Imagine for a moment that you just orchestrated the most amazing real estate deal of all time. This deal is so impressive Scorsese will make a movie about it with Di Caprio playing your part. People who aspire to become successful real estate investors will hold week-long case studies of this deal for years to come.
All the elements are present. Through world class negotiating skills during purchase, you locked in so much equity it should be illegal. Price to rent ratio is in the low single digits so your property throws off cash like an ATM machine. And finally, the return on investment might make people think you’ve entered the loan shark business. A thing of beauty, a work of art.
And yet, I’ve got news for you. The most amazing real estate deal of all time, will NOT change your life.
Let’s run through the numbers of one such hypothetical scenario.
Suppose you were able to purchase a $250,000 property for $150,000 and secured six figures of built-in equity. No repairs are needed. The first week on the market you find a great Tenant willing to pay $2200 per month for a two year lease on the property. Total operating expenses plus mortgage payments add up to $1400 per month leaving you with positive cashflow of $800 per month. Assuming a 35,000 capital investment that’s a 27% cash on cash return with internal rate of return in the triple digits.
If you zero in on the numbers of such an amazing real estate deal, it’s pretty impressive. But when you open up your focus and look at the big picture, things come into perspective a little clearer.
Let’s look at the end result. With all the amazing equity, cashflow and returns, at the end of the day even the most amazing real estate deal produces just $800 per month in passive income. That’s a fantastic return on the capital invested but from the perspective of your complete financial picture, that cashflow will not change your life. It will not allow you to retire early or do the work you want to do instead of the one you have to do.
The main point I want you to takeaway is this: Real estate investing isn’t some form of olympic sport where investors compete for the highest return, or the largest amount of built-in equity record. Instead it is a vehicle you use to create the passive income and net worth required so you can design and live the life you want.
Even when you pull off the most amazing real estate deal of all time, if the aggregate of your investing efforts fails to create the life changing circumstances that set you financially free, it’s all for naught. Or put a different way – if all you do in a lifetime of investing efforts is pull off a couple of “most amazing deals” but fail to fundamentally alter your financial life then what good did it do?