Eric Tait: Yes, absolutely. I wrote that article to demystify the process of real estate investing. I didn’t write it to tell people to go out there and buy single-family homes. But for the average physician, most of us have experience of buying a single-family home for our personal residence. Some of us have done well with it, just buy price precision. We’re in a good market. Some bought during residency and bought in areas where the price went down, so they feel like real estate is bad.
What I wanted to do is demystify the process and put it into an investment context. I started with juxtaposing real estate as an asset class versus stocks, bonds, mutual funds, and other things, explaining that you can get all the same returns and return types in real estate that you can in any kind of public equity or public debt kind of structure. We then wanted to go down and explain to people that real estate, when done correctly, you can basically choose your return, which means that if you want to make a 10 percent return, with real estate you can do that.
You may not be able to do it in your backyard. You may have to go somewhere else, but you can say, “My money is worth 15 percent to me.” So then what you do you just figure out, you know what whatever the rental rate is in this market – I just used single-family home. You could use commercial properties, you could use apartments, you could use whatever, but single-family was just to get the context for people that they can easily understand.
Once you know the rental rate of a particular property, once you know what it’s going to cost you if you’re going to use any debt, if you know what record the interest rates are, and then you can get a plug number for management, what’s insurance is going to be, what maintenance is a plug number. The real variable is just what price you’re going to purchase it at to get your backend in investment number. If you want a 10 percent return, well then well, this is the rental rate multiply it by 12, you know what your monthly note is going to be like, what your monthly insurance is going to be, just put a vacancy factor in there.
Okay, now the variable is, “Okay, can I buy it at X or do I have to buy it a Y to get the return that I want?” If you can’t buy a specific asset at the price that you want, then you just don’t buy. There’s really not a lot of guesswork in it. Now granted there is some management variables here and there, but for the most part, there are tried and true management principles that if you follow them, you’re not going to kind of deviate from kind of the norm. And so it’s really not a crapshoot. You can make the decision to purchase or not purchase absolutely based upon what the rental rate is in a particular market.
Now what you do want to do is you have to do a little bit of forecasting and say, “Okay, this is a market that these rental rates in 5 years are going to be roughly higher or lower, but you can take a snapshot in time, too, and say, “You know what, this is what the market has been in the past few years. This is where it’s going. I’m confident that this rental rate will be in place at this point in time, so now I need to buy the asset X amount of dollars to get the return that I want on the backend.”
It’s not guesswork. It only becomes guesswork when you’re buying real estate on the premise that it has to go up in price for you to make money. If you buy it based upon the understanding that you will make money off the cash flow and any price appreciation is just gravy, and you’re happy with your entry price, and the entry returns you will get off your cash flow, then it’s really hard to lose money.
Josh Mettle: That in my opinion is the most important fundamental 101 level understanding that someone has to have before they invest in real estate.
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