It is generally considered a big “no no” to say that an investment has a “guaranteed” return.
Real estate investments are NOT the exception.
Appreciation
Organic appreciation is speculative… no one really knows what the market will do. Over a long period of time, prices tend to go up due to inflation as well as supply and demand. But, again… no sane person can, would, should guarantee that.
Maybe you can get closer to certainty with some forced appreciation… doing some work or changing the use of the property to forcibly increase the value of a property.
Cash Flow
Some people… incorrectly… believe that cash flow is reliable and guaranteed. It’s not.
Rents go up and down. Sure, over a long period of time rents tend to increase with inflation as well as some supply and demand forces… ask any tenant… they’ll confirm that. But, that’s not guaranteed.
And, if you haven’t experienced unexpected and significant maintenance on a property or required capital improvements to properties… you don’t have that many properties and/or haven’t owned properties for very long.
Inevitably at some point, you’re going to need to replace a roof, heating/cooling system, windows, etc.
And, that’s going to impact cash flow.
I’ll put a full class below on capital expenses for you to learn more about this.
Speculative
That’s why I’ve been saying that the two top returns in the Return Quadrants™ are said to be speculative.
They’re still important… appreciation can often be the largest return you’re going to see… and a primary driver in wealth building. And, cash flow is often the return area that investors focus on to provide for their financial independence (although one should take a more holistic approach to that in my opinion).
Guaranteed Return?
But, if the top half of the quadrant is speculative, then what about the bottom half?
Well, it is less speculative and more certain.
For example, debt paydown is the return you get from paying down the loan each month.
As long as you make the mortgage payments each month as agreed, you’re going to get that return. It doesn’t matter if the market goes up or down. It doesn’t matter if rents go up or down. It doesn’t matter if you have a massive capital improvement requirement.
The return is contractually agreed to between you and your lender when you get the loan.
If you make the payments as agreed, you get that return.
For example, if you’ve got a 30-year amortizing loan and you put 20% down, you’re getting a 5.51% compounding return on your money over the 30-year period it takes to payoff the property.
If you buy a house as a Nomad™ with 5% down, you’re getting a 10.5% compounding annual return over the entire 30-year period.
So, is that guaranteed?
Maybe not… but it is not really speculative either… if you make the payments as you agreed to with the lender, you get that return.
See how we calculate debt paydown.
Next we’ll talk about the tax benefits part of the return from rental properties so stay tuned.
Video on How CapEx Impacts Cash Flow
Here’s a full 94 minute video on how CapEx impacts cash flow on rental properties and some tools to address it.
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