10% Rule
- Thread starter AminMurji
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[quote user=gwasser]Secondly, it is nonsense to state that one does not run a business to create appreciation value. We create a business to make money and nobody cares too much about whether the profits are due to appreciation or due to positive cash flow. That is pretty 'practical' I would say.
Point taken however if you had to give up all your other sources of income and relied on the cashflow of your RE investments to live how would you then view your next RE investment purchase?
Suppose your investments were paying you just enough to get by, would your next purchase be soley in the hope of future appreciation? Likely not, the investment must create enough cashflow to carry itself and then some, in fact one of the reasons any business appreciates in value is the consistency and reliability of the cashflow it generates.
One of the things many inexperienced RE investors will tell you is 'RE always goes up in value' - we all (most of us) know the inherent falsity in that statement!
Point taken however if you had to give up all your other sources of income and relied on the cashflow of your RE investments to live how would you then view your next RE investment purchase?
Suppose your investments were paying you just enough to get by, would your next purchase be soley in the hope of future appreciation? Likely not, the investment must create enough cashflow to carry itself and then some, in fact one of the reasons any business appreciates in value is the consistency and reliability of the cashflow it generates.
One of the things many inexperienced RE investors will tell you is 'RE always goes up in value' - we all (most of us) know the inherent falsity in that statement!
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[quote user=EdRenkema]One of the things many inexperienced RE investors will tell you is 'RE always goes up in value' - we all (most of us) know the inherent falsity in that statement!
it depends on the timeline .. 1 year ? 3 years ? 5 ? 10 ? 20 ? 50 ? 100 ?
it ALWAYS goes up over a 10, 20 or 50 year period, assuming the city is viable (i.e. near the Fukushima nuclear plant houses are worth less today than 50 years ago most likely ..) .. but you're right: it may not in 1 or 3 years !
There are plenty of "investors" who buy a condo in Vancouver for $1M with negative cash-flow to sell it for $1.5M (or higher) in 10 years .. but they have enough cash to sustain the negative cash flow due to mortgages, condo fees and taxes, even if vacant !
Thus: have enough cash, or cash-flow, to get to year 10 (or later) !!
it depends on the timeline .. 1 year ? 3 years ? 5 ? 10 ? 20 ? 50 ? 100 ?
it ALWAYS goes up over a 10, 20 or 50 year period, assuming the city is viable (i.e. near the Fukushima nuclear plant houses are worth less today than 50 years ago most likely ..) .. but you're right: it may not in 1 or 3 years !
There are plenty of "investors" who buy a condo in Vancouver for $1M with negative cash-flow to sell it for $1.5M (or higher) in 10 years .. but they have enough cash to sustain the negative cash flow due to mortgages, condo fees and taxes, even if vacant !
Thus: have enough cash, or cash-flow, to get to year 10 (or later) !!
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[quote user=EdRenkema]Point taken however if you had to give up all your other sources of income and relied on the cashflow of your RE investments to live how would you then view your next RE investment purchase?
Suppose your investments were paying you just enough to get by, would your next purchase be soley in the hope of future appreciation? Likely not, the investment must create enough cashflow to carry itself and then some, in fact one of the reasons any business appreciates in value is the consistency and reliability of the cashflow it generates.
Many properties barely break even in cash flow (in the first two or three years) and I would not touch them with a 100ft pole if there was no chance of appreciation. The whole purpose of the Gold Score Card is to identify areas with the potential of better than average appreciation in addition to rentability.
The role of cash flow is to be able to hold on to the property until that appreciation is realized. Why else bother with the risk of mortgages? If you did not have appreciation there would be no chance of enhancing your profits using leverage; there would be no reason to have a mortgage.
If I invested just for the cash flow yield there are, as Rickson-not-quite-10 claims, a lot easier opportunities to get yield. Maybe not the 10% he is looking for, but on an after tax basis you can get a relatively large amount of mula. E.g. BCE yields 5.2% dividend comparable on an after tax basis with 7 to 8% interest or net rental income (if you ignored depreciation).
It is true that real estate does not appreciate at a steady rate. There can be some stomach sickening set backs just like in the stock market - think 1990, 2007-today in U.S.; think Calgary NE, Calgary 2 bedroom apartments, Canmore, Spain, Canary Warf, etc., etc.
But over the longterm, 5, 10 years and longer it'll do just fine. Cash flow is to enable the investor to hold on and pay the mortgage man. Yes you could call that 'speculation' but in that case you would call Thomas and Don Campbell also speculators, which they aren't in my books.
Speculation is about risk - excessive risk. Buying into unbuild condos at the peak of the market with $5000 down and no back-up funds. But, in some cases, it can be quite lucrative to buy in new developments, as long as you recognize the risks and don't take excessive ones. This risk is not only dependent on the investment but also on the investor and his/her situation.
I bought an apartment unit at University City, a new Calgary development with construction about to start. I bought the unit last year - a 2 bedroom unit with $12,000 down. I have enough financial strength to handle the mortgage which upon the buildings completion would require monthly payments. I even did build in significant vacancies for at least the first 6 months - like 5 months vacancies. But I bought in a depressed market at a competitive price when compared with nearby existing condos. I hope for significant appreciation based on the Gold score card in the coming two years. Considering the economic outlook of Calgary that will likely happen. The apartment building will be in a very attractive area within 300m of an LRT station, 500m from the university and surrounded by a shopping centre located at a recently upgraded major traffic artery.
It is possible that initially, the true speculators, who cannot afford to hold on and who cannot handle negative cash flows, will be forced to sell. By then, I will be in a position to be very knowledge about the property and buy some more, hopefully at very cheap prices from those speculators. On the other hand If the price has sky rocketed, I may experience some early unexpected profits. I am willing to hold on for 5 to 10 years and on average, because I bought at a depressed price, my average annual appreciation may be 6% or so. You may call this speculation, for me it is investing at a slighty higher risk level than I usually do.But a risk level I can handle.
Suppose your investments were paying you just enough to get by, would your next purchase be soley in the hope of future appreciation? Likely not, the investment must create enough cashflow to carry itself and then some, in fact one of the reasons any business appreciates in value is the consistency and reliability of the cashflow it generates.
Many properties barely break even in cash flow (in the first two or three years) and I would not touch them with a 100ft pole if there was no chance of appreciation. The whole purpose of the Gold Score Card is to identify areas with the potential of better than average appreciation in addition to rentability.
The role of cash flow is to be able to hold on to the property until that appreciation is realized. Why else bother with the risk of mortgages? If you did not have appreciation there would be no chance of enhancing your profits using leverage; there would be no reason to have a mortgage.
If I invested just for the cash flow yield there are, as Rickson-not-quite-10 claims, a lot easier opportunities to get yield. Maybe not the 10% he is looking for, but on an after tax basis you can get a relatively large amount of mula. E.g. BCE yields 5.2% dividend comparable on an after tax basis with 7 to 8% interest or net rental income (if you ignored depreciation).
It is true that real estate does not appreciate at a steady rate. There can be some stomach sickening set backs just like in the stock market - think 1990, 2007-today in U.S.; think Calgary NE, Calgary 2 bedroom apartments, Canmore, Spain, Canary Warf, etc., etc.
But over the longterm, 5, 10 years and longer it'll do just fine. Cash flow is to enable the investor to hold on and pay the mortgage man. Yes you could call that 'speculation' but in that case you would call Thomas and Don Campbell also speculators, which they aren't in my books.
Speculation is about risk - excessive risk. Buying into unbuild condos at the peak of the market with $5000 down and no back-up funds. But, in some cases, it can be quite lucrative to buy in new developments, as long as you recognize the risks and don't take excessive ones. This risk is not only dependent on the investment but also on the investor and his/her situation.
I bought an apartment unit at University City, a new Calgary development with construction about to start. I bought the unit last year - a 2 bedroom unit with $12,000 down. I have enough financial strength to handle the mortgage which upon the buildings completion would require monthly payments. I even did build in significant vacancies for at least the first 6 months - like 5 months vacancies. But I bought in a depressed market at a competitive price when compared with nearby existing condos. I hope for significant appreciation based on the Gold score card in the coming two years. Considering the economic outlook of Calgary that will likely happen. The apartment building will be in a very attractive area within 300m of an LRT station, 500m from the university and surrounded by a shopping centre located at a recently upgraded major traffic artery.
It is possible that initially, the true speculators, who cannot afford to hold on and who cannot handle negative cash flows, will be forced to sell. By then, I will be in a position to be very knowledge about the property and buy some more, hopefully at very cheap prices from those speculators. On the other hand If the price has sky rocketed, I may experience some early unexpected profits. I am willing to hold on for 5 to 10 years and on average, because I bought at a depressed price, my average annual appreciation may be 6% or so. You may call this speculation, for me it is investing at a slighty higher risk level than I usually do.But a risk level I can handle.
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[quote user=gwasser]But a risk level I can handle.
And I can't.
I'm not a geologist or a realtor - and geology is an honourable profession, realtor is ummm lucrative anyway, point is my RE has to provide for me, otherwise I won't buy it. I haven't seen an investor complain if they're getting regular cheques...
Robert Kyosaki: "there are 2 kinds of money problems, not enough money, and too much money - which problem do you want?"
And I can't.
I'm not a geologist or a realtor - and geology is an honourable profession, realtor is ummm lucrative anyway, point is my RE has to provide for me, otherwise I won't buy it. I haven't seen an investor complain if they're getting regular cheques...
Robert Kyosaki: "there are 2 kinds of money problems, not enough money, and too much money - which problem do you want?"
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[quote user=EdRenkema][quote user=gwasser]But a risk level I can handle.
And I can't.
I'm not a geologist or a realtor - and geology is an honourable profession, realtor is ummm lucrative anyway, point is my RE has to provide for me, otherwise I won't buy it. I haven't seen an investor complain if they're getting regular cheques...
Robert Kyosaki: "there are 2 kinds of money problems, not enough money, and too much money - which problem do you want?"
Ed you are absolutely right. It is what works for you and what kind of risk you want to handle that is important. One thing works for Thomas, but may not necessarily be your game. Don and Thomas have hundreds of properties, I may become a gold member, but for sure not a diamond member with 100+ properties.
One investor uses JV partners, but that may not work for another. Don says that we don't count each others doors; it is about learning from each other and to learn understand what may work [for you/me]. I am listening to the Tony Peters interview while I am writing this. I am full of admiration for Tony, and one day I may come accross a 'Tony Deal', but it is not my style. Same for RTOs. But I still want to learn about it - it or a variation may come in handy and knowing about it makes me a better investor.
Nice discussion.
And I can't.
I'm not a geologist or a realtor - and geology is an honourable profession, realtor is ummm lucrative anyway, point is my RE has to provide for me, otherwise I won't buy it. I haven't seen an investor complain if they're getting regular cheques...
Robert Kyosaki: "there are 2 kinds of money problems, not enough money, and too much money - which problem do you want?"
Ed you are absolutely right. It is what works for you and what kind of risk you want to handle that is important. One thing works for Thomas, but may not necessarily be your game. Don and Thomas have hundreds of properties, I may become a gold member, but for sure not a diamond member with 100+ properties.
One investor uses JV partners, but that may not work for another. Don says that we don't count each others doors; it is about learning from each other and to learn understand what may work [for you/me]. I am listening to the Tony Peters interview while I am writing this. I am full of admiration for Tony, and one day I may come accross a 'Tony Deal', but it is not my style. Same for RTOs. But I still want to learn about it - it or a variation may come in handy and knowing about it makes me a better investor.
Nice discussion.
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[quote user=gwasser]Nice discussion.
indeed !
Some plants grow well in the dessert .. other well in swamps or on Rocky Mountains' slopes .. and it takes a while to find out what soil works best for you ! [took me about 22 years after highschool]
indeed !
Some plants grow well in the dessert .. other well in swamps or on Rocky Mountains' slopes .. and it takes a while to find out what soil works best for you ! [took me about 22 years after highschool]
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[quote user=Rickson9]Owning 1% of 100 doors is the same as owning 1 door.
Best regards.
It's more equivalent than it is exactly the same. 1% of 100 doors probably comes with someone else running the portfolio as an asset manager, which comes with an associated cost. It also comes with some of the benefits of diversification (unlikely to have 100% vacancy w/ 100 doors). So the return will have more constrained upper and lower bounds, but should move in the same direction (appreciation/depreciation) at very nearly the same rate.
Regards,
Michael
Best regards.
It's more equivalent than it is exactly the same. 1% of 100 doors probably comes with someone else running the portfolio as an asset manager, which comes with an associated cost. It also comes with some of the benefits of diversification (unlikely to have 100% vacancy w/ 100 doors). So the return will have more constrained upper and lower bounds, but should move in the same direction (appreciation/depreciation) at very nearly the same rate.
Regards,
Michael