Based on 36 years in real estate and 700+ escrows focusing on investment returns, I would say 80 – 90% of investors focus on cash flow (or income-focused investing) and 10-20% focus on appreciation (capital gains-focused investing). The only types of real estate I have not invested in are hotels and motels.

Income-focused investing, simplified

Cash on cash returns are basically the cash left over at the end of the calendar year as a percent of your down payment. Over the years, As an investor, I have experienced returns that range from negative to over 40% ! Now let’s say an investor receives 40% return for 10 years. Starting with a $1 million building (80% loan-to-value ratio (LTV)) in 10 years the capital gains will be approximately $333,333 based on a 6% selling cap rate.

Add 40% x 10 years x $200,000 down = $800,000 cash flow over 10 years. Gross simple profits after expenses are about $1,133,333 on a $200,000 down payment. 567% profit in 10 years if you sell at the top of the market! Wow, most of you would say, right? Let’s take a capital gains focused approach with no management, no debt and no maintenance.

Capital gains-focused investing, simplified

The California real estate cycle has been about the same since World War II, with approximately 8-12 years between the tops and bottoms of real estate booms and recessions. As adults in our prime working years, 18 to 68, we have 50 years of work and investing. This is about 2 complete real estate cycles (2 tops & 2 bottoms). Based on my past 36 years, real estate values basically double top to top & bottom to bottom. Now what does this mean? Our goal is to buy low & sell high (1 cycle of 8 – 12 years). What returns can be expected based on “cost of goods” accounting?

In the chart below, “c” represents cents, a.k.a. cents per dollar vs. the last high. Cost is what we paid vs. the last high of the market (2006 – 2007).

Cost Profit Profit
@ 100%
@ 200%
50c 50c 100% 300% = $1.50
33c 67c 200% 500% = $1.67
25c 75c 300% 700% = $1.75
20c 80c 400% 900% = $1.80
10c 90c 900% 1900% = $1.90
8c 92c 1150%* 2400%=$1.92
5c 95c 1900% 3900% = $1.95
3c 97c 3133%** 6567%**=$1.97

*1997 to 2007
**2012 to 2022 (estimated)

If you sold all your acres near the top with a cost of goods of 8 cents, your gross profit would have been 1150%. The bottom was approximately 1996-1997. That’s 10 years, bottom to top.

Now if you could do this 2 times in your lifetime, most investors would be very happy with their portfolio of investments. As an investor, I sold most of my buildings and went into vacant land in the 1990s. I sold almost all of my land from 2000 to 2007, about 8,000 acres. My average gross profit was 1167% per acre, with an average 8 cents cost based on almost 200 closed/sold escrows.

Over the last 3 years I bought 5,000+ acres for an average cost of 2.7% vs. 2006-2007 values. This should give me a 3133-6567% gross profit in 6-9 years. Vacant land has basically zero stress and drama, and has permitted me to visit 68 countries and fill 5 passports… I hope these “basic” numbers have swayed your thinking from income-focused investing towards capital gains-focused investing.

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