Investing in real estate presents a strong diversification strategy, which is even more meaningful in times like today as the stock market has tumbled more than 25% since the beginning of the year. It is by no means a get rich quick scheme. However, it can be a powerful tool to build wealth over time through the power of cash flow and appreciation.
I am sometimes asked how that can happen over time. In today’s quick snippet, we will show just that – how rolling over your passive investments can help you build wealth over time and set you well ahead on a path of pursuing your own freedom (whether that is retirement income or early retirement from your W2 job or whatever shape or form your own freedom takes).
Needless to state, there are events that may impact the performance of any investment, including real estate. And as with any investment, it is important to recognize that there are risks. The only way to avoid risk of course is to not take one (but that is a topic for another article). However, to simplify the illustration and not overcomplicate it with multiple scenarios, permutations and combinations, we will make a few key assumptions. We will err on the more conservative side and assume returns will be on the lower end of the spectrum.
- $10MM purchase price on a 150-unit asset generating $150K in cash flow after debt service in Year 1, $200K in Year 2, and $250K in Year 3
- 3 year hold and no refinance for each investment
- the $50K investment represents 1.5% of total ownership share
- $50K is invested each year starting in Year 3 and reinvested thereafter along with reinvested capital
- 7% preferred return “pref”; not all deals offer a pref; pref returns vary but may range from 6% to 8%; pref is paid on the amount invested
- 100% return of proceeds at sale in Year 3
- 1.5x equity multiple
- 70% LP -30% GP split
- does not account for potential tax deferrals via depreciation
All you need is $50,000 to start with. Where could the $50,000 come from? We answered this very question in this article.
This is how your seed investment can grow over time, if reinvested.
Year 1: You invest $50K in your first passive investment. By the end of the year, you receive both your share of the cash flow (since you are one of the owners of the property) and your preferred return, both totaling $5,750 or $479/mo.
Year 2: As the property gets stabilized and cash flow improves, you net $6,500/yr in Year 2 (another $3,500 from your preferred return and $3,000 from your share of the cash flow).
Year 3: The sponsor sells the property and you receive not only your annual cash flow (now $7,250) but also your original principal back as well as your share from the gain on sale.
Year 4: You reinvest the proceeds ($75K) into another deal and invest another $50K from your annual bonus and savings over the past three years into another deal. That brings in $13.25K a year as detailed in the chart above.
Year 5-10: You repeat the process, as you stack up investments over time and therefore layer up more cash flow over time.
$6-36K annual income can be meaningful to many and can go a long way depending on where you live. Needless to state, if the actual performance of the investment is on the higher end of the performance spectrum and/or if you start with a larger principal investment, the potential for annual income is even higher (2x, 3x, or even 4x). The results can be further accelerated, if you invest $50,000 each year (vs. every 3 years) and roll that principal investment over and over.
We hope today’s quick snippet helped illustrate the power of investing in real estate over time. It certainly helped me visualize the potential outcome when I first started running the numbers. And it also helped demonstrate that achieving such desired outcome is well within reach. All one needs to do is to take action and get started. Taking that first step is all it takes to get one step closer to building your freedom and making those dreams real.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.