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Real Estate Investing - The 10% Solution!

By Gene Riemenschneider

Real Estate Broker/Owner with Home Point Real Estate DRE # 01492725

January 09, 2011 06:46 AM

I am a big advocate for Real Estate Investors getting the best return possible on your money. Well we have all been taught (or are learning right now) to avoid credit and pay cash when ever possible.

However, this does not hold true for Real Estate Investing. When it comes to Real Estate Investing you want to maximize your return on investment. This means borrowing as much of the purchase price as possible for your Real Estate Investment.

The initial reaction of many Real Estate Investors is negative. The two main objection I hear is the interest rate is higher when you put less down or the payments are such that there is no profit in the Real Estate Investment.

My point comes back to the fact the key issue, in most cases, is the amount of profit you are making on the actual cash out of pocket is the determining factor in how profitable a Real Estate Investment is. I have prepared a chart on a potential Real Estate Investment in Antioch California. Take a look at the numbers prepared based on 10%, 20%, 25% down, and cash.

The numbers are not even close. This is an example and all Real Estate Investments will vary. But the numbers are based on real life properties and opportunities.

I work with Real Estate Investors all over the place. My office is in East Contra Costa County near the Cities of Antioch, Brentwood, Oakley, Discovery Bay, and Pittsburg.

Call me or e-mail me for more information. Find out about how to get a Real Estate Investment with only 10% down! For Valuable Information get my Free Book on Real Estate Investing!

Check out My Post On Getting Started Right on Real Estate Investing!

And Low Down Payment Real Estate Investments!

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Li Read

Sea to Sky Premier Properties (Salt Spring) - Salt Spring Island, BC

Caring expertise...knowledge for you!

Good concepts, here, and a timely alert to consider investment buying.

Jan 09, 2011 07:07 AM

Nor Yeretsian

Envoy Capitol Realty Inc. - Toronto, ON

Envoy Capitol Realty Inc., Brokerage Toronto

Rene , interesting post - re/post .

cheers

Nor Yeretsian

Jan 09, 2011 07:10 AM

Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

Thanks for the comments and thanks for coming buy. Real Estate Investing is a lot different than Real Estate for personal use.

Jan 09, 2011 07:20 AM

Michele Miller ~ REALTOR®, LMC, HSE, CHS, SRES, CMRS

ERA Key Realty~Worcester County Realty Group - Worcester, MA

'Helping You Make the Best Move"

So right Gene! If it can be done, real estate investing should be done now!

Thank you for your post!

Jan 09, 2011 07:36 AM

Michele Miller ~ REALTOR®, LMC, HSE, CHS, SRES, CMRS

ERA Key Realty~Worcester County Realty Group - Worcester, MA

'Helping You Make the Best Move"

So right Gene! If it can be done, real estate investing should be done now!

Thank you for your post!

Jan 09, 2011 07:36 AM

Renée Donohue~Home Photography

Savvy Home Pix - Allegan, MI

Western Michigan Real Estate Photographer

I like your cap rate spreadsheet. I am going to come back here to revisit to make my own :)

Jan 11, 2011 12:38 AM

Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

Thanks Renee,

I find that high praise from you. Your Post are always so nice.

Jan 11, 2011 03:22 AM

Not a real person

San Diego, CA

Great post, Gene. When I was heavily involved in flipping properties, I sometimes had a partner who wanted to pay cash for as much as possible. After creating a similar chart, I was able to convert all of them to credit.

And if you work it right, you can get lots of home improvement credit cards (Lowes, Dixieline, Home Depot, etc.) that offer “12 months same as cash.” If it takes longer than 12 months to renovate and flip a property, you’re probably doing it wrong.

Jan 11, 2011 05:12 AM

Bill Burchard

3B Realty: 951-347-3818, CA - Murrieta, CA

Broker, Realtor, Representing Buyers and Sellers

Great post, Gene, and likely a real eye-opener for the investor with $150,000 cash. He can buy one property for cash, or several properties making just the minimum down payment.

Jan 11, 2011 08:45 AM

Larry Story ALC

Total Care Realty - Greensboro, NC

Beneath it all is the Land, Covering all of NC

Gene,

Great concept and numbers but this is set-up for a rental. Change the numbers for a flip and the ROI % actually changes on the Cash only deal. I have investors and they always pay cash and will turn a property in 30 to 60 days max. Then they are aggressive in the listing price. It does not stop there. If it does not sell or get attention in two to three weeks they start cutting the price. They plan on a lower margin so they can do more in volume.

Jan 11, 2011 08:57 AM

Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

Larry, on a flip Cash may be the best option. This is for a rental. However, Russel above has some good ideas about financing the fix portion of a flip.

Jan 11, 2011 09:30 AM

Jeramie Vaine

Century 21 Carioti - Orlando, FL

Gene,

Great post and information on the cash vs. credit investment! With most investors setting up these great charts shows the long term gains and how stable the investment can be!

In the Orlando Market we have seen a larger push with cash purchases due to the lower prices and quicker closing time frames. Larry made some great points with the aggressive investor approach, that pretty much sums up the best way to invest in Orlando, aggressive, creative and pro active!

Great advice all around!

Jan 18, 2011 12:34 AM

Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

Thanks Jeramie, Showing people the numbers not only makes them money, it makes me money. I would rather sell 4 houses to someone than one.

Jan 18, 2011 02:50 AM

Adam Aguilar

Adam Aguilar (Reliantra-Reliant Realty & Associates) - Toluca Lake, CA

Reliantra.com/Reliant, Realty~Serving Southern California

Gene,

Interesting concepts. I agree there are several investor opportunities in our current market whether the goals are short-term or long.

I was concerned because I did not see you allocate for operating expenses or a vacancy factor. Also the scenario was examined as a cash flow project only. What about the resale proceeds and how it affects the overall investment return? What about the Return on Equity?

Your numbers seem impressive when you only look at how financial leveraging affects the profit margin. Let us not forget there is a difference between speculating and investing. One of the main reasons there are so many distressed properties on the market is because so many supposed "investors" saw the magic dollar sign of leveraging. There are times when leveraging makes no sense and an all cash purchase is better. Consider the same scenario you proposed above, but with an interest rate of 7.75%. The numbers change drastically.

Jan 23, 2011 09:52 AM

Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

Adam,

I do include a 10% Expenses Catagory. That may be too high or too low, but I certainly reccomend they build a reserve.

I understand Operating Cost and Vacancy Issues. These articles are aimed at new and first time investors - I try to keep the terminology simple. Ussually when you are dealing with apartment houses or large numbers of rentals that will be more predictable. However, as you are dealing with a single family home here there are a lot of variables dealing with tenant selection. I talk about this in other sections.

You could account for your Vacancy Rate as part of the "expense catagory" or put it in as an up front cost on your first tenant anyway.

I think return on the resale is a big issue and very important. I am saving that for another post. However, with SFH it will generally mirror the rest of the real estate market in the area.

Jan 23, 2011 02:13 PM

Charles Perkins

Charles G. Perkins, CPA - Burien, WA

I have to agree that leverage can be a great thing. It is important though to be sure that you are not over leveraged. Negative cash flow can put an investor in serious risk of losing everything.

The calculations you show have some critical errors. One you are not accounting for any vacancy. As an investor, I assume at least a 5% vacancy factor. It is also clear that you are not allocating anything for reserves. One thing you learn owning real estate is that major repairs will happen over time and a wise investor sets money aside for this. Many investors also choose to hire a property management which is not in your model either.

Feb 13, 2011 07:29 PM

Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

Charles,

You are right about the over leverage when it comes to negative cash flow. However, at this time we are getting positive cash flow on rentals from the start. That is why now is the time to invest.

There is no accounting for a property manager, which runs about 7% with a firm some of my clients use,this includes placement cost.

I do not know if the expenses are realistic. It depends on the property. It is easy to say 5% vacancy factor when you are talking about large numbers of units. I however, am talking about a small investor with 2 o3 units. It may be zero for some years and more in other years. I would build that cost into the ongoing expense reserve. Double it and you still have a great return on investment.

Feb 14, 2011 08:42 AM