Real Estate’s Five Profit Centers: A Study In Buy vs Hold


Gregg Cohen goes into a deep dive of what the five profit centers of real estate investing are and why you should hold onto your rentals versus flipping them in the short term. Gregg and Pablo walk through a case study of a real JWB investor in this master class episode of the Not Your Average Investor Show.

At JWB, our goal is to help you avoid a very common mistake we're seeing investors make:

Thinking it's time to sell just because prices are so high.

In this week's episode of the Not Your Average Investor Show, we discussed:

  • The current home price outlook over the next 12 months
  • The economics of holding for a full market cycle (including vacancies and maintenance)
  • A case study shows the difference between selling your rental property today vs. doing a cash-out refinance (it's a difference of tens of thousands of dollars in returns!).

You'll feel like an intelligent investor after Gregg offers valuable insight behind the five profit centers of real estate and why those who hold their properties for the long term come out ahead!

What's The Current Status Of The Jacksonville Real Estate Market?

There is a lot of equity currently being built in the Jacksonville market. Many people are moving into Florida, Jacksonville is the 12th largest city in the United States, and prices are increasing in the entire region. It's a super hot real estate market, and many of our JWB NYAI community members are taking advantage of the low-interest rates, cash-out refinancing, and buying as many rentals as they can. 

What Are The Five Profit Centers Of Rental Properties?  

The five profit centers are:

  1. Net rental income / positive cash flow — which most investors pay attention to
  2. Tax savings
  3. Principal paydown
  4. Home price appreciation — which gets the most headlines and gets the most impact on ROI
  5. Inflation hedging via Rent prices

Few real estate investors know these profit centers well. Most only focus on one or two of the profit centers, like positive cash flow and appreciation. But there is so much more to uncover in the five profit centers. All five profit centers contribute to a larger Return On Investment.

Let's take a look at the average ROI of the five profit centers in the Jacksonville, FL real estate market:

This graph shows the percentage of Total Return On Investment (ROI) broken down by profit center when purchased with smart debt and held over a complete market cycle, assuming only 4.3% home price appreciation per year. The home price appreciation accounts for 64% of the total ROI over an entire market cycle. The cash flow is 12%, the tax savings is 9%, and the principal paydown is 15%. Most people focus on the monthly cash flow, but they miss the other profit centers! 

Why Isn't Inflation Hedging Included On This Graph? 

The inflation hedging isn't in here because it's embedded in the other categories. It's included in all of these other profit centers.

In today's 2021 market, inflation is becoming influential in financial strategies. For those who believe in an increasingly inflationary environment, hard assets (real estate) AND leverage (paying down loans with “cheaper” future monies) is a great strategy.

What Would This Graph Look Like If Investors Purchased The House In Cash? 

It would look very different. The graph above shows conventional lending. 

What About Non-recourse Loans? 

It depends on how much you're putting down and what the interest rate is. You have some pluses and minuses with a non-recourse loan.

Do Home Values Always Go Up? 

That was the traditional thought process until 2007, when we experienced the Great Recession. We learned that there's not an “always” or “never” in these situations. You can often see home price appreciation, but that's not the critical factor. 

The key is longevity and giving ownership of that rental over a full market cycle. That's when you see the actual value of your property increase.

Home price appreciation is not something you do in the short term. If you buy and hold for 10 – 20 years, yes, you can count on price appreciation. If you don't do this, you miss out on the most significant profit center shown on the graph above.

The graph above shows the Jacksonville Home Pricing from 2001 – 2021, a full market cycle. You can see that it’s gone up and down, but for those who held onto their properties for the entire 20 years, they are certainly ahead.

Can We See A Case Study Of These Profit Centers?

Yes! Meet Joe DelaCruz. He bought his home in 2014 for $94,860 at 7320 Bamberg Road, Jacksonville, FL 32277. He put 20% down for $18,972.

He had a tremendous first year from 2014 to 2015 with a 22% ROI.

This graph does not show home price appreciation included. He made some good money from the rental income, tax savings, and principal paydown. Since he had such great numbers, he considered flipping the property to make a profit.

If Joe sold at the end of 2015, here’s what he would have made:

His total ROI for this 2-year investment would have been 17.3%, which is an excellent return. They are better returns than he expected, and this isn’t bad at all!

If Joe held onto the property, what could have happened? 

Well, we had a negative return!  What happened? There was a vacancy and a couple of months without rent. This is what it’s like to own a portfolio of rental properties because you have to take the highs and the lows. 

Fast forward to 2021. Let’s look at the overall performance of Joe’s property over the time from 2014 to 2021. Over time, he’s knocking his ROI out of the park!!!

Joe has done great over time, even with the setbacks of occasional vacancies and repairs. The total ROI on his property is 39.7%, which is terrific!

Do You See How Joe Benefited From All Five Profit Centers?

The amount of Joe's principal paydown is excellent at $13,692. His home price appreciation is $70K! The tax savings is $9046, and the net rental income is $12,037. 

As an investor, your profit centers get better and better with time. Joe has a total of returns at $88,775, which is significantly more than if he had sold the rental in 2015 after two years.

Buy and hold gets better over time. Many people miss that. Fortunately, the Not Your Average Investor Community gets to see real case studies with real JWB clients who are making real money by investing for the long term in the Jacksonville, Florida market.

Should I Buy And Flip For Short-term Gains, Or Hold Onto My Rental For Long-term Gains? 

In our opinion, the best ROI for real estate investors over time is to buy and hold. Look at this comparison from our case study with Joe:

Even if vacancies occur and repairs are needed, the ROI of having your money earn more money for you in a risk-adjusted way, you’re going to get ahead. That is why Gregg Cohen has invested his personal money in buying and holding rental properties. 

Can You Make The Same ROI With The Stock Market?

The hard asset you gain, plus the five profit centers you get with turnkey rental properties you hold for a full market cycle, outperforms well-performing stocks.

We have discussed real estate investments versus stock market investments before on the Not Your Average Investor Show. Watch this episode: How To Invest In Real Estate With Your IRA or 401k w/ NuView Capital's Jason DeBono.

What Would Have Happened If The Only Profit Center Was Home Price Appreciation?

Generally speaking, you can be confident you will get a 4% return, but you need to hold onto that property for a long time to make solid money. 

If Joe held on and only looked at home price appreciation, he still came out ahead by buying and holding.

What Is A Good ROI To Look For When Investing In Rental Properties?

The Jacksonville market is currently performing at 6 – 8% for the things we can control, like net rental income, principal paydown, and tax savings. But then, add the growing appreciation that’s going on in the JAX market, and you could get a 20% ROI when you buy and hold. If you hold on long enough, you gain equity, and you can do a cash-out refinance to invest in more properties. 

Our Return on Equity is zero if you do nothing with it. If you use that cash to reinvest, you can increase your rates of return. A cash-out refinance takes the equity out of your own houses and places the money as a down payment on more rentals. 

But there are other options, too. Many investors buy assets and use refinancing to live on during retirement. If you do this, you’re not paying taxes on that equity. This is a better strategy than selling a property and having to pay capital gains taxes.

The buy and hold strategy is great, and you should speak with your tax planner about it.

When Is The Right Time To Sell Your Rental Property?

There are no one-size-fits-all answers. If your life goals change, like you want to retire or no longer own rentals, or if your income needs to change, you may want to sell your rental properties.

If your life goals get you into a higher income payout, that’s fine. However, there are so many ways to do that with your current properties that you can still do it and hold onto your existing rentals. When traditionally financed, the cash flow you get will spit out way more cash after the loans are paid off.

If you want liquidity, that could be a reason to sell your rental properties. Ken Meleen is a JWB client who was losing money during retirement, and he turned to JWB turnkey rental properties to gain more cash to sustain his retirement years. If you are looking to extend your retirement money, click here to watch the episode with Ken Meleen!

When cash flow is a major concern at retirement, having a rental income-producing asset is invaluable. Having JWB to lean on in retirement as a management company is a must!

In general, holding onto the rentals and taking advantage of the five profit centers is a smart financial strategy.

Why Do So Many People Outside Of The JWB NYAI Community Complain About How Hard It Is To Buy And Hold Rental Properties?

There’s a whole other world of rental properties for people who are not working with JWB because the property management side is not being handled to the same high standards. Every year, a turn (also known as a loss of a tenant) could create an unpleasant experience for any rental property investor.

JWB’s Property Management team works hard to secure 2- to 3-year leases with our residents, establish excellent communication with everyone involved with the homes, and track the numbers showing the investors’ returns. If more companies operated the way JWB does, we strongly feel that more people would want to buy and hold onto their real estate investments for an entire market cycle.

Here are the PROS of buying and holding your JAX rental properties with JWB:

  • More rental properties, therefore more income sources
  • Leverage at low interest rates to increase equity & appreciation
  • Cash flow positive at these rates
  • Inflation protection and preservation of capital

How Do I Find Out More About Investing With JWB? 

Contact the JWB team to begin the discussion. If you want to invest in Jacksonville real estate, now is a great time to jump in. Go to www.ChatWithJWB.com and find out how we can help you reach your financial goals.

If you want to become part of the JWB online community, join us in the JWB Facebook Group at https://www.facebook.com/CashFlowProperties.  

You can also go to www.JWBInventory.com to see what properties are currently available. We encourage you to contact the JWB team for a consultation to determine how our turnkey rental properties can deliver positive passive cash flow. 

We hope you enjoyed learning about the five profit centers of rental properties and seeing this case study about buying vs. holding. If you are a real estate investor who wants to purchase turnkey single-family homes from JWB, contact us today at www.ChatWithJWB.com. The Jacksonville real estate market is on track for continuous growth, and JWB is excited to help many investors grow their wealth through single-family home rentals.

To Your Success,

Gregg Cohen

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