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Financial advisory
Buying Real Estate:
Measuring the Risks
vs. the Rewards
BY CHRISTOPHER MILLER, MBA WSPECIALIZED WEALTH MANAGEMENT
hich investment is more desirable: one with a moderate projected return and moderate risk, or one with slightly higher income and slightly higher risk? The answer to that question
depends on the investor who is asking and on his individual financial situation.
As a real estate investment advisor, I am always working with my clients to find the right properties for them; the investments that will best fit their personal risk/reward objectives.
THE GOAL OF INVESTING
As investors, we seek ventures that fit our goals and risk tolerances. Real estate is my favorite investment vehicle since it offers the potential for income – with tax benefits – during the hold period and the opportunity for great appreciation; particularly when leverage is used.
If I had $1 million of cash to invest today and invested it in stocks, would I be surprised if they were worth $600,000 next year? I shouldn’t be. That is what stocks do; their values are volatile and
can swing wildly. What will these stocks be worth in 10 years? More, I hope. Hope is the key word in that phrase, since it is virtually impossible to build a financial model to predict stock market returns.
Let’s say, on the other hand, that I invested that $1 million in real estate. While I certainly could not be sure that the property would still be worth what I paid for it next year, I would be confident the property would rise in value over the next decade. Prior to purchase, I would create a financial model using reasonable projections to help me forecast this. For example: I can put $1 million down on a $2,000,000 property and borrow the rest for 30 years at 4%. For our 10-year re-sale projection, we will estimate that rents and expenses grow at 4% annually. If I bought at a 5% CAP Rate and sold at a 6% CAP, this would give me a potential sales price of $2,900,000. Since the loan balance will have decreased to $760,000 by then, I am left with $2,151,000 of sales proceeds – doubling my money over 10 years.
This is why I like real estate investing so much. If I create a model and use reasonable assumptions, I can make projections that help me feel comfortable about the investment. I realize that there is always
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Christopher Miller is a Managing Director with Specialized Wealth Management and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator and as an advisor helping clients through over four hundred 1031 Exchanges. Chris has been featured as an expert in several industry publications and on television and earned an undergraduate business degree and an MBA emphasizing Real Estate Finance from the University of Southern California. Chris began his real estate career in 1998. Call him toll-free at (877) 313 – 1868.
AMM1/6 APARTMENT MANAGEMENT MAGAZINE - JUNE 2021 67