Sometimes people become real estate investors on purpose: They have a clear goal, they plan for it, analyze investment opportunities then pull the trigger on the option that better helps then achieve that goal. However, at times one can become a real estate investor by inertia. The property could be a former residence that got converted to a rental once they moved up in house. Or it could have been student housing for their children while they were going to college and became a rental once they graduated.
In the end, it doesn’t really matter that much how one comes to own an investment property – it matters how that property is performing and whether it is propelling that investor towards the fulfillment of that goal. So in that spirit I want to ask those inertia investors a Dr Phil question: How’s that been working out for you?
Certainly, there are exceptions as there are with every rule. But in the overwhelming majority of cases, the property is underperforming as a real estate investment. It might be breaking even or even costing the investor some money every year. But it’s easier to continue that inertia “trend” then to do something about it and right the ship. It feels that way because the opportunity cost of sticking with an underperforming property isn’t readily apparent. So allow me an illustration.
Jim Investor owns a property worth $130k with a $85k remaining balance on the 5% 30 year mortgage with 16 years left on it. Currently the property pays for itself most years except when repairs exceed the “normal” range. So Jim sees no reason to fix a situation that’s “not broken”. Let’s take a quick look at the numbers. Jim has $45k in equity in the property. Best case scenario, his return on that equity is the amount that goes to principal from his mortgage payment or $1959.54. That’s a 4.3% return on a best case scenario! What happens when the AC has an issue and needs a major component replaced? Rhetorical question.
If you’re in the same situation, here’s how to tell whether you should stick with the status quo or make a move to improve it. Answer this question: If you didn’t own that property, would you go buy it today as a pure investment property? If the answer is no, there are much better opportunities for that equity capital within that property. You could sell the underperforming asset and trade to purchase a newer property in a better location with higher rent demand than the current. And your rate of return would be 4 times the best case scenario mentioned above. Isn’t it time to take control and be intentional about your investing?
If you’re in this situation currently and would like to do something about it, call my cell at 713-922-2702. I will show you step by step how we can go from “inertia” to “on purpose”.
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