Yes, You Should 100% Invest In Real Estate
Take A Journey Through The Numbers of a Typical Nexus Client
Nexus Property Management® has been managing residential and commercial properties in New England for almost a decade. And over that time we’ve helped many clients have great success in maximizing investment returns and creating value for their families that will pay off for several generations. Real estate investment provides unique opportunities and it’s our goal to help people better understand how lucrative and rewarding property ownership can be. Unlike the world of financial markets (i.e. The Stock Market), the real estate playing field is dominated by do-it-yourself, amateur owners and landlords who typically own just one investment property. Because of that reality, the overwhelming benefits of real estate investment might be harder to appreciate as they don’t scale as well as other investments might. Our goal is to increase scalability, break down that incomplete information and subsequent barriers to entry (by offering unrivaled property management), and we’ll start by diving into the costs and value of property ownership as we’ve come to know it.
MEET NEXUS NICK
Nexus Nick is a typical guy with a typical life. He’s done well enough for himself, has put money aside to invest with, and is ready to take his first big step into real estate. He’s found a 4-unit apartment for $300,000 and his bank is going to give him the loan he needs if he can put 20% down at closing. Fortunately, he can. But $60,000 is a lot of cash...so Nick needs to do some homework before he takes the plunge. He makes the smart choice to reach out to a local property management company for advice.
LET’S LOOK AT THE NUMBERS
For a $300,000 home with 4 units let’s assume $1,000 in rent per unit. That’s certainly a low estimate but all of our numbers will be conservative for budgeting purposes. With a reputable property manager providing advice and security every step of the way, while also helping with leasing responsibilities such as unit advertising, tenant screening and placement, creating leases, collecting rent, and handling all of the maintenance requests that arise, he’s going to pay his property manager 8% of rents collected per month. At the end of the year, Nexus Nick will have collected $44,160 from rent with full occupancy.
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Obviously, Nexus Nick has plenty of expenses he needs to address with that 44K. Mortgage, taxes (unlike with a single family home, taxes (escrow) are not included in commercial mortgage payments), water, sewer, insurance (again, not in escrow), and common area electric are musts in most areas. Here are typical numbers which will obviously vary from city to city, town to town, but we’ve chosen these as fairly representative for what typical investors are most likely to experience in and around Southern New England:
- Mortgage (based on a $240,000 loan) = $1,200/mo. ($14,400/yr)
- Taxes = $6,500/yr
- Water = $1000/yr
- Sewer = $1500/yr
- Insurance = $1500/yr
- Electric = $400/yr
Add those up and Nick’s gotta plan for $25,300 in expenses. But wait...there’s more. If Nexus Nick wants to be successful, he’s going to need to take steps to ensure his tenants stick around and honor their leases. The best way to ensure long-term tenancy is to stay on top of maintenance needs and maintenance requests that come in from tenants. Property owners looking to cut corners and save a couple bucks might choose to defer maintenance, but it is more often than not a shortcut to greater problems and expenses [What’s Your Property Owner Type? Be An Active Participant]. Maintenance expenses will vary from month to month but a smart play as a responsible investor is to allot $250 a month per unit for possible maintenance issues...just to be safe. So let’s add another $12,000 ($1,000/mo.) in expenses for the year to make sure any maintenance needs are budgeted for.
Where are we now? Nexus Nick is looking at roughly $37,300 for a year of maintaining his new investment property. If this is starting to sound expensive, remember that all of those costs should be paid entirely by the rent collected from tenants. Now that we’ve covered all of the typical expenses, simple arithmetic ($44,160 - $37,300) tells us that at the end of the year Nick can expect a profit of $6,860 based on this budget.
[ Learn More: 5 Steps To Follow After You Close On A Rental Property ]
MUCH MORE THAN JUST A RETURN ON INVESTMENT
Nexus Nick “spent” $60,000 and in year one he earns $6,860 back in rental income after expenses. That’s an 11.4% return, which is outstanding! Typically, an investment is considered a good investment starting around 6 to 8% ROI. Nexus Nick has exceeded this while also paying a property manager to help protect him from costly surprises down the line. He’s had a successful year and because he’s not going it alone, he can reasonably assume that this return will be the norm rather than an outlier.
But wait...there’s more:
TAX WRITE OFFS:
The government incentivizes investment and as a rental property owner you are in line to take advantage. Your mortgage interest can be written off. Same for the insurance on the property. And finally, remember that $12,000 for maintenance...also tax deductible.
BURYING THE LEAD
The reason real estate investment is such a great opportunity goes beyond rental income and tax incentives. For just 20% down, you can leverage the value of your property and ultimately will have someone else pay off the remaining 80% (through rent). For $60,000, Nexus Nick bought a $300,000 asset. If Nexus Nick put $60,000 into the stock market, he would have received $60,000 worth of stocks...not five times that amount. This type of leverage doesn’t exist elsewhere! With zero return this investment would be worth it...nevermind at 6%, 8%, or 11.4%.
REVISITING NEXUS NICK, A DECADE LATER
It’s been 10 years and Nick’s property is still doing great. On the income side, that $6,860 (x10) has accumulated to more than the $60,000 Nexus Nick originally put down to get the loan. As for that loan, he only owes $96,000 on it (originally $240,000). Houses typically appreciate 3 to 5% a year, (outside of improvements you elect to make yourself), so let’s just say the value increases 3% each year. After 10 years, that property is now worth an estimated $403,175. With an initial investment of 60K, 96K left on the loan, and no personal expenses contributed since, Nexus Nick now has $327,175 of equity in this property! That is quite the return on investment...to say the least.
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THIS SEEMS TOO GOOD TO BE TRUE...WHY ISN’T THIS THE NORM?
It isn’t the norm...yet. The reality of the matter is that maintaining property, and doing it well, is really time consuming and difficult to do, especially on your own [Nexus DIY Cost Calculator]. Property management offers an incredible value but as an economic culture we don’t turn to those experts with the same frequency as we do with the financial markets. It is part of Nexus’ mission to help break down the barriers that block opportunities for other Nexus Nicks and Nexus Nicoles out there. Better explaining the opportunities by digging into the numbers is a good place to start.
It’s also important to point out that there are no guarantees. There is risk involved in all investment and real estate is not immune. The figures we used are based on full occupancy, which is not unrealistic for many of our clients, but will vary based on the property and amount of value you’re willing to add through maintenance improvements, especially during tenant turnover. To decrease risk and potential discomfort, Nexus Property Management® will place your next tenants for free if tenants we place leave within 90 days or are ever evicted.
Learn More: [ Maximize Return and Attract Quality Tenants During Turnover ]
With a strong property manager on your side you can decrease natural risk and maximize your returns. As property management gains momentum and smart investors like Nexus Nick continue to pave the way for others, further confidence in these services and willingness to try something that isn’t quite as simple as automatically contributing to a 401K will surely snowball and more and more people will benefit from the incredible opportunities of well-managed real estate investment.
Take advantage of the opportunities that exist around you, or at the very least, do your best to learn more. With active offices that service all of Rhode Island, the western suburbs of Boston, much of Worcester county, and Bristol County (Fall River, New Bedford), Massachusetts, we’ve got you covered throughout Southern New England. Click one of these links and speak with the Nexus team leader closest to you. For franchise information and opportunities to join our team, reach out to our franchise team here.
Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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