Christopher Miller, MBA | Specialized Wealth Management
Originally Appeared in Apartment Management Magazine
As a real estate investor, I find myself considering my other purchases the same way that I buy real estate: I want to buy quality goods that I won’t need to spend a lot of time and effort repairing, and I want to go as long as possible without having to replace them.
For example, I recently bought a new car. As the owner of a vintage Pontiac, I guess I’d be considered a “car guy,” but I don’t buy a new car every 2 years like some people I know. I view buying a car in much the same way I buy a sofa or a refrigerator: I want to buy a high-quality item that will last a long time and that will serve all of my needs. (In the case of a car, it needs to be comfortable and powerful enough to get by those folks who floor it when I try to pass them.) And just like that sofa and refrigerator, I will keep and use them until the day that I am forced to replace them.
Until recently, I had a car that I used and enjoyed for many years. It was a nice-looking car, and it fulfilled all my needs well. As my car had gotten up in years it required some substantial maintenance investments that exceeded the value of the car. While these maintenance items were certainly expensive, they were undoubtedly cheaper than purchasing a new car. I did identify some other important issues as well: As I, too, had gotten older I found it harder to climb in and out of the relatively low seats of a car that I bought as a younger man. Now that I had two children, we had a harder time fitting all of our stuff into the car sometimes. When I learned that my wife was pregnant with our third child, I decided that I had outgrown my old, faithful, car and that it was time to move on.
Have you outgrown some of your investment properties? Could it be time to move on for you, as well? This month’s article will review how to evaluate your real estate investments to see if they are still doing their best work for you.
What Is My Net Income From Each Property?
While working with investors, I will ask them how much they earn from their rental property. I have learned to always ask a follow up question – what are your gross rents? Very often, an investor may tell me “My apartments pay me $12,000 per month.” Their answer to my follow up question, however, can be – “I already told you my rents: $12,000 per month.” Our investment goal shouldn’t be to maximize our “Gross” income (what we receive in rents) but, rather, our “Net” income. (What we get to keep after expenses are paid.) Do the math to calculate your net income, and you will have some powerful information with which to make decisions.
What Is My Property Worth?
Next, we will need to determine what your property is worth. A good estimation can be obtained by looking at what comparable properties in your area have sold for. A better estimation can be found by contacting a local broker and asking for an opinion of value.
What Is My Return On Equity?
To find your return on equity, you’ll need to first calculate what your equity amount is. Take the opinion of value mentioned above and subtract the amount of any loans on the property to find your equity amount. Then, divide your Net Income by your Equity Amount to find a Return on Equity. This will state your Return on Equity as a percentage.
How Hard Do You Need To Work To Earn That?
One thing that’s often missing from our calculations is the Value of Our Time. Would you rather have an investment paying 8% annually that required 30 hours of your time per week, or one that paid 6 ½% that required one hour of time per month? I know people that will drive 45 minutes round trip to the “cheap gas station” to save $5 / tank, and know others who value their time more highly. Perhaps it could be time to sell your more labor-intensive properties and move into something that is easier to manage.
What Is My After-Sale Strategy?
If I sell my time-consuming property, what will I do with the proceeds? If I just take the cash, I’ll need to pay taxes. This could take a large bite of the profits from all those years of hard work. I can also defer, (potentially forever), these taxes by completing a 1031 Exchange into another real estate investment.
Buying A Replacement Property
Fortunately, helping my clients find replacement properties with lower time requirements is my specialty. I like to focus on partial interest properties managed by large, specialized, investment firms. Call my office at (877) 313-1868, and I’d be happy to share my current offerings with you.
This does not constitute an offer to buy or sell any security. Investments in securities are not suitable for all investors. Investment in any security may involve a high degree of risk and investors should review all “Risk Factors” before investing. Investors should perform their own due diligence before considering any investment. Past performance and/or forward-looking statements are never an assurance of future results. Examples given in this article are for illustrative purposes only. Individual results may vary based on IRS tax changes, market conditions or tenant occupancy. SANDLAPPER Securities, LLC nor Specialized Wealth Management/Chris Miller do not give tax or legal advice. We recommend that you seek advice from your tax and/or legal professional before investing. Securities offered through Sandlapper Securities, LLC. Headquarters: 800 E. North Street, 2nd Floor, Greenville, SC 29601. Member FINRA/ SIPC. Specialized Wealth Management is not affiliated with Sandlapper Securities, LLC. California Insurance License # 0I80282. Copyright 2018 Specialized Wealth Management. All rights reserved.
