So what happens if you buy a home over the median? Well, today's closing day, I'm
actually going to be signing on a property that I'm going to be selling
and this is a home that I broke one of my rules on, I went over the median and I
want to share with you what my results were and some of the things that I could
have done different to improve.
Hey, everybody. So I'm sitting here with Jason and what we're doing right now is we're
actually closing on a property that I've had for many years. Most you know that my
favorite strategy is a short-term buying hold where this is actually a
single-family property, this one's a little bit more, do I just sign right here?
Jason and I, so Jason represents the title company when he and
I get together. How long does signing normally take? - When you're the seller, it
takes about 15 minutes.- And when it's with me? - When it's with you about 3
minutes. -Alright, that's because I've just been doing this
for such a long time so we just cruise and crank but I'm going to hang on to Jason
just for an extra second here. So I want to tell you just a little bit about this
property so this property, I ended up purchasing this home, this was one of
my longer holds, I probably had this property for close to 10 years and I'm
normally three, five, seven years when I want to hold on to a property but this
one we ended up purchasing and this kind of breaks one of my rules that Jason
that I talked about and some of my videos here because when I buy my single
family homes, I normally purchase them below the median, this one actually paid
275 and it kind of illustrates, you know, if you're buying something above the
median, there's greater risk. I have been cash flowing my low cash flow a month
has been 211 dollars, my high cash flow has been 339, it's actually kind of a
small cash flow for that size of our property being that far over the median
and on this one, you know, we're selling it today for $348,000.
So 348, bought it for 275 so there's roughly $68,000 there
that I'm getting as far as having, and owning a property for nine ten years and
only getting $68,000, I mean, the ROI will still come
out way ahead of 401k's and IRA's but this would have been a way higher ROI had I
actually bought the property closer below the median so this was still
closer to the beginning of my investing lessons and I wanted to shoot this video
for you to really illustrate some of the mistakes that you can make. If you
purchase a property over the median, your ROI goes down, your cash flow may look
bigger but it's actually proportionately smaller that's what creates the greater
risk. This property looks like it has had over the the term of holding it
probably $20,000 a cash-flow of additional profit above
and beyond after expenses so you know on this one we're sitting at $88,000
almost $90,000 so it's been a good project.
Really glad to get this one off the books though because this is one of my
riskier properties and so, it's made me my cash flow,
it's got good profits on it but frankly, if I had to do it all over again, I
generally don't buy single family homes over the median unless you really know
what you're doing and you're really confident. So Jason, dude, thanks for
coming on down today to help me get this wrapped up. I appreciate you.
So I want to break it down for you what just happened in that property that
I was selling and I made this comment that it was riskier to buy something
over the median, obviously, it worked out but I talked about my percentage of
profits being less. Let's talk about what that risk is because some of you live in
markets where you're over the median and I'm not going to recommend that you
invest in your backyard where you've got really expensive real estate especially
which is why I'll give you access to better markets. Most of us around the
country do live in markets that do work just fine for backyard investing, things
like my lease option system. So in this example, if I buy a property for
$275,000 and the median is actually $225,000
then this means that I am $50,000 over
the median. What does that really mean at the end of the day? It means that there
are less people that can actually rent a home the size, there's less people that
can buy and when you're in real estate, playing at or below the median, you're
marketing to the largest group of people that can actually afford
to be in your home which means that there's just a higher demand and it's
easier to find someone. For example, go to the opposite. Let's say that we're not
talking about 275 which is 50,000 above the median, let's say we're talk about a
million-dollar home, a million-dollar home, it's going to be really hard to find
someone to put in that home. Why? Because think of how many people live in your
area so they could actually rent a home like that and so that just exemplifies
this, so there's risks in two ways so number one is, you have less renters.
Number two that I talked about is that you have less cash flow. Now what do I
mean by less cash flow? This is what I specifically mean.. When
you get up, I have found the math this, as you approach three hundred to three
hundred and thirty thousand dollars, something happens, you end up approaching
the break-even. The break-even on cash flow and what that means is that what
people are willing to pay in rent for property compared to hey, if I buy this
with a 20% down payment, if my payment now is $1,600 a month, I might
not be able to collect more than $1,600 a month rent for that
house. Again, take it to the extreme, a million dollar house. If you just put 20%
down on a million dollar house, your mortgage might be $8,000 a month
but you might only be able to find a renter at $5,000 a month which
means you're losing $3,000 a month. Here you're breaking even, here at 275, that's
why on this house, I was making a few hundred dollars a month, couple hundred
dollars a month. I call that risky because I've got a big mortgage and some
of us are like, well $300,000 a month is a lot.
$300,000 a month is a lot on an eighty thousand dollar
property. It's not very much on a $275,000
property. Does that make sense? So if I were to draw you just a little bit of a
graph and this is the value of money, so this is a hundred thousand dollar home
and this is a million dollar home value, does this but rent does that and let me
break it down.. It means that anything, if this mark right here is the three
hundred thousand dollar line, then that means that this is a really juicy place
where you're going to get your highest percentage of cash flow compared to the
value of the property and on this side, this is negative, this is that million
dollar home that you have an eight thousand dollar mortgage on that you're
actually just running for five thousand and you're losing $3,000 a month, not a
good situation to be in. So in that video where I sold this house
and I said, well, you know, made $68,000 but I'm kind of
relieved to dump it off my plate, it's because it was one of my earlier
properties and I allowed myself to violate one of my investing rules even
though it worked out and even though my ROI was really solid, I would have been
safer if I had focused on buying a property for $200,000.
Why? It would have had more renters that would be interested into it and would
also have what? You would also have more cash flow and ultimately, when you're
doing a short-term hold and holding a property for years, cash flow becomes
important because if something breaks down, then in those months, the cash flow
is going to go to pay for those things so I wanted to kind of share that with you so
that you got a little bit more of the math and the science behind why I feel
so strongly about buying properties at or below the median for the average
investor that is kicking off their career. Learn from my mistakes, I'm
telling you right now, this whole channel is dedicated towards helping you have as
much real estate success as you possibly can. Bottom line is, everyone needs real
estate in their portfolio and if you want some assistance in building yours,
click the link up here and ask me in my team what we can do to actually help you
succeed in building a powerful financial freedom real estate portfolio.