Learn why a $200,000,000 (Two Hundred Million) Real Estate Portfolio MAY (MAY) sound better than it actually is. HINT: CAP RATES ARE EXTREMELY IMPORTANT. IF YOU ARE BUYING 4 CAP RATES YOU MAY WANT TO READ THIS!
Everyone loves to brag. The guys in the local business journals. The guys in the Wall Street Journal. The guys on YOUTUBE. What do they say?
“I have a 200 Million real estate portfolio”
To the average neophyte, this sounds impressive. And it very well maybe. Especially if it was purchased during the previous recession – or possibly you are an OLD SCHOOL Billionaire like Donald Sterling with tens of thousands of units. Someone in either of those positions is DEFINITELY in a position to brag.
BUT WHAT ABOUT THE GUY THAT STARTED BUYING IN 2014 and brags about his 200 MILLION PORTFOLIO?
Lets consider the facts:
Cap Rates in most tier 1 and even popular tier 2 markets around high 4 cap rates or maybe low 5’s. Of course, everyone thinks that they are buying an 8…..until the numbers actually present themselves in the lack of distributions.
So here is some quick math:
- $200,000,000 Million of real estate that was purchased on CAP RATES of 5% will yield a net operating income of $10,000,000 per year.
- Assuming an all debt transaction (No Equity) the annual (P&I) payments assuming a 4% Interest Rate over 30 years are $11.457,967.09
- At the end of 12 months, you have lost $1,457,967.09
YOU READ THAT CORRECTLY
THE GUY BRAGGING ABOUT HIS $200,000,000 REAL ESTATE PORTFOLIO IS LOSING MONEY because he is buying stuff like this (and these advertised cap rates are way higher than actual)
http://www.loopnet.com/Listing/533-Evergreen-St-Inglewood-CA/11386063/
Can he make this up by selling if the property value goes to $250,000,000? Yes! But from a pure cashflow standpoint, it is risky.
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LETS TAKE THE RISK OUT OF THE CAP RATES AND INCREASE THEM A BIT. LETS ALSO PUT SOME EQUITY INTO THE TRANSACTION.
OK, now lets assume that the 200M of real estate was bought on an average of 5.5 – basically cap rates that avg out to 5.5%. Lets also assume that the owner (owners) injected 20% equity into the project:
TOTAL DEBT: $160,000,000
Interest Rate: 4%
Cap Rates: 5.5%
NET OPERATING INCOME: $11,000,000
Monthly P&I payments: $763,864.47
Annual P&I Payment: $9,166,373.67
NET INCOME BEFORE DEPRECIATION ETC = $1,833,626
Look, this is BIG MONEY. And the guy pulled off about a 9.1% CASH ON CASH RETURN on his money when he bought the portfolio with a blended avg. of 5.5% CAP RATES…..
BUT HOW MANY PEOPLE ACTUALLY HAVE $20,000,000 to put down?
If they raised $20,000,000 what guaranteed return would they need to offer their investors? And what % of the deal would they get for themselves?
Obviously, people have gotten tremendously wealth with this formula. But for the avg individual, this is very HARD to pull off. Assuming no appreciation and assuming an 8% pref, there is roughly $18,336 left for the GP’s to divvy up with their LP’s…..hardly a feast for anyone – unless you live in Venezuela!
I show people a very simple formula that I have used to create monthly passive income. You won’t become a millionaire overnight. And quite frankly, this is not a formula for someone that already has 7 figures saved up. This is the exact formula that I used to retire by first creating a $3,000 passive income stream and then repeating the process 10X over. Just 2 little properties can get you to $6,000 per month which is enough for most people to live comfortably on…..ESPECIALLY IF THEY DONT HAVE TO WORK FOR IT!
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