I’ve read a lot of articles on real estate investment, but few seem to track a deal from beginning to end. I thought it would be interesting to see what has happened over the years. Mostly to look at how much a property appreciated. Cash flow from rent is a very important part of real estate investment.
Real Life Example
Way back in June of 2002 a client needed to buy a property because he wanted to do a 1031 Tax deferred exchange to save on taxes. I found him 2407 Commercial NE as a replacement property where the seller, Pameco, would lease the property back from him for $4,528 a month. This worked out fine for everyone at a price of $486,000 and the buyer got a loan of $248,000. Unfortunately, Pameco did not mention they were nearly bankrupt and they moved out about a year later on a 10-year lease. About this time, the property was traded to his daughters for estate planning purposes. They took it over and needed to spend about $20,000 to get another tenant, Drive Train Industries, in December of 2004 and have stayed in the property ever since.
Here is where it begins to get interesting. The loan payments were about $1,900 per month so over the years the rents averaged about $4,300 a month, less than the original amount but still pretty good. That gives a cash flow of about $2,400 per month for 12 years or, $345,000. The loan was paid down to only $44,522 when they sold it. That means the tenant paid off this loan by $203,478. After all these years and low interest rates, Drive Train Industries decided after some prodding by me, to buy the property for $550,000, and with costs of sale the net is $504,373. This made them only about $18,373.
So most people only look at what we bought and sold, a property to determine if it made any money. In this case it looks like it was not very worthwhile, but take a look at what happened over the time of ownership and it tells a very different story. Over time the total money made was $566,851. The magic of cash flow and time is where much of the benefit of real estate’s power to create wealth really is–now that’s a good investment.
By: Richard Hanna, CCIM, Hanna Commercial, LLC (HomeStyle Magazine by Albuquerque Journal)
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