The new Tesla Model 3 is only $35K? That’s at least what their advertising would like you to believe. It’s only a “bit more” expensive than your last vehicle purchase. Maybe it’s finally time to get on that; you’ll save so much money on gas too!
Hmm… it seems too good to be true, let’s slow down and take a moment to do some due diligence… after all, the advertised price is after government tax rebates and alleged gas savings. That seems like a shady way to advertise… after all, the base purchase price is really ~$47,600 and after all the fees and high financing costs it’s really much, much more.
You can purchase a luxury 3 bed/2 bath condo for $600K (http://bit.ly/2Clh7J9) which would cost you $4,400 monthly excluding utilities ($3K mortgage + $600 property tax + $500 property maintenance + $300 insurance)
…or you could purchase a 6-plex (http://bit.ly/2MLDgVP) which earns you positive cashflow ($500-900 / month), appreciation ($1K-1.5K / month), equity via mortgage paydown ($1K-1.2K / month) and tax benefits via reducing tax basis due to depreciation ($2K / month).
In 2015, we purchased this luxury 6-plex for $960K with indoor parking, central air, four 3 bedrooms/2 bathroom units and two 1 bedroom 1 bathroom units. Each year we’ve been close to cashflow neutral, earning absolutely no monies from positive cashflow. Many of my startup students ask in bewilderment, “Why bother?”
The reality is that many of my new startup students have walked away from investment opportunities simply because they don’t generate cashflow. Unfortunately, they have likely missed out on some pretty amazing opportunities. The reality is that positive cashflow isn’t the only way to build wealth in real estate investing; in fact it often isn’t even the typical way.
Last year, my friend bought a cottage for $180K. His down payment was 25%, or $45K. This year he boasted to me that he had made $18K in a year off the cottage. It was recently appraised at $195K (+$15K equity) and he rented it out a few times this summer to earn $3K in additional cashflow. Not a bad return right? $18K total. If only it was true…
Here’s the reality…
To all of my entrepreneurial friends, if you read just one book this year, I strongly recommend this be it.
After mentoring nearly a hundred entrepreneurs in 2015, and my going through my umpteenth own self-discovery phase, I’ve noticed one of the biggest mistakes made by almost everyone is a burning desire to do more. This is the not only the wrong approach to achieving success; as you gain momentum in different areas you continue to de-focus yourself and push yourself further away from achieving the potential that you are capable of in any singular focus.
Last night I met with a colleague of mine who said she didn’t have any money to invest in her retirement. As it turns out, within five minutes I found several instances where she was believing her own lies. The biggest one? Her car costs as much as her mortgage… that’s nuts!
Mortgage ($810 mortgage + $140 property tax)
$950 / month
Car ($465 payment + $250 insurance + $240 gas)
$955 / month
Does that $30,000 kitchen renovation really make you that much happier? Did you need granite countertops, new stainless steel appliances, built-in double ovens and recessed ceiling lighting?
Alternately, would new modern cabinetry with a standard countertop at a tenth of the price have been sufficient?
What about that $30,000 pool install? Did it need to be installed in-ground? Did you also need to replace your patio and extend it with high-end interlocking stone?
Alternately would an above ground pool that was a tenth the price have been sufficient?
Do these “luxurious” upgrades really bring you increased sustainable happiness or are you a victim to consumerism, short-term lust for higher-end physical possessions and, of course, trying to keep up with the Joneses.
What can $100,000 buy you?
- Home expansion / renovation (~500-750 sq. feet)
- Luxury car & costs for 5 years (insurance, gas, maintenance, etc.)
- Camping trailer, insurance & lot for 5 years
What can $100,000 earn you?
Alternately, if you deposited the $10,000 saved each year over the duration of 10 years instead of spending on one of the luxuries above and then earn an average return of 7.8% each year for the next 30 years you would own investments valued at $694,763.08.
The first step is to consider what area interests you the most; it’s always easier to choose something that you have some degree of interest in because you will be more likely to best absorb the materials and take action.
If you’re a beginner and not sure what area interests you most I recommend you read one of the following blogs I’ve written that are geared for beginners on these topics:
This is what a real estate cashflow analysis looks like. It informs you of your up-front costs, assesses cashflow positivity with current and potential future scenarios, budgets appropriately for vacancy/repair/contingency and accounts for overhead costs even if they may be unrealized (e.g. property management, accounting, bookkeeping, etc.). It is also vital to highlight any assumptions and verify them in writing, absolutely no exceptions.