In this episode of The Same Day Podcast, Mat Zalk breaks down the lifecycle of a real estate investment, highlighting the factors that contributed to its success. He explains why real estate often outperforms the stock market on a risk-adjusted basis and discusses whether similar deals can be replicated in today’s economy. Mat also explores common investor concerns, such as timing the sale of a property and navigating tax implications.
Lifecycle Analysis of a Real Estate Deal
Mat Zalk is the President and Property Manager at Keyrenter Property Management, which has offices in Tulsa, Oklahoma City, and Arkansas. He focuses on the acquisition and management of single and multi-family residential properties on behalf of himself and a small network of investors.
Before founding Keyrenter Tulsa, Mat was a Strategy Director at The Property Finder Group, where he worked closely with the CEO and senior management team on various international acquisitions, scaled local teams in the group’s Saudi Arabia and Egypt offices, and executed a number of strategic projects in the core business market of Dubai. Mat has been an active investor since 2014 and is a licensed real estate agent in Oklahoma.
Here’s a glimpse of what you’ll learn:
- [1:51] Challenges real estate investors faced in recent years
- [3:06] Breakdown of a real estate deal: purchase, renovation, and financing details
- [5:00] Analyzing net operating income, cash flow, and return on investment
- [9:03] Comparing real estate returns to stock market investments and risk-adjusted gains
- [11:32] Can similar real estate deals be replicated today?
In this episode…
Understanding the financial dynamics of a real estate deal is essential for making informed investment decisions. From acquisition to sale, every step impacts overall profitability. But what does a successful investment look like, and how can investors maximize their returns?
According to Mat Zalk, an experienced real estate investor and property manager, a well-structured investment strategy can generate substantial returns even in challenging market conditions. He shares a detailed analysis of a deal involving three duplexes, covering the purchase price, renovation costs, rental income, and long-term financial performance. By examining key metrics like net operating income and internal rate of return, Mat illustrates how strategic decision-making and effective property management can significantly enhance profitability.
Resources mentioned in this episode:
- Mat Zalk on LinkedIn
- Yonatan Schmidt on LinkedIn
- Keyrenter Property Management
- Keyrenter Property Management in Tulsa | Oklahoma City | Arkansas
- Keyrenter Property Management email address: [email protected]
Quotable Moments
- “People really feel like they’re bleeding, and they don’t want to be bleeding. They want to stop the bleeding, and so they look to sell.”
- “We certainly got a bump during COVID. Interest rates were low; prices went up hard. Assets are primed to do well when inflation is high.”
- “Everything looks cheap in the rearview mirror. So buy today. Keep buying today.”
- “Could we replicate it again? I don’t know. The question is, what can you do today that in 10 years looks really good?”
- “All of them are going to look better than the stock market. That’s nearly a guarantee.”
Action Steps
- Analyze your real estate investments thoroughly: Reviewing financial metrics like net operating income and internal rate of return helps in making data-driven investment decisions.
- Consider long-term appreciation over short-term market fluctuations: Real estate values tend to increase over time, making patience and strategic holding the key to maximizing returns.
- Factor in inflation when making investment decisions: Fixed assets like real estate often perform well in inflationary environments, protecting your purchasing power.
- Evaluate the benefits of selling versus holding: Understanding the tax implications and cash flow potential of a property can help determine the right time to exit an investment.
- Continue investing despite market uncertainty: Every deal may not look perfect today, but historical trends show that real estate remains a strong wealth-building vehicle over time.
Sponsor for this episode…
Keyrenter Property Management:
This episode is brought to you by Keyrenter Property Management.
Keyrenter Property Management is a full-service property management company that helps clients buy, renovate, and operate real estate assets.
The team helps clients build wealth while taking the headache out of property management.
That’s why, no matter what rental you have — single-family homes, condos, townhomes, or apartments — they can give you the management solutions you need.
To learn more about their services, go to https://keyrenterpmc.com/ or send them an email at [email protected].
Episode Transcript
Intro: 00:05
Welcome to The Same Day Podcast, where we discuss driving incremental business growth and other topics related to real estate, property management and entrepreneurship. Now to the show at hand.
Mat Zalk 00:20
Mat Zalk here. I’m the host of The Same Day Podcast, where I connect with top business experts and real estate leaders. Today’s episode is brought to you by Keyrenter Property Management. At Keyrenter Property Management, we are a full service property management company helping our clients buy, renovate and operate real estate assets. We help our clients build wealth while taking the headache out of property management. Go to keyrenterpmc.com or email us at [email protected]. Today we’re going to do something slightly different. I’m going to do a little bit of an analysis on a property that we purchased and sold. We’re going to do something a little bit different today. I’m going to share a roughly real life example of an investment that I did with a partner some years ago, and we just sold it. And I want to run through the numbers. The backstory or the context is that we get a lot of questions about real estate investing from owners, people looking to buy or people looking to sell. And of course, many of those people that are looking to sell, I feel like have a recency bias that prevails. And when they experience a year of high maintenance, potentially even coupled with inflationary increases of that, of that maintenance spend. So not only are they, in other words, to explain, not only have they experienced more maintenance, but the cost of that maintenance has gone up as it has in the last couple of years. People really feel like they’re bleeding and they don’t want to be bleeding. They want to stop the bleeding. And so they look to sell. And I want to explain, you know, my situation and what happened with this partnership.
The last couple of years have really been tough for a lot of real estate investors. Rents surged, of course, but inflation caught up and then rents have stagnated or fallen by a tiny bit. But the prices that we’re paying for maintenance have stayed high and it can be painful. It feels painful, and especially when you buy older houses and you have to do sewer line repairs and you have to do HVAC repairs. The cost of those systems have gone from 3200 to $7000, or $8,000, and that just it feels really painful, and it doesn’t look like there’s any stop to that increase that is coming anytime soon. We just switched from 408 to Seer two, which is a different type of refrigerant. It’s now flammable. There has to be additional components that are put on to the system to make sure that they don’t catch fire. If there is any leak of that refrigerant that it stops immediately. So prices are going to continue to go up. Anyways. When my back to the story here, when my partner in this project said he wanted to sell, I started questioning everything. He wanted to take the money out and put it into an equity investment that was yielding 12 or 14%, and I just thought that was crazy. I said, I understand you feel like we’re bleeding on this. You feel like it’s not making any money, but you’re crazy to put it into 12% unlevered vehicle.
So I went down the rabbit hole and I started looking at the numbers for an investment that we made again December 2019. We bought three duplexes. We renovated five of the six units over the next 3 or 4 months, and we’ve had them rented ever since. So let me share my screen and run through these numbers in a very rudimentary Excel spreadsheet that I put together. Okay. So basically we bought these units. They appraised for $250,000. We had a $200,000 mortgage on it, which was roughly the cost, you know, some portion of the acquisition plus a larger portion of the construction. So the bank financed all the mostly all the construction and a big portion of the acquisition. We had $40,000 in the deal. So four times five is 200. We had roughly 20% of the of the equity in the deal after it was all after we’d spent everything and. No, that’s that’s wrong. Less 15% because I think ultimately we had something like 225,000 in the deal. We paid 144. And then we did a renovation. It was 75 or $80,000. So this is what the numbers actually look like in the first year, 2020, the first year of operations, we had 28,000 of income. We had 40,000, 43, 37. It dipped here. And that’s because we had turnover and we had, you know, some vacancy period and whatever else. And then we had 41,000 in 2024. Our expenses were super high at the beginning. Obviously, we had all sorts of money that we put into the property. And some of this is included in here is is part of the acquisition cost because we don’t really I don’t separate it out in that fully. We don’t run a true very strong balance sheet. We just kind of run everything as as real cash numbers in the in in our portfolio.
And so then we had less expenses in in in the following years. But they were still pretty high. Some of these includes because of the way our system works. Again we include principal and interest in here. And just to get the numbers, because we are, you know, for the most part, we’re we’re working as a property management company with investors and they handle their own principal and interest. We don’t generally pay those fees for them, those expenses for them. And so they add that in below the line of what we give them at the end of the year in terms of their cash flow and expenses. So this comes in here, I wanted to pull it out because realistically, you know, that’s not part of the NOI number. So this NOI number is the the rent income less the expenses. And I added back in the principal and interest payment because really NOI doesn’t include the financing mechanism that that you employ when you are Looking at a property. So our noise here and then I put, I just broke down the principal and interest and I did some rough math. I looked at some numbers and said basically 62% of our, of our total principal and interest in the first year was going to pay the interest 60%, 58%. Right. This is a normal amortizing loan over 20 years, and it was a five year term. So I came down here and I said, look, we’ve got about $40,000 of cash in the deal. We had no cash flow the first year. We had negative cash flow. In the first year we had depreciation that we took. And then the ultimately, in terms of the real cash that we put in, it was something like $16,000 of net outflow because we had taken this $37,000 of depreciation times two and split it between my partner and I. And so it was at a 32% rate, which is the the effective rate of our tax returns or returns or whatever we say it’s it’s worth 23,000. Similarly, we had cash flow in these years NOI plus the sorry minus the the principal and interest which gives us our real cash flow for the for the year of these numbers and the depreciation that we that we pushed through for those years, an accelerated basis, which is rough. I mean, just these are just rough numbers. And even if you change these to, you know, you can change these to zero and it doesn’t make a huge impact. It’s big. And you’re talking big numbers here when we get down to the IRR and the ROI. But it’s not it’s it’s not meaningful from the sense that you would do this deal all day, every day if you had the opportunity. And then basically we sold the three duplexes. We netted 160,000 cash. And you’ll notice that, you know, this cash, some of this cash that we took out is, I guess, what you’d consider profit on the sale. So we, you know, if we buy something for 100 and sell it for 110, you made $10,000. If you buy something for 100, you pay down 10,000 of principal. You sell it for 110. You’ve netted 20,000. Some of that was just the forced savings that came here every month. When the resident paid down the principal of this note, we were just putting it into a savings account equivalent. And you get to take that out at the end of the project. So here are our numbers of of kind of net flows of the project from a cash flow perspective. And the IRR is 116%, which means it’s essentially 116% compound annual growth rate. I mean, you can look at what an IRR is. It takes into account time, it takes into account an initial purchase and an exit value. But essentially for simplistic purposes, basically 150% return the return on our investment, something like 550%. Now, again, you can take these down and say, look, we didn’t take any depreciation. It goes to 407. What difference does that make. You can make some other assumptions change. Things say that we you know we actually had $60,000 in the deal. And what if we what if we did have depreciation? But we had, you know, actually 60,000in the deal. 64% IRR with a 367. None of that really matters.
The point is this the return from this investment was far, far, far in excess of what you could do in any sort of real stock market vehicle, whether it’s, you know, a total stock market index, the S&P, or you have a lead into why Apple stock is going to jump unless you’re a real, real professional invest investor and you have or you’re day trading crypto and for some reason you have a lead in your whatever all that stuff on a risk adjusted basis, you’re not going to make returns anywhere near what you’re going to make in a good real estate investment deal. So that was my thinking in sharing this with you. I’ll also say, I’m going to stop my share now and come back to you. A couple of thoughts that came to mind, like. Questions that people may have and I’m happy to entertain other questions. If you want to give me a call or send me an me an email. But you know, doesn’t the IRR encourage you to exit quicker? And the answer is yes. If you are IRR focused and not return on investment focused, then yeah, it generally emphasizes timing of the cash flow. But IRR can also be thought of as a tool to compare different investment opportunities. And so you want to look at IRR but you also want to look at the return on investment or the return on capital. Second question that I thought of that might be that people might have is something about, you know, cherry picking the deal. Did I just pick a specific deal to make this podcast? And the answer is yes. My partner in this, in this opportunity said, you know, I want to sell this. And so I thought, well, that’s a good this is a good time to to do that. I can also do investment analysis on some other properties that we’ve sold over the years and, and do some do a podcast on those. The, the you know, the other question is if IRR is incentivizes you to sell, are you happy that you sold and, you know, could you have sold a year earlier and even bumped that IRR even higher? Well, that may be true. But if, if, if the appreciation of properties is going up 3 or 4 or 5% per year, there may be an incentive to sell quicker, but there may also be incentive to hold long term. I don’t really care about the IRR. I’d rather just have the appreciation over time when I sell. If I don’t 1031 exchange it into something else, then I’m paying taxes on it. So all of a sudden you have a significant depreciation recapture, and you also have a significant profit that you’ve got to show to the government and pay taxes on, which I don’t really want to do. I’d rather exchange it into something else, replicate the debt and and kind of kick the can down the road.
The final question that I thought through was something around, could you replicate this deal today? And the answer is nobody has a crystal ball. We certainly got a bump during Covid. Interest rates were low, prices went up hard. Assets are, you know, are primed to do well when inflation is high because they’re just fixed assets, and fixed assets do well in inflation. Just Google that and you can understand why. So could we replicate it again. I don’t know. The question is what can you do today that in ten years looks really good. And my argument and one of my colleagues says is everything looks cheap in the rear view mirror. So buy today. Keep buying today. I know we’re still buying today, and we’re hoping that in ten years principles paid off. Rents have appreciated and prices have similarly pushed higher so that we have an asset that’s worth a lot more money. So I don’t know if I could replicate these same numbers today, but I could probably do an analysis on any of the properties that we’ve bought in the last five years. Some look much better, some look worse, but all of them are going to look better than the stock market. That’s nearly a guarantee. I know we bought some in nicer areas because we wanted a little bit lower cash flow, but we wanted higher appreciation or we wanted to not have some of the of the variability of of the cash flows that come when you’re buying older properties and you don’t know when the sewer is going to need to be replaced, and you don’t know when a tenant is going to be a bad tenant and destroy something. We wanted them in nicer areas closer to our primary residences. My partner and I in this in this deal, we wanted them to be in Broken Arrow and Jinx in Midtown Tulsa, etc. and I bet that those deals still would be. I would almost bet anything that those deals would still be despite being cash flow neutral or negative, would be significantly better investments than putting the same amount of money that we put down to buy those properties into the stock market. So I’m going to leave you with that. If you have any questions, give me a shout. [email protected] or [email protected]. Happy to chat about this.
Outro 13:38
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