[Transcript Summary] Welcome to Money Mondays, where we share new real estate investing content every week. Join us on our journey as we learn from our experiences, including the mistakes we’ve made, to provide investors with confidence. But if you prefer, we’re also happy to assist you with your investments at Disrupt Equity. With over $700 million in acquisitions and projected to reach a billion dollars this year, we’ve amassed a portfolio of over 5,000 units.
Through our journey, we’ve gained valuable insights and continue to learn every day. We’ve had the privilege of working with over a thousand investors and are always looking to bring on new investors who seek better returns and beat the market. In this video, we’ll discuss six different real estate investment strategies you can explore. Real estate offers various pillars of success, including market appreciation, value-add, cash flow, amortization, tax advantages, and financing.
So grab a pen and paper as we dive into these topics.
#1 Market Appreciation in Real Estate
First, let’s talk about market appreciation. Though most people may be familiar with this concept, especially those on the West Coast, it’s important to note that historical real estate appreciation rates typically range from two to three percent. While it may not be a sudden 50 percent growth in a few years, over time, the value of real estate tends to increase. This is because valuations are directly tied to income and as rent grows, so does the property’s valuation. Holding onto a property for a longer period allows for further growth, enabling opportunities such as refinancing or restructuring deals to extract cash. Appreciation is just one of the numerous ways to generate cash in real estate. It serves as a stepping-stone for future endeavors.
As your property begins to appreciate over time, it’s crucial to consider the increasing delta between the amount of debt and equity in the deal. The growing spread leads to more positive cash flow since a smaller percentage of the income is used to service the debt. That’s why we emphasize the importance of time in the deal over time being in the deal.
#2 Value Add
Additionally, let’s talk about value add. As we know, commercial real estate is valued based on cap rate, which we’ve covered in a previous video. In short, cap rate is a way to evaluate commercial real estate and compare deals within the same market. It measures the returns on a cash investment if there were no improvements or changes made compared to the previous seller. By improving the NOI (Net Operating Income), we can enhance the property’s value. Thus, when searching for properties to purchase, we are constantly on the lookout for opportunities to add value. This can be achieved through various means, such as upgrading the interiors to command higher rent or introducing amenities like covered parking.
Ultimately, these value-add strategies allow us to acquire properties at a certain cap rate initially. As we implement improvements over time, the cap rate improves, resulting in increased cash flow. For instance, if a property initially covers only its debt, but after a year, the revenue increases by 25%, the surplus becomes positive cash flow. This forms the basis of our approach to generating income quickly from real estate.
This allows them to identify neglected areas, address financial limitations, and transform properties into lucrative income generators. By utilizing the value-add strategy, one can enhance property value and force appreciation.
#3 Cash Flow
Cash flow, the lifeblood of real estate investing, becomes the ultimate goal – representing the surplus income generated after expenses are paid. By focusing on value-add, we maximize cash flow potential and ensure a fruitful return on investment. Cash-on-cash return is what truly matters for day-to-day operations; it reflects the actual return on equity invested.
Amortization, the gradual debt reduction over time, plays a pivotal role in commercial real estate transactions. Understanding concepts and implementing value-add strategies unleashes the full potential of investors’ properties. Let’s break it down: After 10 years, the loan is recalculated as if it were a 30-year payment plan. Why is this significant? Well, think about it. When you buy a house, if you hold onto it for 30 years, you’ll own it free and clear—no debt. It’s an equity-building opportunity. With time, your loan decreases while your equity increases, creating tangible value. And we can’t forget about market appreciation. As the market flourishes, the gap between the loan and equity widens, amplifying your gains.
Real estate is truly powerful when all of these factors align. Now, let’s touch on amortization, the unsung hero often overlooked. It’s a tremendously influential aspect that improves your financial standing. But here’s a crucial tip: be well-informed about the loan you’re stepping into. Some loans, such as interest-only loans, won’t help in burning down the note over time since you’re only making interest payments. Understand the loan and its impact. These aspects combined can have a profound impact on your financial well-being.
#5 Real Estate Investing Tax Advantages
Now, let’s discuss another essential aspect: tax advantages. Although not immediately apparent, these advantages have a significant impact in the long run. When investing in commercial real estate, employing a cost segregation study allows you to itemize the property, increasing the depreciation rate in the first year. Please consult your CPA or expert for personalized advice, but if structured correctly, significant losses can be used to offset income and reduce your tax burden. This aspect is often overlooked when discussing returns with investors, yet for many, it is a primary reason to invest. Some investors choose real estate for the immense tax benefits. Instead of paying a hefty tax bill on a significant income, they seek ways to minimize it, and depreciation plays a vital role.
Investors often seek out safer deals and stable areas, prioritizing long-term gains over immediate returns. One example of this is utilizing tax benefits – when an investor puts in, let’s say, a hundred thousand dollars, they may receive a tax document called a K1 stating a negative fifty thousand dollar income from the investment. The investor can then apply this fifty thousand dollar paper loss to their taxes, potentially saving them from paying taxes on that amount. It’s a powerful benefit.
Furthermore, wise financing strategies can work in your favor when managing debt in real estate. Consider the factors we’ve discussed so far – market appreciation, value add, and cash flow. These factors can compound over time. Imagine purchasing the right property, improving it over a couple of years, and then refinancing to pull out a significant amount of cash. We aim to do deals where, in four to five years, we can achieve a hundred percent cash-out, meaning we can effectively own the property without having any of our own money tied up in it. This results in infinite returns, as our initial investment has been completely recouped.
It’s about time in the deal, not just timing the deal. The longer you’re invested, and with all these other factors at play, the more power you have to pull substantial amounts of money out. I met someone who has been involved in real estate for 40 years, with a business model centered around purchasing properties and holding onto them indefinitely. Over time, as the properties appreciate and cash flow accumulates, they have been able to do multiple cash-out refinances, pulling out 100 percent of their invested capital each time. The returns on this kind of strategy are extraordinary, reaching well beyond traditional benchmarks.
In summary, it’s not about focusing on one strategy alone. It’s about leveraging and integrating multiple strategies simultaneously to reduce risk and create opportunities for both cash generation and long-term wealth accumulation. These are the fundamental pillars of real estate investing that have the potential to unlock incredible financial achievements. Consider these factors and their compounding effects. Real estate was an eye-opener for me, showing me its immense power.
As someone from a tech background, I used to think I was the smartest person in the room. But when I compared real estate to the stock market on Google, I saw that real estate appreciates by only two to three percent a year, while the stock market averages ten to eleven percent. Based on that, I thought real estate must be a bad investment. But here’s the thing: real estate’s true power lies in compounding. When you combine all six factors that contribute to its success, you can generate substantial wealth. So, in a nutshell, these are the six ways we find success in real estate.
Remember, to succeed, you need to create a solid business plan, do thorough research, and understand how all these factors impact your investment. Once you’ve done your homework and found the right deal, execute your plan, and let it stabilize. Then move on to the next one. Over time, these investments will start to stagger, building and snowballing your wealth.