QUOTE (ThomasBeyer @ Apr 22 2010, 11:19 PM) I like the graphs .. thank you !
However, I do NOT see ANY time period where the fixed rate was lower than prime had you locked in that year .....
late 70`s was also a period of huge baby-boomer induced growth .. s.th. that will not happen again in N-America.
A fixed rate is like buying insurance. On average, you will ALWAYS, ALWAYS pay more with fixed rates. The winners: the banks !
Yes, lock in if you cannot afford a temporary peak to 6 or 6.5% with prime ......
Rather keep the savings in a separate bank account for a "rainy" day !
The keyword here is: "If you can not afford a temporary peak". Why wouldn`t you be able to afford a somewhat higher interest rate? Simple, you`re probably overleveraged. So, keep your LTVs down. Especially in an rising interest rate environment 90 or 95% leverage is too risky. I prefer 65 to 70%.
Here is the problem: ROI versus positive cash flow! If your leverage is too low your ROI falls back to the normal real estate appreciation rate 6-8% per year while getting oodles of cash flow. If you have an LTV around 80 to 90% you may achieve ROIs as high as 30%. What people forget is that this ROI is on a low down payment thus my saying "a 100% return on nothing is still nothing". On the otherhand, get the returns that are `good enough` and you have cash flow, a buffer against rising interest and less risk. What is wrong with 10 to 15%?
For a conservative and prudent investor it is not a matter of achieving the maximum ROI, but to achieve a good ROI that compares well with that of other investment classes. Problem in real estate is that the ROI also includes your compensation for work, especially when you are the Finder in a JV.
I propose that when you evaluate your next purchase, you include your work compensation in the operating costs of the property. Just like the property manager. It truly estimates what your ROI is compared to other investments and shows whether you are properly compensated for the risks you and your partners take (including LTV risk).
Look at high leverage and `ROI`s this way:
Case one: Net worth $1000,000 with 10% down. Now you can own $10,000,000 in real estate. At an average door price of $100,000 that means you run 100 doors. How much time does it take you to find 100 properties at $100,000 each and then manage them? So your ROI is 30% and that means you are making $300,000 per year. At an average 11.7% historical average stock market return you make $117,000 - of course that is without working. You could live from $117,000 and do nothing or do some other money making work without the fear that a 5% drop in the real estate market would wipe out half your capital.
Case 2. With a net worth of $1000,000 and 50% down you can own $2,000,000. With an average door price of $200,000 you own 10 properties and say the ROI of 15%. You`re making $150,000 per year and you`ll be sleeping a lot better at night. Guess what you also work a lot less hard. In the stockmarket you make $117,000 per year, so for your managing your real estate (assuming a comparable risk level) you`re getting paid for this part-time job $33,000 per year. The rest of the time is yours.
When Don Campbell is talking about lifestyle, family life and being there for your kids, which scenario does he have in mind do you think?