Hey gang, Chris Clothier here to uncover the difference between paper returns and real-life returns…
Just how “real” are paper returns, and what can you expect to get back as an investor?
This is the topic at hand today, and one that can benefit all investors, whether you’re a rookie or a seasoned pro.
Let’s get to it…
Why the Proof Isn’t Always on Paper
Paper returns versus real-life returns - what you actually get back at the end of the day...
So, what is the difference, and why should you know?
Paper returns can be deceiving – so beware – and companies can manipulate paper any way they darn well please to reflect a return that sounds great but may not be realistic.
I recently had an investor claim that he gets over a 20% return on everything he buys (including yearly appreciation). In reality, he has no clue if his property is actually appreciating, but he uses a conservative number in his calculations.
This is just one of too-many-to-mention examples of how you can (but I don’t recommend it) manipulate your returns to make them look too good to be true.
And in fact, they probably are too good to be true.
Just the Facts, Ma’am
When I'm reviewing returns on my investment properties, I want to see hard costs. Period.
I want to know exactly what my taxes, insurance, principal and my interest are going to be on each property, and frankly, estimates aren't good enough.
Hard costs come each month, right?
So when you have exact costs (or pretty darn close to exact), you can budget accurately.
Are there soft costs involved too?
Of course. Soft costs like vacancies and maintenance aren't as predictable, so I get that those won't be precise, and that's okay. But the more hard costs you can know in advance, the better off you and your finances will be.
Now, I am not a big fan of “Spreadsheet Selling.” It’s a common practice in the turnkey industry that relies on a spreadsheet-generated number to determine the price of a home. Number plugging isn’t always the best method.
But, market trends, portfolio comparisons, and investor experiences with move-outs and repairs, on the other hand, can be helpful and more accurate methods of determining a property’s price.
So while spreadsheets have their place, I’d much rather talk 1-on-1 with a company to find out how they keep soft costs to a minimum and improve the bottom line. I want properties and processes that can lower my soft costs as much as possible.
Companies should be able to give you this information quickly and easily, so make sure you always ask for it. It’s should be a simple request, really.
So why is this a big freakin’ deal to you?
Well, on paper, facts and figures can appear one way when they are really something else. As an investor, you’ve got to choose companies that regularly practice plans to keep costs down. I’m talking lower costs for things like major renovations, tenant services and even ways to eliminate deferred maintenance.
Beware of the “Guarantee”
There’s no such thing. Nothing is guaranteed. (Well, almost nothing.)
Point is, if a company says it guarantees anything, you should see nothing but a red flag… and you should walk away.
In my experience, most guarantees are created for the benefit of the company, not for the investor. Guarantees are made not to give you – the investor – peace of mind, but to help companies sell. And in some cases, guarantees are created to cover up and compensate for some other problem.
No matter what the reason, you don’t want any part of a guarantee. Guaranteed. (See what I just did there?!)
One Final Reminder
Remember, there is a big difference between a guarantee and statements that say a company stands behind its work. You want a company that stands behind its work.
Just make sure you don’t allow a “sexy” guarantee to seduce you into buying a property or justifying numbers that you know aren’t real. Always calculate and consider what will happen when you call the guarantee’s bluff.
Note: Want a step-by-step process to finding, securing, and managing out-of-state rental properties? This is only 1 of 7 super-secret keys that I cover in my brand-new real estate investment success report.
Leave a Comment
If you’ve got a comment, question or story about paper or real returns, leave a comment below.
Don’t fall for guarantees – they aren’t realistic.
Remember that what’s on paper might not be the real thing.
Don’t rely on calculations and spreadsheets to give you “accurate” numbers.
Consider experience and research when determining property prices.
Always look for hard costs and ask how companies keep soft costs down.