Thursday, September 19, 2013

Great advice from Don Campbell of REIN

Last week I sent you a link to an interesting letter I wrote, hope you spent 5 minutes reading it...if not, Read it HERE now.

You know, I'm asked all the time why I invest in real estate...why am I 'biased' towards this asset class.

Truth: I have money in the stock market, I lend money at ridiculous interest rates privately, I have a few hobby farms, some new warehouses, a bit of commercial/light industrial...but I still LOVE my residential properties; they're my bread & butter and they've made me a lot of money (and still do).

So stick with me for 5 minutes, you'll like this.

Let's go through some super simple math you might have missed from my letter above...and the reason why residential real estate is so cool.

Let's say you go out and buy a single property TODAY for $300,000 (call it a suited house) and based on your conservative numbers, this property does nothing more than break even every month (and we're buying in a stable, well-performing market based on the fundamentals).

No cash flow, just break even.

Then we're going to assume that the market will stay flat forever. We both know the market will go up, it will go down, but assume that over the next 20 years those ups and downs equate to a FLAT market...it's still worth $300,000 in 2033.

Still with me?

Good.

Now over that 20 years the property just breaks even, nothing more, nothing less. Sure we've been up some months, but we've had some repairs & maintenance, some vacancy...so, over those 20 years we just break even.

Some would call this a boring piece of real estate...even a 'non-performing' piece of real estate.

Call me crazy, but guess what, I call that a $900 a month savings plan that someone else (called my tenants) paid for .

That's right, after 20 years of holding this 'non-performing' piece of real estate I'm left with the equivalent of someone giving me $900 every single month for 20 years...I call that one heck of a savings plan.

Tell me, do you put $900 away every month right now? Maybe...but that's still YOUR money, money you had to work hard for!

I'm talking about $900/month that someone gave me for the last 20 years, and it's mine...all from an unexciting, 'non-performing', piece of residential real estate.

Want the math?

OK. So I bought for $300,000, I put 20% down plus closing costs, so roughly $65,000.

In 2033, 20 years from now, I sell it for the exact same price...$300,000.

I get my $65,000 investment back.

I pay the Realtor and closing costs and I'm left with roughly $215,000.

That's no cash flow, that's no appreciation, that's simply my tenants paying down my mortgage (both principle and interest) for the last 20 years and leaving me with a free and clear property.

So $215,000 divided by 20 years = $10,750 per year

Divide that by 12 months = $896/month...that someone else gave me.

Sure we can calculate opportunity cost for your $65,000 investment, but tell me, would you be even mildly happy if someone, some stranger, was contributing even $500 a month into a savings plan for YOU & YOUR FAMILY for the next 20 years????

That's like someone else contributing to your RSP fund every month. You OK with that??

Of course!

Go ahead, poke holes in it if you want...

"Don, no one gets a 20 year mortgage!" OK, you're crazy if you think my investment properties aren't paid off in 20 years...and no, I don't kick in more money from my wallet to do so!

"Don, what about a the roof, the furnace, etc???"

You're absolutely right.

But let's be serious, over the next 20 years do you think my rent is going to go up or down? Do you think my property will be worth more or less in 20 years buying in a fundamentally strong area?

Heck, even WHEN interest rates go up, guess what? So will my rent!

Folks, this is a no-brainer.

You can spend the next hour tearing this apart, telling people this Campbell guy is full of #$%...

OR maybe...just maybe, this makes sense.

Bottom line - real estate is simple...it's just not easy!

And we're not talking get rich quick, we're not talking some 'sexy' investment strategy that 0.1% of investors ever pull off, just a simple old piece of real estate that you rent out and maintain for 20 years that YOU have 100% control over!

IT'S SIMPLE - I invest $65,000 to make $215,000 (before tax)...I'll take that all day long, and that's ONE PROPERTY.

Now imagine if you bought 10 properties just like that over the next few years (which isn't rocket surgery). 

More truth...every single property I have like the example above, cash flows. Maybe not crazy cash in the first few years, but they cash flow (not break even).

And ALL the properties that I've sold were worth more when I sold than when I bought them.

It's the power of leverage, the power of having control of your investment, and the power of being in the business of putting a roof over someone's head (a business that ain't going anywhere any time soon!!!)

Think about it, read this note a few times, this stuff works.

Next week I'm going to share some of my favorite personal strategies for taking properties like the 'non-performing' one above and making them kick out cash every month.

To Your Success,

Don's signature
Don R. Campbell
REIN™ Senior Analyst

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