Dave Meyer, On a rainy day, I will sit at my desk and completely geek out on Excel with my rental portfolio and come up with all kinds of numbers and measurments but man I dont even come remotly close to some of the geeking out that you do. Good job. You are the defently the Chief and I give it up to you.
My partner and I also did something similar last week comparing against HY CDs, Treasury Bonds, the average on the Stock Market, etc. It is great advice to share to make sure your deals will beat any other type of investing you would do (that may not be a favorable especially when you factor in taxes). Thanks Dave! 💪
I like the percentage you chose, and comparing it to other kinds of investments. And this applies to the full breadth of residential real estate investors, including those on the entire spectrum of value add to cash flow focus. WE NEEDED A NEW RULE OF THUMB! Down with the 1% rule!
If you want to look at risk adjusted I would suggest a few tweaks: 1) back out the yield on t-bills from ROR or compare both the stock and real estate play to t-bill returns. 2) I am guessing you levered the real estate investment, you should also lever the stock portfolio 3)you said real estate investing requires more time and effort than being an index fund, adjust for the value of that time 4)to really consider risk adjusted returns you need to reflect the cost of under performing. I can be pretty sure that the 100k in low cost whole market etf is going to get the 8%. 100k in real estate has more variability/risk is 2% enough of a premium to cover that?
I think a problem with this response is that it is extremely difficult for some normal person to be able to lever the stock market (from my understanding). While real estate it is easy and normal practice. People when talking about the stock market almost never lever the stock market.
Specifically for point number 4. When you are talking about leveraged properties this is very easy to beat the 8% of the stock market. You can actually do this by just looking at the appreciation alone on a leveraged property. For example a 50k down payment on a 80%ltv means buying a 300k property. That mean you now own 6x the amount of your down payment for only 50k. A 2% appreciation means you will get 6k year over year, now that in itself is a 12% return in respective of your 50k you paid each year because it is leverage.
I personally do not invest on margin but I think anyone with at least 2k in a brokerage account could invest. Leverage investing is risky, at least riskier than unlevered investing.. My question/comment was regarding the “risk adjusted” 10% to 8%. I don’t think anyone needs a spread sheet to tell them 10% return is better than 8%. But 10% requires work, expertise, and risk. 8% is there for anyone who can open a brokerage account and buy a low fee etc that tracks the whole market.
@zacyanez3832 yes you are right anything above the market requires you to then to do extra work. But when you consider normal investing strategy for real estate which is leveraging. You pretty much can increase your return 6x+. Especially if you are using leverage that makes it way more risky for sure because it's you don't properly manage and run the numbers you will fail. If you buy without leverage you will make less but you will for sure be safer and not have to worry about getting foreclosures or loans getting called due on.
LOVE IT!! Truly shows there is more than one way to “skin a cat”. HOWEVER, this is not something that can be done like the 1% rule that can be done in your head. Great for a more detailed review, second level review, then a quick review. Keep working on it, simplify. BTW, I couldn’t find the spreadsheet in the Resources webpage could you please direct me to it?
Interesting and good info. I'm not cash flowing on my 1 rental because I'm nice and wanted my tenant to enjoy lower-than-market rent in that area as I did when I lived around the corner. Now, she's in her 3rd year and I have to increase to market. When she's gone I think I'll do try AirBNB.
The other issue you run into with investing in the stock market is that a lot of the gains come from a very small timeframe. If you miss those weeks or months then you're getting much lower returns. I like your 10% rule.
Great video. This is a great way to actually visually display the added benefits beyond cashflow. People eyes usually glaze over when I start talking smh these types of numbers beyond cashflow
Positive cash flowing is very hard to achieve in CA unless you put down 40% downpayment or more. A 600k house here will give you $2700 rent for your reference. You would have HOA (couple hundreds), Mello Roos tax (couple hundreds) and all that. People are negatively cash flowing 500-2000 a month as a landlord in CA if they enter the market now (not in the past). But but but the appreciation is like sky is the limit 😂. CA is completely different market than other states.
I'm a Pro member but can't find the spreadsheet like others have mentioned. Interested in reviewing this as I've done similar analysis in the past. Thanks for the video.
10% seems like a good logical number - however - I would argue - market appreciation is hard to completely figure out. And cash flow - I think that number should be adjusted based on the price of the house. For example - say you have a house that costs $10k a year in loans - if cash flow is only 2%, that means you are taking home $200. Not enough to justify if the house say needs a major replacement like hvac.
How is the value add percentage calculated? Purchase price is 270K. Improvements is 15K. ARV is 290K. Wouldn't the value add be (290K-(270K+15K))= 5K/290K=1.7%? But that's just the instant value add percentage. So yeah, how's the value add calculated and how can it be recurring as part of your return?
Real Estate doesn't beat the stock market with appreciation.. Only cash flow. Im in both and Im in great neighborhoods. Maybe someone invested in the worst mutual fund ever
That is actually not true at all. How many assets are you Abel to get that you can get an 80%ltv attached to it. You for sure can't do that really in stocks or not easily. 50k down-payment 80%ltv buys you a 300k property. Thinking of a very conservative number of 2%appreciation. That ends up being 6k appreciation on the asset year over year. This ends up being a 12% return of your 50k down-payment to get the deal. That in itself beats the stock market.
Why would I do all that work and take on more risk for only 10%. I can get the same return in the stock market for no work or just put my money in a money market with no risk making 5%.
@@davidmeyer1101 People have to stop talking about the broad stock market. That should be compared to the broad real estate market. No single residence property has outperformed Nvidia over the last 10 years
@leroyjenkins5584 this is how you have a very risky portfolio. The reason why you do the big funds is because they have much less volatility. Even with the case of nvidia when you start using the formulas for risk adjusted it becomes much less because a single stock has a lot of volatility regardless of what stock it is.
A big reason to do this is because real estate is also a type of market that you can easily leverage money. Because of this that 50k you invested gets you at a 80% LTV a 300k property. Now that 300k property would be by his numbers getting appreciation alone for 2% which would be 6k a year. By that alone in relation to the money you put into the deal aka 50k. You are getting a 12% return year over year. Then debt pay down which is also technically a leveraged at the 5:1. Because of this you are making way more money than the stock market long term because of leverage alone.
Also and example of the debt paydown. With that I am currently cashflowing on my first property which I paid about 40k on May 2022. Since that time I have already gotten to 9% equity since then before any renovations I made. When I started at the 3.5% so I basically made my money back already in equity.
@@atubolino I've seen duplexes, triplex's and quad's for 250-350k in a couple of the Ohio markets and the combined rent exceeds $2850. I've been looking at Ohio since it made it the #2, #3 and #8 spots for Zillow top 10 hottest markets.
I love this video but it is really kinda difficult to use so it really wouldn't be useful because to do this you almost already have to do a full analysis to get these numbers. Also, something that I haven't seen talked about is actually running the numbers of actual return on equity in relation to your down payment and the return. For example, 50k with 80%ltv buys you a 300k residence. If you then have 2% appreciation year over year which is a 6:1 so it would then be a 12% return in respective of your down payment. I think this would be a really good video with a ton of views because nobody really quantifies that stuff.
Comparing the stock market to Real Estate is like comparing apples to oranges. The stock market is 100% passive while RE is time demanding. In the stock market, you can make 10% in a single day, week, month, and/or quarter. Since October, I jumped back in the stock market. Of the 10 stocks I currently own, I am up over 55% on 3 of them, up 16% and 8% on two others, and down 1%, 3%, & 6% on another 3. I am up 21% on the portfolio (that's a 42% increase on an annualized basis). Since all of these were purchased in a ROTH, the gains are not taxed. Of course, as quickly as these stocks rise, they can decline as well. That would never happen in RE (safer bet). In the future, I would not compare stocks to Real Estate. Both are exceptional investment vehicles and both should be in everyone's portfolio. Even though a gas engine needs both gas and oil to run, we do not typically ask which is better/more important. I do like your creativity of the 10% rule. It forces the one analyzing the deal to look at all possible areas of return on a property. Helps us to look at the entire picture.
I never understood the 1% rule because if interest rates are higher you can cash flow negative even if it's hits the 1% rule. Basing it off a cash price makes no sense. You need to calculate debt too
Thank you Dave for this excellent video! One question regarding tax benefits: I see $2209 in year 1 benefit at the top of the spreadsheet, but I notice that in the rates of return section, it is below $1000. Also, the amount changes every year, but I would expect it to stay the same size as it is based on the purchase price? Would you kindly please explain this?
Hey Dave, good video. How does IRR stack up against your 10% rule (differences, etc)? I think one of the X-factors is going to be accurately estimating the rising (non linear, as you have it input currently) costs of maintenance repairs and most notably insurance costs, depending on where you live. I believe environmental factors will play a crucial role in the future for accurately estimating future returns, 10% rule or otherwise.
Buying at 8% interest and accounting for vacancy / Repairs / Cap ex and property management If this leaves you with + very cash flow , I am Shocked. I am buying creatively with 4% interest and accounting zero for all the above. Still negative cash flow. Pay down just cover the negative cash flow to make it breakeven. Still on hook if any expense or vacancy comes up. I am buying in Orlando/ Tampa / Houston / Dallas and RaleighDurham triangle. Depreciation is just premature gratification. Only play for me is 5 year hold and 30% appreciation over that time. Leverage at 1:8 So 100 k investment holding 800k assets with 30% target gains will get me out at 200% gain over 5 years. MAY BE TOO STUPID.😢
In his calculations, Dave is adding the portion of the amortized loan paying down the loan principle to the appreciation growth to get the total increase in owner's equity. If the market takes the property up by 2% and then rent used for mortgage pays down the debt by 1%, the owner's equity increases is 3%.
Yikes, adjusting rules to justify investments that don’t provide returns is not the answer. also, depends on holding period. 5 year period might give you a negative 30% on value of the property. calculate that into your bogus 10% target.
