Investing Architect

Author: Erion Shehaj

What happens after you decide to move forward with your Blueprint
Based on conversations after the fact, many of our clients revealed that they had been reading Investing Architect for months (and in one case, over a year) before they decided to contact us to craft and execute their real estate investing Blueprint. This surprised me a little at first.

But after giving it some thought it all started to make a lot of sense. Before you take the step to contact someone like me, you have to come to two important conclusions. First, you have to decide that investing in real estate offers the most efficient path between where you are right now and where you aim to be at retirement compared to any other asset class. Then, after considering the plethora of options in the real estate investing spectrum, you have to decide that the Blueprint method we advocate is the one that best aligns with your goals, risk profile and personality. As tall an order as that might be, the “glue” that brings it all together is trust. After you decide that you will start investing in real estate and our strategy speaks to you unlike any other, you must be able to trust that with our help you will be able to execute a plan and bring the strategy to life.

So, just in case there are some of you who might be wondering what happens after you decide to move forward with our Blueprint real estate investing strategy, I thought I’d just tell you.

The Blueprint comes first

Everyone’s combination of financial goals, capital, income and time is unique so the very first thing we do is craft your Blueprint. For this you will need to provide some answers to our questions and then we can answer your most important questions in return. Namely, we need to know:
- What is the main goal? (i.e retirement),
- What income would accomplish it? (i.e. $75,000/year)
- How long do we have to get there? (i.e 10-12 years)
- How much capital do you have saved at this moment?
- Based on your job income, what’s your savings rate? ( i.e $25,000/year)
If you don’t quite know the answers to those questions, let this be an invitation to start thinking about them. Once we have those answers, here are the major questions we can answer for you:
- How many properties you will need to acquire during your asset accumulation stage?
- How much liquid capital it will take to acquire those properties?
- How long will it take you to complete the acquisitions based on your current level of capital and your savings rate?
- How long your capital growth stage will take using just the positive cashflow from the properties?
- If that will take too long, how much you will need to contribute from your job income to pay off the properties in the time we have till retirement?
- How to allocate your porfolio between standard and premium assets based on your investment timeframe?
Financing and commitment

Now that we have our “roadmap”, we have to get ready for the trip. Before we go about the business of acquiring investment properties we connect you with our investment property specialist Lender. You aren’t obligated to use them after the pre-approval is done but after you speak with this pro you will understand why nearly 100% of our clients opt to finance their investment properties with this Lender. Once the preapproval letter has been issued, we are almost ready to start looking. Also at this stage, paperwork is drafted, reviewed and signed that establishes the client-agent relationship. We commit to help you achieve your goals and you commit to working exclusively with us.

Potential properties and acquisition

Now the fun part begins. We research hundreds of potential investment properties daily then distill that list down to about thirty contenders. At this point we run a market analysis on each property to find out what the incoming rent would be if we were to acquire it and what is the current market value for sale. What follows is an in depth cash flow analysis that projects the positive cashflow, capitalization rate and cash on cash return at Year 1. Then, it tells us how the property will perform throughout the investment timeframe and what your internal rate of return is during that time. When a property satisfies our high minimum standards and it’s a good fit for your portfolio, we will forward our research to you along with general property information and lots of photographs. After this, if you are a local investor, we would schedule a time to tour the property. Photoshop is a hell of a software so boots on the ground on every property our clients buy are mandatory. If instead you’re one of our out of state investors, we could shoot a video walkthrough of the property and send it to you. This process may take some time and will require some patience because Houston is the hottest real estate market for investors after all. But when that right property comes along, we pull the trigger and start negotiations right away. We go into those negotiations a strong pre-approved Buyer and that enhances our chances of success.

Hope that gives you an idea of what’s around the bend when you decide to move forward with your Blueprint real estate investing strategy. If there’s other questions or concerns you might have, ask away in the comments below, email me or call my cell at 713.922.2702.

wolfgangfoto via Compfight
January 25, 2013
What catching monkeys can teach you about real estate investing

The story goes that in ancient India, the natives used a clever technique to catch monkeys. Unable to catch them outright since the monkeys were much faster, they dug a hole in a tree trunk that was just big enough to fit the monkey’s open hand. Inside that hole, they placed some nuts to lure the monkey and hid. When the monkey would reach in and grab the food, he would make a fist that was bigger than the hole in the tree. The monkey was trapped and the natives would come out of hiding and catch him with ease. This technique worked because it would never occur to the monkey that if he just let go of the food, he could pull his hand out again and run away.

We can derive three essential real estate investing lessons from that story.

First, when you’re faced with an important real estate investing decision, there are almost always more options than what’s readily apparent at that moment. As an illustration, last week an investor asked me for my opinion on a dilemma he was facing: In the price range where he was looking, there were only two viable locations and neither of them would serve the investor well. But he kept insisting that he had thought this through backwards and forwards and there were no other options. He had painted himself into a corner then continuously went over those same two steps that corner allowed him to take. When I pointed out that he could purchase an excellent property in a high quality location at a slightly higher price while maintaining solid returns, there was a long pause on the line. His assumption that the property had to be restricted to a certain price range wasn’t based on data or reason – he just held it to be true and it negatively affected his decision making process. So next time you are faced with a similar situation don’t just accept the readily apparent options – there are always other alternatives. You aren’t restricted to either going hungry or being trapped – You can just pull out your hand with no food and live to eat another day.

Second, everything that shines isn’t necessarily gold. In the real estate investing world, we are constantly taught to “keep an open mind” and not turn down a deal that might not fit all our criteria exactly. “Sometimes you just have to be creative” – the advice usually goes. I’m certainly not against open minds or creativity. But sometimes when the only tool you have is a hammer, everything starts to look like a nail. When you have a solid investment plan that produces specific investment criteria, it inevitably eliminates some deals from your consideration. But in the end, that’s a good thing. Because it’s fine to be an open minded, creative investor as long as that flexibility does not lead you down a path that isn’t aligned with or (worse) goes against your goals. Next time you see that tree trunk full of goodies, it’s perfectly fine to whistle past it if your plan advises your to stay away from that type of tree.

Last, you can’t make money in this business if you don’t take risks but as Warren Buffet says: Don’t ever test the depth of the river with both feet. It’s not the end of the world if you pass on a deal that might have made you money if it ensures that you don’t go all in and get wiped out. In Wall St they have a saying: Bulls and bears make money but pigs get slaughtered. It’s a fine line between ambition or drive – both necessary ingredients to a successful investor- and greed. The stories of successful investors ending up in bankruptcy court due to greed are too numerous to mention. If you ask them, they will tell you that absent the greed, they could have taken a completely different path towards a prosperous retirement. But instead they kept chasing the next deal and the next one after that losing sight of risk in the process. Like the monkey found out, sometimes what might look like a “great meal”, may be the trap that seals our demise.

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January 21, 2013
Houston real estate market outperforms: Rents, sales and prices surge in 2012
Every month of 2012, Houston’s real estate market continued its gallop posting higher sales and prices each month year over year – usually by double digits. Most importantly – the statistic that never fails to put a smile on my face – rents continued to rise reaching their peak at the end of the summer for the back to school rush then maintaining high levels through the end.

At the bottom of this post, there will be a link to the Realtor association press release for those who want to peruse the whole thing. But there’s four numbers you really need to know that tell the whole story of 2012 and write the prologue for this year:
1. The average rent for single family homes in Houston was $1552/mo – that’s a 3.1% increase over a good 2011.
2. Sales of all Houston properties came in at 73,994 units – that’s a 16.3% increase year over year.
3. The average home price climbed to $225,000 – that’s a 5.4% increase from the previous year.
4. Inventory at the end of December was at 3.7 months! – Down 36% from 2011 (lowest level since 1999)
As we have pointed out in our previous updates on the state of the market, the real estate market’s strength was fueled by a solid local economy. According to The Economy at a Glance: Houston – a Greater Houston Partnership Publication:

The Houston-Sugar Land-Baytown Metropolitan Statistical Area added 85,300 net new jobs, a 3.2 percent annual increase, in the 12 months ending November ’12, according to data released in December by the Texas Workforce Commission. The private sector added 86,600 jobs, a 3.8 percent annual increase, during the same time frame. Houston continues to lead the state’s economy, with no other metro adding as many jobs.

Houston’s November unemployment rate was 5.8 percent, down from 7.3 percent in November ’11. Texas’ unemployment rate was 5.8 percent, decreasing from 7.2 percent in November ’11. The U.S. rate was 7.4 percent, a drop from 8.2 percent the past November. This is the lowest unemployment rate for Houston, Texas and the nation since December ’08. The rates are not seasonally adjusted.

To put that unemployment rate in perspective, that’s 1 percentage point higher than full employment so the Houston economy is definitely headed in the right direction.

As great as 2012 was for the Houston real estate market, many of you may be wondering what this might mean for the market in 2013. Fortune telling isn’t one of my strongest talents so I won’t even try. But we can look as some indicators that might shed some light on what’s to come especially as it pertains to real estate investors.

Interest Rates

The Federal Reserve intends to keep interest rates low through the end of 2014. That’s if the economy continues to grow at a similar 2-3% per year pace. If there’s an acceleration in growth, the Fed (as we call them among friends) will have no choice but to raise rates to stave off inflation. Another interesting note here is that they plan to keep rates low – that’s doesn’t necessarily mean that they will be AS low as they have been in 2012. In fact, most economists predict that mortgage rates at the end of 2013 will be 0.5-0.75% higher than they were at the end of the previous year. And when most economists agree on anything, that’s really saying something. That rate increase may seem insignificant, but a half a percentage point increase in interest rate will cause the cash-on-cash return of a real estate investment to drop by 1%. It’s not the end of the world obviously – but if you had the option of choosing between getting a higher or lower return on the same investment just for pulling the trigger earlier…

Economy

When we try to assess what might happen to the local economy, we have to consider projections for the national economy as the two are intertwined. Quoting from that same Greater Houston Partnership publication:

Recent reports on U.S. gross domestic product (GDP) reflect an improving economy. Real GDP (i.e. growth once inflation has been factored out) increased at an annual rate of 3.1 percent in the third quarter of ’12, up from a tepid 1.3 percent rate in the second quarter…Houston receives an additional stimulus to its economy when U.S.GDP grows at a 3.0 percent or better annual rate. Slower growth doesn’t signify a downturn for Houston. Slower growth means that Houston must rely on the other drivers—energy and foreign trade—to create jobs in the region, which has been the case the past three years.

Most forecasters expect the uncertainty over U.S. fiscal policy to limit growth in the first half of ’13. If Congress makes significant progress by mid-year toward resolving the challenges, GDP growth should pick up. The consensus among NABE economists is for real GDP growth to reach 3.0 percent by the fourth quarter of ’13.

Provided that the national economy toes the expected line (or better), the Houston economy should continue to grow in 2013, creating more jobs, lower unemployment and higher demand for real estate (both to buy and rent) as a result.

Real Estate

The most telling indicator of the four numbers mentioned above is the inventory figure. Just over three and half months of inventory city wide indicates a very tight supply. If you doubt that’s true, just ask any Buyers who have been looking for a home in the last six months or so. They will tell you tales of frustrating bidding wars, multiple offers and pride-swallowing full price offers. Inventory levels that low almost guarantee rising prices in 2013. The good news for investors is that the Houston market likes its price increases slow and steady as indicated by a respectable 5.4% increase last year. If you sneer at that number, I invite you to remember that 4 years ago we didn’t drop by double digits like some markets, either. In my opinion, rents will continue to rise due to high demand from inward migration seeking good paying jobs. Sales will post a deja vu performance as well.

The King is dead. Long live the King. 2012 was great. 2013 will be even better for Houston’s real estate market.

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HAR Press Release

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January 17, 2013
Out of state investor’s guide to investing in Texas
At this point, the idea that Texas is the best real estate market for long term investors is a well-established reality. And as it gains more national publicity and exposure, we are receiving daily calls from interested investors that reside out of state: New York, Massachusetts, Las Vegas, South Carolina, Washington DC – you name it. After they read articles about our Blueprint real estate investing strategy, they recognize the powerful impact that investing in high quality Houston real estate assets would have on their returns and retirement. Houston’s competitive advantage that springs from a strong job-producing local economy, affordable well located assets and attractive price to rent ratios has become hard to overlook.

However, from the viewpoint of an out of town real estate investor, it is one thing to recognize that the Texas market offers great investment opportunities. It is another to actually take that first step and acquire investment properties in that market. Inevitably, questions and challenges arise:
- I don’t know the local market – How will I know which areas I should buy in?
- How can I be sure that I will find a tenant soon after I purchase the property?
- I don’t want to have to make a trip to Houston every time I buy a property – that will cost lots of time and money. How can I avoid that?
- I don’t want the tenant to call me in the middle of the night with a leaking sink. How will I manage these properties from far away?
Although they arise out of fear, all these questions and challenges are legitimate and every out of town investor should have an answer and a plan to address them,before they buy their first investment property. So we’ll take them one by one and provide those answers right here.

Knowledge of the local market is the crucial puzzle piece that, when absent, can derail a real estate portfolio and condemn it to fail. The entire Blueprint investment strategy hinges on the investor accumulating quality assets in great locations that will rent to great long term tenants and stay rented. These properties must be located in excellent school districts, nice and safe neighborhoods and offer easy access to freeways, shopping etc. That’s what attracts great tenants that lease for long periods of time, take care of the place like it’s their own and pay rent on time. We can help you get this right: Not only do we have vast knowledge of the market but we also share our expertise with you during your feasibility period before you decide whether to move forward with the purchase. For every property we provide you with micro market statstailored specifically for that property, its neighborhood and the immediate vicinity. We show you what amount the property will command in rent (and why) as well as what the current market value of the property so you won’t overpay for the property. As part of a property proposal, we share with you all comparable rentals and sales for the neighborhood – so you can have the same data at your disposal as a professional appraiser. Last but not least, you will get a macro view of the overall market so you can see the trends of where the market is and where it’s headed during your investment time frame.

Every cash flow analysis starts with “Potential Rental Income” – for an important reason. Your ability to bring in rental income from a good tenant in a timely fashion is the foundation for the returns that follow. Falter here and the rest of the numbers are nothing but pro-forma, pie-in-the-sky projections that mean zip. So how can you be sure that once you close on your investment property there will be a tenant in place within 30 days or so? Those micro market stats I mentioned before will show you not only what’s the going rental rate for that area but also how long it takes an average property to get leased there. Before you buy, we make sure that those statistics show a market that has sufficient demand for the properties for rent in the area. And then, we pick great properties, make them move in ready and market them aggressively to bring in interested tenants. In 2012, we got 4-5 applications per property, leased out our properties in 21 days on the market (or less) and got two year lease terms on average.

When it comes to making trips to Houston, we recommend that each investor who isn’t familiar with the Houston area, at least fly down once while in the process to purchase their first property. Usually a 2-3 day weekend trip is sufficient to view the property itself, get a tour of the different areas and get a feel for the town. During such a tour I will show you actual examples of investment properties owned by other investors so you can have a benchmark to compare. After that orientation trip, it is up to you if you want to come down for every property. Most our clients, come down the first time then close on additional properties remotely. Usually we are able to arrange for the closing documents to be emailed to you so you can sign them from where you live. Therefore, additional visits are an option but not required.

Property management is usually the elephant in the room for out of town investors. You can feel it after just a few minutes of our phone call that the “big question” is coming: How do I manage a property from thousands of miles away? There are two possible solutions to the long distance property management problem: Implementing a property management system or hire us to manage the property for you. In a nutshell, the first option minimizes the need for “active” management through systems for rent collection and repairs, a trustworthy broker that will help you find and screen good tenants (I know a good one , a handyman to handle miscellaneous items and an eviction service just in case. The second is self explanatory. The difference between the two is that investors who use our property management system save just over 30% of their cash flow before taxes that would have otherwise gone to management fees.

In closing, there seems to be a lingering stubborn idea that investors should avoid investing in markets that aren’t a short driving distance to their residence. While I understand the fear, I think it’s a recipe for disaster. If an investment is working the way it should, you shouldn’t have to drive by the property whether it’s located two miles or two thousand miles away. This illusion of control – that somehow the distance to the property determines it’s performance – leads investors to put their money in markets where it makes zero sense to invest. But at least, they get to drive by their money pit, right? You don’t apply this selection criteria with any other asset class. Do you only buy stock in companies where you can tour the facilities periodically? I rest my case. Take what the market gives you – don’t try to fit a square peg in a round hole and invest in way-past-their-prime markets just because they happen to be close to you. Pay attention to the fundamentals – economy, jobs, demand, supply, price. Work with a trustworthy adviser and implement systems to limit your risk. A decade from now you’ll be glad you did.

Are there any other concerns I forgot to address? Please let me know in the comments below or contact me. If you’ve been thinking about building a long term real estate investing portfolio we should at least talk. 713-922-2702 is my cell.
January 15, 2013
Debt free real estate investing for income and appreciation

When I have previously outlined our Blueprint real estate investing strategy, I have usually given examples that involved the leveraged acquisition of quality assets followed by an aggressive campaign of debt elimination to produce maximum cashflow at retirement. But as crucial as smart leverage can be to the investing success of some investors following our strategy, it is not required or necessary. At its very essence, our Blueprint is the road map from where you currently are to where you are trying to go at the end of your investment horizon. So in that spirit, the right investment strategy for you is determined and shaped by your current financial situation. For instance, an investor with limited capital will follow a very different path to retirement than another investor with a large enough capital base to generate sufficient debt-free income to retire tomorrow.

Next, let’s take a deeper look into the main reasons and motivations that push some real estate investors to the path of debt free real estate investing for income and appreciation.

Risk aversion to debt

Most investors that make the choice to avoid leverage completely do so to avoid the perceived risk that debt inevitably adds to their portfolio. And it does not matter that the added risk is usually accompanied by a higher, leveraged return on investment. A very conservative investor is content with a lower rate of return if they can avoid the risk of financing. They view leverage not as a temporary tool to grow your capital base in a shorter amount of time but as a fatal risk that could bring the whole thing down. And often they have the time and/or the patience to build their wealth at a slower pace as long as it’s done within their risk comfort zone. This isn’t neither right nor wrong – every investor should operate within “comfortable” risk and return levels. In the end, it does not matter how good is the return on your investment if you perceive it so risky that you can’t sleep at night.

Lack of access to investment property financing

The investor that sidesteps debt due to this reason does so out of necessity, not choice. Take as an illustration a 58 year old teacher that takes early retirement and has some liquid capital to invest. He gets a pension every month but it’s not enough to fully retire. And also it’s not enough to qualify for financing on an investment property. In this case, the only available option to this investor would be an all cash strategy to increase his monthly income through some well placed real estate investments. Another example would be that of a newly minted entrepreneur that just ditched his corporate shackles with plenty of capital to invest but with no regular 9-5 income to qualify for financing.

Lack of need for financing

In this case, the investor already has a large enough capital base that the unleveraged yield on that capital is sufficient to provide the income she’s seeking. File this under, “good problem to have”. Say you have an investor that has $1.5M in liquid capital to invest and they’re trying to create an income stream of $120k per year. This investor has no need to leverage that capital further – she could purchase $1.5M in paid off real estate and reach her desired income right away.

Lack of necessary time

One critical ingredient in the utilization of leverage as a tool to grow one’s capital base is time. Without sufficient time to execute a proper debt pay off, leveraging your capital is simply risk for the sake of risk. You should only take calculated risks if you have a) an exact idea on how to eradicate that risk as soon as possible and b) sufficient time to carry out that idea. As an example, take a 65 year old investor that needed to retire last Friday at 11:30 – he just doesn’t have the time to execute a plan that involves the undertaking and paying off of leverage. The only option left is to use the capital that he has accumulated and generate the highest yield possible on quality asset(s).

The numbers

Now that we figured out some of the reasons why an investor would choose (or be forced down) the path of all cash real estate investing, let’s take a look at some of the numbers. Since the investor is not utilizing leverage, her return comes from exactly two places: Yield on capital and Appreciation. Yield on capital sounds like a big ten dollar term right out of a finance textbook but it’s actually pretty simple. If I purchase a property all cash for $140k, and after paying all operating expenses I have $11.5k in cashflow left over at the end of the year, my yield on my invested capital for the year is 8.2% (11.5k/140k). It would be the same as you going to the bank to open a CD where you put $140k and the bank pays you $11.5k in interest at the end of the year. Except that your banker would think you are on something if you asked for an 8.2% return these days! Depending on the relationship between the acquisition price and the incoming rent of the asset you acquire, your yield on capital on free and clear investment properties will vary from 7-9% annually.

On the lower end of that spectrum, you will find premium properties in highly desirable locations that are in high demand – which results in higher acquisition prices and lower yield. The higher end yield will come from more standard properties in good locations. But here’s where it gets interesting – the properties that produce lower yields have a higher potential for appreciation than their counterparts. So when it’s said and done, opting for a premium property at a lower yield may end up giving you a higher overall return. But in the end, it all comes down to the needs of the investor: If the investor is mostly concerned with income, the higher appreciation may not matter as they may never sell the property to realize it. Otherwise, if they’re just opting for an all cash strategy to avoid risk, going for higher quality assets may result in higher returns and lower risks over time – a pretty rare combination.

Last but not least, cash is still King – a generous monarch that at times allows an investor the patience to pursue and negotiate bargains on quality properties. This could be a dual boost to returns: 1) It would allow the investor to acquire the same income stream for a lower purchase price therefore increasing her yield and 2) the built in equity captured at purchase can act as instantaneous “appreciation” that can be tapped later. The challenge with pursuing bargains is to never lose sight of the quality of the asset you are purchasing. An inferior asset at a great price is not a quality asset. So as long as property standards aren’t compromised, patient chasing of good deals is the recommended route.

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Are you interested in debt free real estate investing? I can help lead you in the right direction. 713-922-2702 is my cell. Or if you prefer email, Contact Us

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January 11, 2013
Asset allocation in a Blueprint real estate investing portfolio
As more and more investors come to the consensus that a well-crafted real estate investing strategy can help them achieve their financial goals (even the R word itself: Retirement) a fundamental question arises: How should you allocate your real estate holdings within a Blueprint real estate portfolio? Now, the whole notion of “allocation” within a portfolio containing 100% real estate assets may come across as unnecessary. But keep in mind that even in an “all-stock” investment portfolio, there are different types of stocks that bring different returns (and their accompanying risks) to the portfolio. In much the same way, different real estate assets bring different benefits and risks to a real estate portfolio.

Standard assets

These properties are consistent performers and reliable money makers: They are easy to lease and keep leased. Their weakness is that they don’t offer much in the way of property appreciation. Typically they follow the appreciation curve of the overall market or come just under it. These assets offer higher returns for moderate risk. They are recently built (under six years) or new properties located in areas that aren’t yet established to their full potential. Remember, if an area is already popular, it’s already too late for real estate investors. That train has already left the station – prices have risen to the level where price to rent ratios no longer allow for reasonable returns.

Approximate returns for this category of assets: Cash on cash returns of 15%+ and Internal rate of return of 17-18%. Prices range from $100k-$150k

Premium assets

These properties are typically located in established and highly desirable neighborhoods. They offer moderate returns for lower risk when compared to the standard category. There is always high tenant demand for these properties which results in rising rents over time. They tend to be well cared for, older homes (10-20 years old). Their strength is that they offer higher than overall real estate market appreciation so whatever they lack in cashflow returns they tend to make up on value increase over time.

Approximate returns for this category of assets: Cash on cash returns of 10%+ and Internal rate of return of 12-13%. Prices range from $150k-$200k

Note: There are some properties that have no place in a long term real estate investor’s portfolio, regardless of the “outstanding” returns they appear to offer. The reason their “paper returns” are so high is due to the fact that their extremely high risk is “baked into” that return. That risk often takes the form of a property located in a rough neighborhood with high crime rates, low school quality, higher turnover and eviction rates and property damage from defaulting tenants. These assets are the real estate equivalent of penny stocks. Just say no and thank me later.

So back to the big question: What types of assets should be part of your real estate portfolio and how should they be allocated?

If you just purchase 100% standard assets, you will have good cashflow and return on investment but you won’t be able to take advantage of appreciation waves to the extent that you should. If instead, you purchase a portfolio full of premium properties, you would be relying heavily on appreciation to accomplish your goals. Without appreciation, the cashflow produced may not be enough to get you over the finish line within your investment time frame and that just smells a little too much like speculation for my taste.

The optimal solution is to own a combination of the two asset types within your portfolio so you can have the best of both worlds: Solid returns and appreciation. The exact allocation will depend on the goals of the investor, their available time frame for investing and their income level.
- Investors with short time frames to retirement (under 5 years) more than anything else need all the cashflow they can muster during their short capital base growth stage. They don’t have the luxury of time to wait for appreciation. These investors have no other choice but to build a portfolio made up of 100% standard properties.
- Investors with medium time frames to retirement (5-9 years) need a portfolio weighed heavily towards standard assets but should add some premium properties in the mix to take advantage of value appreciation. Exact percentages will vary with each individual investor’s situation but a good rule of thumb in this case would be a 80% standard, 20% premium allocation of assets within their portfolio.
- Last, investors with long timeframes to retirement( 10-15 or more years) do have times on their side so in their situation it makes financial sense for them to add even more premium properties. Generally we advise these investors to adopt a 65% standard, 35% premium allocation of assets within their portfolio.
When I bring up appreciation in a conversation with a client, they always have a conflicted look on their face. After all, I’ve just finished telling them moments ago, that we don’t account for any appreciation in our cashflow analyses for potential acquisitions. So now, why are we even concerned with appreciation?

Appreciation is an elusive and manipulative animal. It’s hard to empirically quantify how much appreciation an area is likely to experience (if any) and when. As such, we cannot build our analysis based on a factor that may or may not come into play. But understand one thing – normal appreciation is an innate characteristic of real estate assets. It’s common sense: The cost of materials and labor to build new homes goes up every year in response to inflation. So the same property will cost more to build in 10 years than it does today. Home builders are in business to make money and they can’t make money unless they sell their homes for more than what it costs to build them. So therefore, the same home should cost more in 10 years than it does today – it’s just plain economics. So why should that matter to a real estate investor? Well, let’s look at the arithmetic. Say you purchase a 125,000 property and you invest 25,000 of your capital as a 20% down payment. If the value of that property appreciates by 10% to 137,500, your return on investment from that appreciation is 50%! That’s due to leverage- since your investment in the property is $25k, a $12.5k increase in value represents a 50% return – in addition to any cashflow returns you might have enjoyed that year. That’s why it’s a big deal and that’s why you should purchase assets that have the potential to capture it in your portfolio if your investing situation allows it.

Are you looking to build a real estate investment portfolio that can get you from where you are to where you want to be in the future? I can help so don’t hesitate to call my cell at 713-922-2702 or if you prefer email head over to our Contact page

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January 7, 2013