What makes a 6% return look like a great deal? A -34% one, that's what!

Some things in the real estate world will dramatically shape (or reshape) your view on investments.  I recently went through one of these, when I sold an investment property I purchased 6 years ago.  I used to believe investment properties with a return of 6% should only get the delete button, but now a 6% return may not be so bad!  The particular investment property I sold was a good learning lesson in several ways:

• Do not be too motivated to buy a property using a 1031 exchange.  Many times, it is better to just pay the taxes and find a better deal without time constraints.
  
• Falling “in love” with an investment property never ends well.  As they say, “breaking up is hard to do.”  My suggestion is to never start the relationship.
  
• NEVER count on appreciation to make your investment a good one.  ALWAYS use cash flow as your gauge.
  

This particular investment was not too expensive that I could not handle it, but yes, it would have been much nicer to just put the 1031 money under my mattress, paid the taxes, and waited for a better investment to come along...as they often do.  For those that like calculators as much as me,  I have included my yearly cash flows below along with my initial investment indicated as Year 0.   If you calculate the IRR for this investment, what do you get?

     Year                    Total Cash Flow
       0                           ($70,012)
       1                              $577
       2                            ($2432)
       3                            ($4759)
       4                            ($7395)
       5                            ($3543)
       6                            $12934

On this deal, assume the cash flows occur at the end of the year and that there is only 1 payment per year.  Sometimes the best learning experiences come long after college is over!