After watching your Special Report video presentation, I was wondering how your analysis is coming to those dollar amounts of potential gains and losses of maintaining or selling a property in a specific area…..the reported amount differences seem quite high.
Yes, the difference is quite surprising when you don’t give your profits back in the down cycles.
To keep it simple, we assume all cash flow from rentals equals your expenses. (That’s pretty close to reality for most markets… break-even cash when you factor in ALL expenses, reserves and mortgage servicing.) It doesn’t really affect the results because it’s the SAME assumptions for BOTH scenarios.
So all we’re looking at is “REAL” (inflation-adjusted) APPRECIATION (that’s where real estate wealth come from.)
When you buy & hold, you get the benefit of the leveraged appreciation, but you also give it back in the down cycles.
Here is a hypothetical that may help.
$20,000 down, buy a $100,000 property.
5 years (or 10 years – doesn’t matter) later let’s say it’s worth $180,000 ($80k (or 80%) total appreciation)
If you sold you’d have $100k cash of which $80k is profit (a 400% ROI on your $20k initial investment).
Here’s where the two scenarios separate:
Buy & Hold
You don’t sell, and that market enters a down cycle where it loses 10% of its value per year for 5 years (ignore compounding).
That 180k property is now worth 90k. You only have $10k of your original equity left.
If you sold now, you’d have $10k (gross) to re-invest … so let’s say you “hold” and stay in the same market, and it has the identical up to and down cycle as before.
5 years (or 10 years – doesn’t matter) later let’s say you had the same 80% appreciation. That $90k property is now worth $162k (80% total appreciation)
It then enters the same down cycle where it loses 10% of its value per year for 5 years (ignore compounding).
That $162k property is now worth $81k. You only have $1k of your original equity left.
You’ve lost 95% of your original $20k investment.
You Sell at the end of the first upcycle and put the $100k in the bank. You re-invest that $100k (plus any interest earned) at the start of the next cycle.
Using the same leverage ratio, that $100k down payment buys you $500k worth of real estate.
Let’s say it has an identical up to and down cycle as before.
5 years (or 10 years – doesn’t matter) later you had the same 80% appreciation. That $500k property is now worth $900k (80% total appreciation).
You sell before the next down cycle, payoff the $400k mortgage and have $500,000 leftover, of which $480,000 is (gross) profit.
That’s a $2,400% ROI on your original $20k investment.
Last update of the article: 04/15/2020.