Epic Real Estate Investing - What is a Good Return on Investment (ROI) ? | 3rd Degree Thursday

Episode Date: August 7, 2014

If you have a question, comment or concern that you’d like Matt to address live on the show, send it to him at [e-mail] and type "3rd Degree" in the subject line… or leave him a voicemail on the Epic Hotline at 1-888-891-7203. See you tomorrow for a new episode of Financial Freedom Friday!     Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello and welcome. Welcome to the first episode of third degree Thursdays, the show where I subject myself to you giving me the third degree. You can send your questions, comments, and concerns to Matt at Epic Real Estate.com and type third degree in the subject line or leave me a voicemail on the epic hotline at 1-888891-7203. Do that and I'll respond to you right here on the show. And if you leave a message, I'll actually play your voice right here on the show and you'll be famous. Today's question comes via, email, though, from Jeff in Hampton, Virginia. And Jeff asks, I'm interested in purchasing my first income property. And I hear you speak a lot about ROI, return on investment. What's a good ROI? Well, good question, Jeff. And it's a common one. I get that question frequently.

And the answer, are you ready for it? Okay, here it comes. It depends. Generally speaking, you want your return, Jeff, to outpace inflation. at the very least, to make sure your investment is actually growing. You got outpaced inflation. And depending on what source you read, inflation is probably averaging, I don't know, somewhere between 3 and 4% per year.

That's kind of what you hear frequently. And also, on top of that, though, what most people don't realize is that that rate doesn't include food or energy costs. So in reality, inflation is probably closer to 5% or 6%. Some people will tell you even more than that. everyone's got their theory on it. It's very subjective, but probably between three and six percent, really. And what that means is your money is losing its buying power by three to six percent a year. So that's what that's what inflation does to your money. That's why you got to, when you're looking

at investments, you're looking at the return, you've got to calculate the inflation because your buying power is getting lower and lower. So you've got to make sure that you at least outpace that. So with that information right there, if you're not going to be that. you're not receiving at least a, I don't know, I'd say a 5% return on your money, you need to move it. You got to look for something else to do with it. So, you know, that kind of puts a whole new twist on your savings account. It puts it in a totally different light, doesn't it?

I mean, if the typical savings account today is offering less than 1%, I mean, it's like 0.6, 0.7%. I mean, I think mutual, or not mutual funds, but money markets are getting like, you know, 0.8 and 5%. And that's like, whoa, we're advertising this. we're aggressive, this is a good thing. You know, what that actually translate to is that your money is shrinking. You're losing money in a savings account. You're not actually losing money, but your money's buying power is shrinking by at least

three, four, five, maybe even six percent a year. And that right there, that's a real simple explanation to where that expression, savers are losers, comes from. It actually goes much deeper than that, and it gets much worse. It's pretty ugly if you dig deep enough, but that's not Jeff's question. Jeff wants to know what a good ROI is. So generally speaking, I'd say at least 5% annually. The buying power of your money at 5%.

At least it's probably standing still at the very least. It's not necessarily growing, not necessarily shrinking. Now above that, how much you want, you get to decide that. So, I mean, if you got 6% or 7% and you're okay with that, at least you know it's getting bigger. You're not standing still and you're not losing. But you get to decide. And you want to just kind of go out and look for whatever you can find,

It's above that. You know, speaking specifically to you, Jeff, and, you know, everyone else, you can put yourself in Jeff's shoes. Just pretend I'm speaking to you as well. I'm sharing this for your benefit as well. But I'm going to ask you, Jeff, the money that you do have right now, what is it earning? So if it's in a savings account earning 1%, and let's say you found 2% return on your income property, you just doubled your return, right?

No, you didn't double your return. You actually, you more than doubled your return. You did much better than that. And here's why. If you go back 100 years or so and you track inflation and you match it up to the appreciation of property values, if you take the, I guess, the chart of inflation and watch it, how it goes up and down. And then you watch the property appreciation go up and down. You put them like on top of each other. those two numbers, they run neck and neck.

So the fact that you've invested in an income property, at the very least, just by the nature of property value appreciation and its history, you've hedged against inflation. Just because you invested in an income property, you're keeping up with inflation. Okay. And, I mean, even if the property doesn't produce an income for you, you're hedged against inflation. So that's good. That's why real estate is one of the aspects of real estate that makes it really a good investment.

Now, if you're getting a 2% cash on cash return from the income that that property generates, you're getting a true 2% return on your investment, of which translates to probably five times what you're getting in your savings account. Get it? So you take the 3 to 4% of inflation, you put your 2% of cash on cash return on top of that, so you're probably on 5% to 6%. So that's 5 times, 6 times what you're getting in your savings account.

All righty? So minimum 3% of 5%? 3% inflation hedge and with a 2% income return, that's 5%. That's the quick and dirty math, but that's basically how it works out. So is that a good ROI? Well, I don't know. You tell me. I mean, if you can't do any better than 5% or 6%, then stay there.

Stay with that and wait until you can. Keep your eyes open for a better opportunity, but stay there until you can. If you can do better, then do it. A good ROI, in my opinion, it's just the best one that you can find. A good ROI is the best one you can find, but kind of use that inflation rate to, you want to stay at least above that, and then the best one you can find above that, that would be a good ROI. You know, Fernando and Mercedes, they have this conversation all the time with our cash flow savvy

clients. You know, a few years ago, we were easily finding properties that were producing 14 to 16% cash on cash return. I mean, just the cash produced by that property was generating a 14 to 16% return on the money that our clients put into the property. And that market, though, it's shifted. And it's always shifting. It's always going up and down.

And property prices have increased over the last few years at a pace faster than the market rents have been increasing. And the cash on cash returns are now closer to 10%. Okay. And I talked about that. You can go back, you know, a year ago in our episodes and I said, hey, it's going to be changing. This window is shrinking.

It's getting, you got to get in. Okay. So that has happened. And in some of our markets, they're dipping into, actual single digits. And some of our clients are getting a little discouraged or a little depressed about that and think that this window of opportunity is closed and now they're stuck and now they're little nervous and they want to hold off for a while. They want to sit on the sidelines. And that's like the worst thing you can do. That's the worst thing you can do in my opinion. I mean,

meaning if a good ROI is the best one you can find, then where else are you going to get a 10 or a 9 or an 8% return? You know, maybe the window is closed on on the 4%. 14, 15, 16% returns, but at 10, 9, or 8, where can you do better than that? Even if it's a 7% return. You know, if it's a 7% return on top of a hedge against inflation, the real estate, when you look at the buying power of your money, a 7% return actually translates it into a real world return of 12 to 14%. Then factor in the tax benefits of owning real estate, and boom, you can put a few more

points on top of that. So, you know, depending on your income situation, you know, it's not too difficult to get a 20% return on your investment when analyzing beyond the cash on cash return. When you look at inflation or you look at the hedge against inflation, you look at the tax benefits, easy to get 20%, most cases. And some people say that they're going to hang out for a while and wait. That's like the worst thing you can do. I mean, where are you going to put your money while you wait in that savings account at sub 1%, or that really aggressive CD that locks your money up for 10 years at 1.5%. How is that better? Don't get me started. Sorry, Jeff, that wasn't your question. You asked what a good ROI is. So in summary, you've got to get above a 5% return. That's my opinion based on current

inflation rates, so right around 5% or above. Anything above that, your money is at least growing. And what you decide above that 5%, that's up to you. Do your homework, do some research, go for the highest return you can find that you can reasonably and confidently manage. So you're on the right track investing in an income property. Good for you. And the reason is, you know, one, you're hedged against inflation. And two, you have a certain amount of control over your investment. And it's going to produce an income for you while you're hedged against your inflation. So damn, real estate rocks, doesn't it? It does. I should start a podcast on real estate. Anyway, Jeff, if you have any questions or if my team can be of any help in your income property investment, even if you don't plan to purchase it from us, that's okay.

You can still go over to cashflow savvy.com and click on our click-to-call feature that will typically connect you directly with Fernando. And he'll help you in any way that you can. Okay, that's why he's there. And that invitation actually goes out to all of you, by the way. That is what we do. It's why we're here. All righty. So thanks for your question, Jeff.

If you have a question, comment, or concern that you'd like me to address here live on the show, send it to me. me at Matt at Epic Real Estate.com and just type third degree in the subject line or leave me a voicemail on the epic hotline at 1-88-891-7203. All righty? See you tomorrow for a new episode of Financial Freedom Friday. This podcast is a part of the C-Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.