We came across a listing recently and thought you would appreciate this little story. It is an influential example of the power of owning and holding real estate.
In December 2003, Prestigious Properties acquired Spruce Manor, a 12 unit building in Edmonton for $492,500 ($41,000/unit) with $100,000 in cash, the smallest PrestProp building ever acquired. After modest renovations and primarily impeccable property management the property sold to a local investor for $585,000 ($48,750/unit) only 9 months later in August of 2004 for a juicy (not even one year) 60% profit.
In just three short years, the next owners were able to sell the building for over $83,000/unit or $996,000. If we had waited just a few more years Prestigious Properties and our investors would have accumulated an over 400% ROI.
Today, about 10.5 years after we acquired it, Spruce Manor is currently on the market for $1,368,000 or $114,000/unit, equivalent to an ROI of about 1000 % on the original $100,000 invested.
Real estate has heavy, front-end loaded transaction costs: raising money, finding the building, realtor fees, legal fees, inspection fees, land transfer taxes (except in Alberta), mortgage commitment fees as well as inspecting 3-5 other candidates that are ultimately not even purchased. All these fees add up and often even a five-year hold is usually too short to make a high return due to these initial, front-end mainly one-time fees. That is why – today – we always tell our investors to be prepared to hold AT LEAST 5-7 years or better yet 10+ years as it is the second five years when the true savings start as those initial fees for another five years do NOT reoccur if you hold 2 x 5 years.
The invaluable lesson in this experience is that if you want to create wealth, you can do it with real estate, and the key is to hold.
If one can take the long view, you can enjoy the immediate benefits of investing in real estate like the cash flow and equity growth through mortgage pay down, but there is nothing like time that can create a substantial increase in the value of real estate and enhance your returns.
That is why we often struggle when investors ask us “how long is the hold for this investment?” We understand everyone has requirements for their cash and want to realize the returns on their investments but it’s hard not to think “forever” as we reflect on the example above. The result is almost the same for every property we have ever sold: today they are all sustainably worth more then what we sold them for and their ROI’s would have exponentially improved with time. That is why we have introduced exit options in our last two LPs, PRISM A and Kings Castle. The result is that in PRISM A LP after over 6 years into it, less than 10% of investors have exited, although they could without a penalty to the current NAV (net asset value).
I guess that’s why they sometimes call our president Thomas Beyer, only sometimes a seller.
More on the performance of this and other assets in our portfolio is in our Performance Summary / Track Record website.
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