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Owning for the long term

“There Ain’t No Such Thing As A Free Lunch.” I read Robert Heinlein’s The Moon Is a Harsh Mistress a few years back and this line has really stuck with me. You’ve probably heard this phrase, or its acronym form (TANSTAAFL), uttered before. It seems to mean different things to different people, but for me its become a personal mantra of sorts.

Nothing in this world comes without a price, and the world of real state is no exception. But for some reason, many people fail to realize this. There seems to be a mistaken idea that you can mismanage your investment properties, own them for a short period of time and still make out like a bandit. Well I have news for you kids: that ain’t the case.

Sure you can stumble upon an under-priced property and flip it immediately or in the short term. You can make a lot of money that way too. But those opportunities are few and far between. Not to mention the fact that they take work to find. The reality is that most deals have the ability to provide respectable returns, but you’re going to have to work for it.

The days of quick appreciation are gone. With all the overinflated appraisals and shoddy lending in the recent past, I sometimes wonder if it ever existed in the first place. However, there is no doubt that it’s currently nowhere to be found. We all need to sit back and learn something that the late-night gurus never mention: patience.

The fact of the matter is that buying property is not going to make you rich overnight. If you bought a property two years ago in the height of the market, don’t expect to sell it this summer for a profit. It’s just not going to happen. Over the long-term, however, you should be just fine if you bought into the right properties. The real profit is ownership.

For an example of what I’m talking about, download and look at the PDF financial breakdown for a property I just listed at 4215 Shreve. From the get-go, the property offers a very respectable $274.50 a month cashflow with 20% down. Thats a 23.53% annual return on the initial cash investment of $14,000.

Not bad at all, but the real key to this and any other property is to look at the longterm. Assuming you don’t refinance the property, your mortgage payment will remain the same throughout your years of ownership. The rents on the other hand will continue to go up and up. That just pushes your cashflow higher and higher over the life of the investment. You should also consider the amount of loan principal being paid down over the life of the loan. In the first few years of a loan you’re are paying mostly interest. As the years go by, a greater percentage of your mortgage payment goes towards paying down your principal, increasing your equity in the property.

Looking at the Shreve example lets see the difference a mere five years can make in increasing profitability. Making various assumptions, I have projected that by the fifth year of ownership the monthly cashflow for the property would have risen from $275 a month to $435 a month. The “Year 5” annual cash-on-cash return shoots up all the way to 37.28%. Over a five-year period that every increasing cashflow adds up to whopping $21,046. Add the amount of principal paid off during that time ($3,286) and you’re ahead $24,332 after only five years. That’s not even considering any appreciation or tax benefits.

What I’m really trying to say with this overly detailed financial breakdown is that there are tons of profits to be made from your properties. The key is that the money doesn’t come from the purchase or the sale, but from your ownership. Improve your properties, push rents, put in at least a few years of your time.

These aren’t lottery tickets to be used as a pathway to easy riches. They are piggy banks that take time to fill up. Your real payoff comes from hard work and time. If you ever start to get impatient, remember that “There Ain’t No Such Thing As A Free Lunch.”

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Matt Kastner

Matt Kastner is an Investment Real Estate Consultant at St. Louis Real Estate Society in St. Louis, Missouri. He is also develops properties on the side through Threshold Properties. When he isn’t representing investors in the purchase or sale of multifamily properties, rehabs, foreclosures and other income producing properties, he is often taking on rehab projects himself. He lives in South St. Louis and has been in the real estate business since 2004.

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