owning this property. My predictions were conservative so I’m happy to report that I’m ahead of schedule on this return on investment (ROI) plan. I paid $69,900 down to acquire this investment property and to date my property has increased in value by $81,200, the mortgage has been paid down by $23,950, I’ve enjoyed $23,329 of positive cashflow and I’ve received $12,500 in tax credits resulting in $140,979 in increased net worth as a result of my initial $69,900 of investment! To top this off the original down payment of $62,500 is still equity within the home since the mortgage started off less than the value of the real estate!
While it’s important to invest in properties that have sustainable cashflow, it’s important to realize that cashflow is a very small aspect of how real estate can help you to achieve financial freedom. Understanding all of the aspects of how a property’s appreciation, mortgage paydown and tax benefits affect your net worth makes a breathtaking difference in the end result! Sure the cashflow of $23,329 in the last ~5 years as a result of an initial investment of $69,900 is acceptable, but it’s certainly much less than the actual returns gained of $140,979.
My mentee’s eyes took turns gazing at the document then at me as if he wanted to say something but couldn’t find the words. His silence accompanied with a smirk turned into an outburst “I get it!!!” he exclaimed as he reached across the table and gave me a hug. “I can’t believe I’ve been convincing myself all this time that it couldn’t work. My eyes were closed this whole time. It really is that easy!” he exclaimed. I smiled and nodded “Yes, there is not smoke and mirrors. It really is this easy. Of course real estate investing is work and you need to manage your tenants. It’s not a get rich quick scheme, but it is one of the most solid investment opportunities in the world.”
I got through to him, he’s made the offer and it’s been accepted. Of course he’s got to do his due diligence to perform, but, now that he understands the impact that real estate can contribute to his financial freedom there’s no way he can go back to thinking how he did before. This is not something you can unlearn.
If you find yourself in a similar position as my mentee and you’re stuck in a state of inaction, or worse yet, in believing your own lies (a state that I myself was also stuck in nearly a decade ago) I suggest you print this blog. Read it, re-read it, try to debunk it. Once you can’t, embrace it. Do whatever it takes to get over your state of paralysis and take action. Find a way to achieve your own goals. It requires stepping outside your boundaries of comfort but that’s just another excuse. Get it done!
This is why I enjoy mentoring so much. This is what makes it so rewarding. If an hour of my time can change a life then it was an hour well invested. I hope you enjoyed this blog and it’s made a positive impact. Always remember this – once today is gone you can never get it back, so make every day count.
Founding Partner, Amplified Investments