Are you Earning What You Thought On Your Seattle Investment Property?
I was stunned earlier this week to find that the average "Return On Equity" after taxes for the clients whose apartment buildings we have the opportuntiy to evaluate, was only 4% .
We probably all agree that 4% is a pretty low rate of return to be earning on an asset as challenging to invest in as real estate. When we look at the projected rate of return for vehicles much safer (savings accounts, CD's, money market accounts) and easier to invest in (stocks, bonds, REITs, and mutual funds), earning a 4% rate of return could really make you wonder if you were doing something wrong by holding real property. Especially if you started seeing your property values began to fall, as they are now doing, even in Seattle.
Seattle Apartment Buildings are Starting To Lose Value
Even historically sterling neighborhoods like Queen Anne, Magnolia, Beacon Hill, Capitol Hill, Greenlake, and other close-to-the-city areas are starting to see cap rates creeping up and properties becoming harder to sell as brokers have to drop listing prices to keep up with the falling market.
Is My Real Estate Investment A Big Mistake?
When you remember that real estate is illiquid, cyclical, can take time and money to manage, and doesn't provide an easy way to keep track of your investment returns, you may began to ask yourself if it wouldn't all be a little easier to just cash in the building and buy a nice easy municipal bond.
Well, be careful at what you're looking at. ROE only tells you part of the story.
Make Sure You Are Tracking Your Results and Looking at the Right Financial Indicators
The way we calculate it at my firm, the "ROE" or "Return On Equity" figure gives us only the CASH return the owner is earning on his equity. It includes cash flow from rents, laundry, vending and other income sources, but, importantly, this figure does not include a number of other important indicators such as debt paydown, tax savings, and most importantly, appreciation. When we evaluate property for clients, we include projections which incorporate these numbers as well.
You see, appreciation is the real wealth building powerhouse when it comes to investing in real estate. Especially in Seattle, where we've enjoyed rates of return on our real estate in the 10-20% range in more than our fair share of years.
That high anticipated appreciation is, in fact, the reason that people are willing to buy apartment buildings here with 4-5 cap rates (they're rising now, as property values fall...) for which they have to make a 50% down payment to qualify for a mortgage.
A Good Return After All
When taken together, these four real estate profit centers (cash flow, appreciation, tax savings, and debt pay down) comprise the real reason we invest in real estate. According to Lisa Vander, author of "The Real Guide To Making Millions Through Real Estate," these four sources combined should give us a 20-30% annual return on our investment portfolio.
And THAT, my friends, is the real reason we invest in real estate.
Seattle Area Real Estate Valuation - How to Get Yours!
Now, for a shameless plug. One of the most important services we offer for our clients at Marcus and Millichap is a real estate analysis. We offer these consultations free of charge, kind of like an "annual check-up" for your property, to help you better understand your property's performance and whether you are meeting your investment goals.
There is no cost to our clients for these services and, since it takes about 30-40 hours of work to analyze one building, the reports and data we provide are very comprehensive and useful.
Since on average it makes sense to sell a property after about 7 years of ownership, it can make sense to review your apartment building's performance regularly, even if you've bought it relatively recently.
If you would like us to take a look at your books and records to compare your property's performance to your investment goals, we would be pleased to do so. Give me a call and I will put you in touch with our best experts, whether your building is an apartment building, commercial building, office building, mini-storage or warehouse! Each of our agents specializes in a geographic area and property type. Talking to someone who knows the market will help you get the best numbers.
I hope you'll call and make sure your investment property is in good health in these turbulent times!
Emily
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