How one property generates 57% annualized return
You do not have to be a jack of all trades to invest your hard-earned dollars to earn a 57% annualized return. All you need is to pick one real estate strategy, learn and turn the learning into practice so you can get the results. I am going to share with you one of my investments where I earn a 57% annualized return after holding the property for less than 20 years. That is I earn a 57% return for every single year that I own the property. I will share the reasons why I picked this market and how I was able to acquire many of these properties even they’re a thousand miles away from me.
If you are new here, this channel is about investing in cash flow real estate, achieving your financial independence, and making an impact. My name is Korianne, and I achieved my financial independence when I was 35 through cash flow rental properties after consistently investing in cash flow properties over 8 years.
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Why do I invest in this market?
You can watch the rest of the content HERE.
Reason 1 - NEW COMPANIES MOVING INTO THIS AREA
In the old days, I subscribed to a lot of real estates investment magazines as a way for me to stay current with real estate markets in the US. I read a magazine in my office about a few high-tech companies in California are moving to Austin. That is a signal there will be a population increase in this area. That also means there will be housing demand to accommodate new professionals moving in this city and its surrounding suburbs.
I did my research about Austin and started making a few phone calls with the real estate agents and local property management companies. I got two real estate agents that I like and requested them to send me current listings in the market. I requested one agent to send me a listing on the North and South area and one agent send me a listing on the West and East side of the city. The reason for that was so I could learn about the price range in each area and know the school rating for them. About two months later, I flew to Austin and checked out some of the areas, and confirmed the data that I found from the listings that I got from these two real estate agents. Just a couple of months later, I made a few offers on bank-owned foreclosures. Even in the peak real estate market in 2006, there were still bank-owned properties. These few properties were only 2-year-old built, and they were in good rentable conditions, so I was able to get a mortgage for each of them. For some of the distressed properties, banks will not lend you money because it’s not in a livable condition. Then, you will have to find alternative financing for those properties, which could mean a higher interest rate.
Reason 2 – Affordable housing cost
The home price was affordable due to the medium household income. I also like it because there were and are a few fortune 500 companies in the area. My target tenants are above the medium-income earners in the area.
Dell’s headquarter is located nearby, and there are other corporate employers like IBM, HEB, AMD, etc.
I bought this property in 2006, I purchased it at $147,000 and the rental income was at $1,200.
I put down 20% and the closing cost, with a total initial investment of $33,400.
I also paid $3,000 for make-ready before renting it out. The property was only 2-year-old.
After paying all the expenses, the monthly cash flow was $250.
The cash-on-cash return on my initial capital investment was at 8.9% per year
I recently checked, the property value is $430,000 and the rental income is at $1,995.
The current mortgage outstanding balance is $73,000.
The current monthly cash flow is $925
Let’s do the math and see how much equity I have gained in the last 16 years holding on to this project.
$430,000 - $73,000 = $357,000
In the last 16 years, I only have had two set of tenants: the first one stayed there for 5 years, and the 2nd family has been living there for 11 years. I have not had any late payments from this property. Even at the rental rate at $1995 per month this property is still at the below-market rent. I do not want to raise the rent given the tenants have been paying on time for the last 11 years and I like to keep these tenants.
However, I had some capital expenditure expenses during the last 16 years to replace the new ac unit, appliances, and roof so the total costs were around $25,000.
Another thing to keep in mind when you calculate expenses for your rental, make sure to put a 5% reserve per month away for future big expense items like replacing A/C, Roof, or Appliances. It’s a good habit to plan for unexpected things so when there is a big expense coming up, you will have the fund for it. Also, to keep your tenants happy, fix these big items in a timely manner when they arise.
Let's do the math again and see how much equity I still have in this home and see what an annual return on investment for this one project is.
$357,000 – $25,000
Total equity gain: $332,000
Return on Investment: $332,000 / $36,400
Total percent return: 912% over 16 years
Annualized return my total initial capital investment: 57 %
I have not factored in the yearly cash flow and the depreciation tax deduction that I have been received in the last 16 years. Even without factoring all that in, the annualized return here is already 57% for every single year that I own the property.
A few things that you can take away from this video.
1. Research and pick a right market
You should take time to learn about each market well before you invest. Check on its macro-economic factors that may play a key role in affecting housing prices.
You can do all research online to find all these data, from job and population growth to employment, demographic, school rating, medium income, medium home prices, types of companies, etc.
Understand your numbers well before making an investment.
2. You CAN’T time the market.
I bought this property at the real estate market peak AT THE TIME. My plan to keep this property for a long time so I will not sell even when the market turns south. Just a couple of years after investing in this property, the housing market crashed in 2008 and the property value dropped 30% below my purchase price. I did not panic or feel the urge to sell because I purchased this property at the right price and the rental income covered all the expenses, so I continued to pay for the mortgage payment and receive the monthly cash flow every month. I was able to ride the wave and this property has tripled its property value after 16 years. If I did a panic sell in 2008, I would not see my 57% annualized return.
As for appreciation, the Austin market jumped at a whopping rate of 42.2% this last year.
A few new and additional big tech companies’ headquarters have been moving to Austin in the last few years like Tesla, Oracle, and others, so Austin’s home prices have increased at a rate much higher than any other city in the US. It’s great to be an investor in the Austin market and see the growth in the last 16 years. The home price increased so much due to low supply and high demand for housing units in the Austin market. Not sure how long this increased rate will last, but in the meantime, I enjoy the fruits of my invested time in doing the research before deciding to invest in Austin 16 years ago. Also, I believe at some point, this market will level out when the supply grows to meet or surpass the ongoing demands.
The sooner you invest every of your dollar, the sooner you can create a great financial future for yourself. Only invest in investments that you understand.
There are still many other cities and states with affordable housing. You can find one and start to invest. Think long-term and take care of your tenants well. In the long run, housing costs continue to go up at the pace of 3-5% on average. When you can borrow money cheaply, you gain multiple ways on your investments.
I continue to invest in cash flow assets when all numbers pencil out. I do not like to keep cash when I know it loses value over time. Especially, during the higher rate of inflation that we are experiencing in 2021 and 2022, with more money printed to stimulate the economy.
Let me know in the comment if you have already invested in real estate. What are your favorite real estate markets? And maybe your ways of dealing with inflation.