Moving from Equity to Income

[Nir]

`andyr`, I`m not surprised you got so many responses. You raised an EXCELLENT point! I read Don`s Great book carefully and learned a lot from it.
However, I, too, believe a $50 positive cash flow property is TERRIBLE!!! The reason is you need to buy 100 to generate a good passive income and retire ($5000).
I prefer buying 10 each generating $500. There is another hidden cost to buying 100 properties instead of 10 - you have extra management costs VS. 10 properties
where you can still manage some aspects yourself.

Everyone, I`m not sure why you find the issue of paying your mortgage fast VS. slow so confusing. It is very simple - if you are in a situation where you want to buy more, pay your mortgage as slow as possible. If you`re done buying, pay it faster.. if you want. Remember: in a way paying fast then re-fi to buy more = paying slow from the start

I, for example, have not finished buying. therefore of course I am not paying my mortgage faster. it would be ridiculous. I will re-fi though if value goes up.

Lastly, the investment strategy also depends on your personal goals. people here argue forgetting there is no absolute truth. It`s more complex than that.
For example, if you are willing to retire in 10 years you have more investment options than if you feel you must retire in 3 years in which case you should be much more aggressive and careful. Another thing it depends on, for example, is how much more you can "take" as an employee. Cheers.

 

[luckyluciano]

QUOTE (investmart @ Oct 3 2009, 10:47 PM) `andyr`, I`m not surprised you got so many responses. You raised an EXCELLENT point! I read Don`s Great book carefully and learned a lot from it.
However, I, too, believe a $50 positive cash flow property is TERRIBLE!!! The reason is you need to buy 100 to generate a good passive income and retire ($5000).
I prefer buying 10 each generating $500. There is another hidden cost to buying 100 properties instead of 10 - you have extra management costs VS. 10 properties
where you can still manage some aspects yourself.

Everyone, I`m not sure why you find the issue of paying your mortgage fast VS. slow so confusing. It is very simple - if you are in a situation where you want to buy more, pay your mortgage as slow as possible. If you`re done buying, pay it faster.. if you want. Remember: in a way paying fast then re-fi to buy more = paying slow from the start

I, for example, have not finished buying. therefore of course I am not paying my mortgage faster. it would be ridiculous. I will re-fi though if value goes up.

Lastly, the investment strategy also depends on your personal goals. people here argue forgetting there is no absolute truth. It`s more complex than that.
For example, if you are willing to retire in 10 years you have more investment options than if you feel you must retire in 3 years in which case you should be much more aggressive and careful. Another thing it depends on, for example, is how much more you can "take" as an employee. Cheers.


Continuously buying & refinancing is fine but the TRUE owner of the property is the Banker....you are just managing it for them. Buying for cash flow and appreciation only is forgetting that interest rates can double, the supply of rental properties can double or triple thus decreasing the demand and lowering the rents. When this happens the cash flow strategy is destroyed. I have experienced this in the 90`s, it is happening at exaggerated levels in the U.S. right now. Ignoring economics 101, supply and demand and effects of increasing rates is very dangerous and short sighted.

 

[tbarcier]

QUOTE (luckyluciano @ Oct 4 2009, 07:52 AM) Continuously buying & refinancing is fine but the TRUE owner of the property is the Banker....you are just managing it for them. Buying for cash flow and appreciation only is forgetting that interest rates can double, the supply of rental properties can double or triple thus decreasing the demand and lowering the rents. When this happens the cash flow strategy is destroyed. I have experienced this in the 90`s, it is happening at exaggerated levels in the U.S. right now. Ignoring economics 101, supply and demand and effects of increasing rates is very dangerous and short sighted.


So is living in fear of the "what if`s" and "but`s" . Stress testing and proper analyizing is important. Planning is important. I can tell you I don`t want to be the owner, why would I ever want to be? Let the bank give me the money and let the tenants pay for it. I don`t want to use my own anyway. Why would I want to pay it off?? I`m more than happy to have a tax deductable mortage someone else is paying for the rest of my life. I can use that money to purchase other propreties and increase my cash flow. I can cash flow if interest rates double or triple tomorrow. If rental suppy increases, I have a plan in place to ensure my units will be rented. It`s about being PREPARED for change, not living in fear of it. I don`t care about the good ol USA, I don`t invest there, and what`s going on there is a whole different ball game, not going to happen here. You need to be fluid, yes things change. Big shocker I know. So if you are not buying for cash flow or apprecitation, what are you buying for?

 

[gwasser]

QUOTE (tbarcier @ Oct 4 2009, 08:36 AM) So is living in fear of the "what if`s" and "but`s" . Stress testing and proper analyizing is important. Planning is important. I can tell you I don`t want to be the owner, why would I ever want to be? Let the bank give me the money and let the tenants pay for it. I don`t want to use my own anyway. Why would I want to pay it off?? I`m more than happy to have a tax deductable mortage someone else is paying for the rest of my life. I can use that money to purchase other propreties and increase my cash flow. I can cash flow if interest rates double or triple tomorrow. If rental suppy increases, I have a plan in place to ensure my units will be rented. It`s about being PREPARED for change, not living in fear of it. I don`t care about the good ol USA, I don`t invest there, and what`s going on there is a whole different ball game, not going to happen here. You need to be fluid, yes things change. Big shocker I know. So if you are not buying for cash flow or apprecitation, what are you buying for?

I think we`re going in circles. The overal strategy for most of us is simple - You buy properties using leverage to ensure you can enhance your profitability (measured as ROI, i.e. return on investment). There are two components of profitability:
1: Positive Cashflow
2: Equity increase due to mortgage paydown and appreciation.

Depending where you are in life and your personal preferences you can tweek the two profit components as you like: [list type=decimal][*]You reduce equity in the house (sometimes to zero) to have maximum appreciation while you make sure to have enough positive cashflow so you are not forced to sell. This is a high risk strategy.You reduce your mortgage to a minimum resulting (along with other measures such as raising rents and reducing costs) in maximum cashflow and little appreciation (only market appreciation). This is a low risk strategy.[/list type=decimal]Ironically, investment theorie indicates that the higher the risk the higher the potential ROI while the lower the risk, the lower the ROI. The two above approaches can be used along with every combination in between as tools to achieve your personal Belize (whatever that is) and then to adjust them to keep your personal Belize.

What Thomas said earlier: "After your 8th visit to the golf course it becomes boring" is the great truth of retirement for many energetic investors. For them, their Belize is an ever changing target unless their `Belize is highly flexible`.

An Example of a flexible Belize is Don Campbell`s dream to teach real estate to others through REIN.
Or Ron LeGrand teaching how to flip houses. I am sure, neither needs to do this for a living - it is something they just love to do until the cows come home (for now).

 

[invst4profit]

[quote name=`Joe from TO` date=`Sep 30 2009, 11:27 AM` post=`66862`]
I wanted to make a comment regarding your comment...if paying down debt does not increase cashflow and make you rich...what exactly does? By the way, this is not meant as a stab by any means, just asking a general question.

Here is my take on money. Cash is extremely flexible, buildings are not.

As a couple of examples in the past I have had an opportunity to invest in a pre construction condo and to purchase a 36ft cabin cruiser. The condo was a $100,000 investment with a pay back in 12 months of 150,000. The boat was in the middle of the winter, urgent sale price of 30,000, resold in 3 months for 53,000. These were possible due to the immediate availability of cash.
Without the cash the opportunity would have been lost.

If we look at the options of financing or cash purchase of a 500,000 rental property, assuming 100% financing at 5% over 30 years your monthly payments are 2,700 including principal.
32,000 paid annually by tenants with a tax deduction for the owner on the interest portion.
Assuming you had 500,000 cash one could easily earn a return of 10% up to 20% or more on investments such as 2nd mortgages, cash collateral loans etc.
This would earn a income annually of $50,000 to $100,000 per year. This is far better than the $32,000 you would earn extra by paying cash for a 500,000 property.

You would still earn the same appreciation on the property and the extra from rent increases.

If we assume we allow the tenants to pay down the mortgage over 30 years at the end you have the $500,000 value of the mortgage pay down, your original $500,000 which you did not put in the property and the income from the 500,000 invested else where at say 10% equalling another 1,500,000 for a total of 2,500,000. Plus of course the appreciation on the property.

IF you refinanced and pulled out the principal pay down and any appreciation every 5 years your investment income would increase farther but at time of sale you would see little to no appreciation return. Since this normally averages 3% per year pulling and investing at 10%+ is again a better idea than waiting 30 years.

Or if you pay cash for the property you have earned/saved the mortgage payment money of 32,000 per year or 960,000 plus you have the 500,000 you payed for the house for a total of 1,460,000.

As I have said although paying down a property increases cash flow it does not increase POSITIVE CASH FLOW because that cash principal pay down could be earning more money elsewhere than what it does by saving the interest on a mortgage. Save 5% or earn 10%+.

These are all very rough numbers

Obviously these numbers are hypothetical and could be argued stating tax implications, risk, opportunities etc but bottom line for me is cash has the ability to earn more that it saves in my uneducated opinion.