When it comes to real estate, Michelle Bosch and her husband Jack are focused in two main asset classes: land and multi-family apartments. In this episode, Michelle Bosch discusses these asset classes and breaks down the expected returns you would receive when making deals. Whether you are newbie to the world of real estate or an old hand, you’ll definitely learn something valuable in this episode of InFLOW.
Listen and enjoy:
- Find out the expected returns on land & multi-family real estate
- Learn about some real world examples of deals in these asset classes
- Discover why you need to be investing in real estate
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Welcome back. So in today’s episode, we are talking about the typical returns that you can expect if you decided to start investing in land and if you decided to start investing in apartments. And those are the 2 asset classes that we have been investing now over the last almost 18 years. Land has been, since the beginning of time, for us the cornerstone of our wealth and we’ve been investing in that since 2002. And we have been investing for the last almost five years now in the multifamily space, larger apartments, 100-plus units. And we basically syndicate, which means that we pull equity from, you know, private individuals, private investors. And we purchase these buildings, you know, in conjunction with our investors and produce returns for us as sponsors and, of course, for the investors.
So let’s start with talking and diving into the typical returns that you can expect in the asset class of land. First of all, I want to say that these returns are active returns. In order to get these returns that I’m gonna be discussing in the land space, you actively have to work for it. You basically have to wake up one morning and go out there and hustle in order to make these returns happen. But there’s nothing wrong with that. The returns are, in my opinion, very well worth the work and the hustle and the waking up and the, you know, grinding and making sure that, you know, properties are always coming into the pipeline, there are properties are always being listed and being sold, because just the returns are pretty fantastic.
So let me just give you or walk you through a quick example. So for example, like any…let’s start by saying that with any asset, your returns depend on what you pay for the property. So you basically you make your profit or you make your returns or you make your money when you buy an asset, not when you’re selling, but when you buy. And I think this is, you know, now common knowledge, unless you have never been in the real estate space, that that’s when you’re making money, is when you buy.
So on average, deals in the land space are anywhere between $3,000 and $1,500, and this is what the profit is on an average deal when it comes to land. And this land that we’re talking about that is below $100,000 in value and ideally higher than $5,000, if not $10,000 in value, because you don’t want crap land as well. So deals are typically between $3,000 and $5,000 and really the returns then depend on how much you’ve paid for it.
So now let’s look at an example of a typical deal. This is a deal that we just sold earlier this year, in 2019, and we bought this property for $5,000 and we sold this property for $64,000. So now let’s break down that return to see, you know, what do we come to when it comes to, you know, a typical return in land using this example of a property that we sold earlier during the year. So what we did is we sold this property using seller financing. If we would have done a quick flip, we would have probably not been able to realize the $64,000, which equals market value for this piece of land. We would have probably had to wholesale, like, for anywhere between $20,000, $30,000 $40,000 to make sure that there was enough buffer, enough incentive for our end buyer to still have some skin and meat in the game in terms of a return and a gain for them as well.
But because we decided to use seller financing, with seller financing, and we become the bank and there’s not very many people out there giving loans and extending loans when it comes to land, then we are okay with charging retail, which is, in this case, market value is $64,000. And what we got in return was someone that was able to give us a $6,500 down payment, which means that if we purchased it for $5000 and we got $6,500, that our initial investment was recouped and we even have an additional $1,500 in our pocket more than what we paid for the property.
And then what we did is we structured this deal in such a way that, you know, our buyer was paying $463 every month for the next 20 years. Think about that. All of a sudden now, from a $5,000 investment, we’re able to produce monthly cash flow of $463 for the next 20 years. That is going to turn into an almost $110,000 profit, once this person is done paying off their note, assuming that they don’t prepay or pay the note a little bit earlier.
And so in that case, if we look at the numbers, we bought for $5000, we sold for $64,000, we use seller financing, and now our profit is gonna be about $110,000 from the $463 every month, we are looking at an almost 2200% return in terms of return on investment when it comes to profits from a typical land deal like the one that I just mentioned that we did earlier this year, and that is just incredible. And so sometimes, you are gonna go out there and try to do this on your own and without any training, without any strategy behind it, without any proven format and methodology, and you might be able to buy them for $5,000 and sell them for $7,000 or buy them for $3000 and sell them for $5,000, which still, it’s an almost 60% or 70%.
In the first case it was like an almost 70%, in the second case, if you buy for $3,000 and sell for $5,000, it’s an almost 60% return on your money, which is still fantastic. But we like to buy at anywhere between 5 and 25 cents on the dollar. So in that case, you know, we would be making so much more because we are basically making our money or increasing our returns by buying extremely, extremely low. That’s why I said returns depend on the land space based on what you paid for a specific property. And pretty much in any asset class, you know, the returns depend on what you’re paying for the asset. So that’s a typical example of a typical return in the land space.
Now I wanted to describe a typical return in the apartment investing side. And in the apartment investing side, returns are usually passive unless you decide to go ahead and sponsor, basically find a deal, put together a deal, raise capital, prepare financing, operate, you know, the property, optimize a property. A person that does that is called a sponsor in the apartment or multifamily syndication world. And that would be active investing. But if you decided to invest with someone that, you know, has the expertise that you trust to pretty much be amazing operators, incredibly metric-centric and able to optimize a property and produce returns for you, then you can also invest passively in these types of investments.
And when you invest passively, we’re talking here about annual returns on investment, usually. And those oscillate anywhere between, I would say, 12% and 16% or even 18%, if you find good deals. But good deals are harder to find, everyone is, you know, chasing multifamily. There’s a lot money chasing multifamily deals right now. And so I would say that the typical return to oscillate, you know, to be really realistic between the 12% and 15%, and those are ballparks.
And so that…say, let’s take for example a 14%, which is a typical deal that we have right now that we are closing in right now in December in Oklahoma City. And that’s a market where we’re working right now. We have already 147 units, and this second apartment building would be an additional 158 units. And so in that typical example, we have, you know, a model for investors, a return of 14%. And that 14% is really composed of 2 components, it’s made up of 2 parts.
The first part is a preferred return, and what is a preferred return? A preferred return is a return that gets paid out to our equity investors before anyone else gets paid. Well, first, let me clarify. First, you pay for your debt because we’re still having to take financing from a traditional lender and you pay for debt. So you service that, you service operations, you know, and anything that needs to happen in order for the property to continue operating. And once that has been taken care of, the excess of cash flow, you know, usually up to 6% is preferred, meaning that it’s being paid to the investors first.
If there’s anything of that cash flow left over, then that would go to a sponsor. And it depends on the syndication and how, you know, the person that you’re investing with, the sponsor that you’re investing with has to structure that deal. But typically for us, you know, we paid a 6% to 7% preferred and that means that you get paid first. And if there’s any excess cash or cash flow, I should say, a month, then that would go to the sponsor. If there is none, it’s because it was used to optimize a property because there wasn’t, you know, an unexpected expense that needed to be taken care of and so on and so forth. And so anything in excess of the 6%, you know, would be used to pay for that, for any needs that the property has, but a 6% is preferred.
And I don’t want to say that it’s guaranteed, you know, because if the property is not performing and there’s nothing to distribute, well, there’s nothing to pay out. But what it means when we talk about a preferred return, it means that you are getting paid before the sponsor is getting paid, and that’s a great position to be in. And for us, we typically pay our investors, you know, every quarter, that 6% is accrued every month, but it’s being paid quarterly. And that’s just how we choose to do it. We choose to disburse four times a year. And so that’s the first component of the 14% return, for example, in this deal in Oklahoma.
The additional 8% return, annual return on investment, you know, come from the split that happens between the sponsors and all our investors when we sell the property. Say, we’re modeling right now to sell this property in five years, you know, from now. We’re purchasing in 2019, and five years from now we’re gonna sell it. And when we sell, we have optimized that property, we have decreased expenses, we have improved the tenant base, we have improved the physical location, you know, of the property, we have renovated units from the interior, and we have basically forced the appreciation of the property and increased the property in value, and we’re gonna be selling for much more than what we bought.
In this case, you know, we’re looking at, you know, a purchase price of around 4.3, 5.3 I’m sorry, and we will probably be selling at 7 or 7.5. And if we are able to realize, this kind of exit sale price at the end, the additional 8% would come from that profit split between what we bought CapEx and what we’re selling the property for.
And what is beautiful in apartments is that, for example, if you were to invest $100,000, you know, and you get a 6% preferred return for the duration of, you know, the holding period of the assets, say we hold it for 5 years, in this case, every year you would be getting $6,000 on that $100,000 investment. And because, you know, the 6%, that’s where the $6,000 comes. And the beauty of that is that, unlike a, say, dividends stock that you would buy in the stock market, unlike a dividend stock, an investment in an apartment syndication like this one would not only produce a $6,000 in passive cash flow, but it would also allow you to basically take advantage of tax benefits that shelter those $6,000 from being taxed by, you know, Uncle Sam and the IRS.
And so, when you shelter the $6,000, in effect, you’re really…your return is more like an 8% or 9% return, you know, depending on whether you’re being taxed, you know, for ordinary income. So it’s superior than investing in a dividend stock. You don’t only get the cash flow every month, you know, or, in this case, we pay…you know, you are accrued every month but being paid quarterly. So you accrue the cash flow, you know, every month for the year, but you also are able to shelter that cash flow that you’ve produced, you know, that that asset has been producing for the year and not have to pay any taxes on that cash flow, which, in my opinion, is absolutely beautiful.
So when it comes to, you know, determining whether land is a good investment, yes, the returns are incredibly amazing. They’re in the 50%, 60%, 70%, 100%, 200%, even 2,000% like the example that I gave you, in my example. But of course, you know, not every deal is gonna be the same, but in my example that I gave you of the property we purchased for $5,000 and that we sold for $64,000, we had a 2,200% return. And yes, we have those returns, but that means that we’re having to actively work, we’re having to actively flip property.
In the second scenario…and there is no tax advantages there. When it comes to land, you know, there’s no tax advantage, you sell and you basically pay taxes, you know. And on the apartment side, the beauty is, yes, it’s a much lower percent return but it’s passive. You’re having to do nothing, you know, in order for that cash flow to come in, I call it mailbox money. And on top of it, you have the possibility to compare, that if you were to put the exact same $100,000 into a dividend stock, you will, in effect, because there is no sheltering or no depreciation benefits when it comes to paying taxes on the stock dividend return that you’re getting. In effect, when you do invest in apartments and have that $6,000 of cash flow that you’re protecting and shielding, your return is closer more to an 8% or 9%, you know, return on your investment.
So I hope you found this information helpful and you know a little bit more now about what it looks like, you know, in terms of returns, typical returns in the land space and the apartment syndication space. And if you liked this episode and would like to share with someone that you care, with a woman that you’re interested in getting her excited about real estate and excited about transitioning from being an earner or a business owner and much more into being an asset owner so that your assets are the ones that are actually paying for your lifestyle, please go ahead and share it, I’d greatly appreciate it. And also if you enjoyed it, give me a five-star review. Thank you so much. And until the next time.
I hope this episode left you feeling inspired and ready to get inflows of cash, inflows of light, and inflows of faith in your life. I welcome your reviews on iTunes. Please leave me a review and help me create an amazing community of women inflow. Thank you, as always, for sharing your voice by going to michellebosch.com and joining the conversation about this show. And while you’re there, grab a copy of my “10 Commandments to Living a Life Inflow.” You can also follow me on Facebook at Michelle Bosch and on Instagram @michelleboschofficial. Thank you very much, and until the next one.
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