SS221: The 10-Year Law of Real Estate Investing

SS221: The 10-Year Law of Real Estate Investing

Many principles and informal laws of investing have been passed down from experienced investors to new investors. In this episode, Charles discusses a real estate investing principle he calls the 10-year law.

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Talking Points:

  • Recently, I recently spoke to a newer real estate investor, and we discussed their buying a small apartment building. One question he asked was about how best to lower his risk. I shared with him my standard 3 points for limiting risk when investing in multifamily: buying a property that cashflows, having long-term fixed-rate debt, and having a reserve fund. Another point that came to mind was what I call the 10-year law of real estate.
  • I learned this informal principle from a seasoned apartment investor many years back. He didn’t have a name for it but stated that if you purchase real estate and hold it for 10 years, the chances you will lose money are very minimal. He was referring to apartment buildings, but you can really utilize this principle with all types of properties and possibly other investments, like index funds.
  • This investor had been through a few real estate downturns and said that the only time he lost money on a real estate deal was when they were short-term investments. As you give your investments more runway, there is a higher probability of success.
  • Of course, this is a broad investment principle, the ones heard from old-school investors who made most of their investment decisions using common sense and simple calculations instead of complicated spreadsheets. Still, if you go into an investment with a 10-year horizon from the beginning, it simplifies the investment process. There is not so much of an urge to negotiate every penny out of the deal or walk away from deals where the seller refuses to renegotiate every item your inspector found in their report. In other words, it is a less stressful buying experience.
  • There are a few main reasons why I like the 10-year law:
    • 1. Real estate is a buy-and-hold business. To truly build wealth in real estate, you need to buy and hold the properties. Additionally, the tax system surrounding real estate incentivizes investors who buy and hold property by offering generous depreciation deductions that are not recaptured until the property is sold or passed to your heirs.
    • 2. A 10-year investment horizon allows investors to make it through any market volatility. Suppose investors find themselves in a down market in 10 years and must refinance. In that case, it will be much easier to refinance a property with a 50% or 60% loan to value versus an investor who had a 3-year term loan and is trying to refinance a property with an 80% or 90% loan to value.
    • 3. Avoiding transaction costs. When selling a property, transaction costs totaling 8%-10% are not unheard of when you factor in broker fees, taxes, and closing costs. This can be minimized if you hold your properties for 10+ years.
    • 4. The current value of the property and the market don’t matter much during the hold period. If your property is cash-flowing, and you are not planning on refinancing it or selling it, tracking the property’s market value does not matter. Property values only matter when buying, selling, and refinancing.
    • 5. It is less stressful and less time-consuming. It takes a lot of time to research and underwrite dozens of properties to buy one. After you close on that property, your first several months or a year or two are consumed by fixing deferred maintenance. Once you complete the renovations, the owner can step back and let their property manager handle all the day-to-day operations. This is where the passive income begins, and the wealth generation begins.
  • The 10-year law of real estate investing encourages investors to buy properties with a longer time horizon than focusing on riskier, short-term holds and flips where market dynamics can quickly shift and leave investors in a difficult position if the market slows down; they have a loan coming do and they are unable to sell the property at or near their target sale price.

Transcript:

Charles:
Over the past couple of decades, I’ve spoken to many successful real estate investors and you consistently hear about their successes, their failures, and their lessons learned. And one simple rule I always remember is what I call the 10 year law of real estate investing. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re discussing a simple but powerful investment principle that could change how you think about real estate. It’s called the 10 year Law of Real Estate Investing. And this principle has helped investors build wealth, reduce risk, and create true financial freedom. But what exactly is it and how can you use it to your advantage? Let’s get started. Recently I spoke to a newer real estate investor and we discussed their buying a small apartment building and one question he asked was about how best to lower his risk. And he shared with him my standard three points for limiting risk when investing in multifamily, buying a property that cash flows, having long-term fixed rate debt and having a reserve fund.

Charles:
Another point that came to mind was one, I called the 10 year Law of real estate. Now we learned this informal principle from a seasoned department investor many years back. He didn’t really have a name for it, but he stated that if you purchase real estate and you hold it for 10 years, the chances you’ll lose money are very minimal. He’s referring to apartment buildings, what the asset class that he invested into, but you can really utilize this principle with all types of properties and possibly other investments like index funds. Now, the investor had been through a a few real estate downturns and said that the only time he lost money on a real estate deal was when they were short-term investments. And as you give your investments on a runway, there is a higher probability of success. Of course, this is a broad investment principle and the ones heard from old school investors who kind of back the makin investors that made most of their investment decisions using common sense and simple calculations instead of complicated spreadsheets.

Charles:
Still, if you go into an investment, the 10 year horizon from the beginning, it simplifies the investment process. There is not so much of an urge to negotiate every penny outta the deal or walk away from deals where the seller refuses to renegotiate every item your inspector found during the inspection on the report. In other words, it’s a less stressful buying experience. So there are a few main reasons why I like the 10 year law. Number one is that real estate is a buy and hold business. To truly build wealth and real estate, you need to buy and hold properties. Additionally, the tax system surrounding real estate incentivizes investors who buy and hold property by offering generous depreciation deductions that are not recaptured until the property is sold or past your heirs and avoided altogether. Now, this is something this point is always forgotten during hyper buying sprees in real estate in these hot markets where people are trying to make double their money in two, three years or something like this.

Charles:
And it’s something that we have to come back to when market’s cool and we’re going down or going just sideways. Number two is a 10 year investment horizon allows investors to make it through any market volatility. Now suppose investors find themself in a down market in 10 years when they have to refinance. In that case, it’ll be much easier to refinance a property with a 50% or 60% loan to value versus an investor who had a three year term loan and is trying to refinance a property with an 80% or 90% or even higher loan to value. Number three is avoiding transaction costs. Now, when selling a property transaction costs totaling 8% to 10% are not unheard of when you factor in broker fees, taxes, and closing costs. And this can be minimized if you hold your property for 10 plus years. Number four is the current value of the property and the market don’t matter much during the whole period.

Charles:
Now, if your property is cash flowing and you’re not planning on refinancing it or selling it, tracking the property’s market value does not really matter. It’s kind of difficult to do sometimes too ’cause you have to figure out what cap rates are and you have to keep on checking that and and changing it back and forth. But property values only matter when you’re buying, selling, and refinancing. Number five is that it is less stressful and less time consuming. It takes a lot of time to research and underwr dozens of properties to buy one. After you close on that property, your first several months or a year or two are consumed by fixing deferred maintenance. Now, once you complete the renovations, the owner can step back, let their property manager handle all the day-to-day operations. This is where the passive income begins, or semi-passive income begins and the wealth generation begins.

Charles:
The 10 year law of real estate investing encourages investors to buy properties with a longer time horizon, then focusing on riskier short-term holds and flips where market dynamics can quickly shift and leave investors in a difficult position if the market slows down, if they have a loan coming due and they’re unable to sell a property at or near their target sale price. So I hope you enjoyed. Please remember to rate, review, subscribe, somebody comment some potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then. You

Speaker 2:
Always want to invest in real estate but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding, and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties in great locations that provide us with consistent passive income while we wait for appreciation in the future and take advantage of tax laws while we’re waiting. And unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out investwithharborside.com. If you like the idea of investing in real estate, if you like the idea of passive income, partner with us at investwithharborside.com. That’s investwithharborside.com.

Speaker 3:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of syndication Superstars, LLC exclusively.

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