Questions about buying RE with all cash
Investor · Indianapolis, IN · Member since 2023 · 6 posts · 6 votes
Questions about buying RE with all cash
Most Popular Reply
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3yQuote from @Zachary Bush:
Why are you employing an all-cash strategy?
Read a few books on real estate investing to learn the power of leverage. I like the Unofficial Guide to Real Estate Investing. Here's a very basic explanation to get your juices flowing:
Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.
Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.
Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.
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- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Have to agree, but here's one of my main reason I feel this way. Let's take your example of the $300k house bought in 2010. The DP (cash spent = cost to REI) was $60k (20% of $300k), and the Cash flow should be around $850/month ($k/yr). That means the REI would recover all of their cash/cost in about 10 years...and would be pure profit from that point forward.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Brilliantly stated!!Quote from @Carlos Ptriawan:
Quote from @Judy Parker:
I paid all cash for quite a few of my properties. I like being able to sleep at night, knowing I have no debt hanging over my head.
Haha , my brain works in reverse ; I can't sleep if I have ton of 100% paid-off property. All the risk is mine.
When 30Y FRM is lower than inflation, why in the world people (in US) is buying cash is beyond me. Like in UK they may have only 5YARM. If this country only offer 5Y ARM then I would buy cash. Buying cash just mathematically doesn't make sense when 30Y *fixed* rate available.Think about it.
When they bought $300K house in 2010, the down is only $40k. Mortgage is only $1400 with 4% rate, inflation is 3%
Fast forward to 2023, same house is $1 mil ; principal paid is about $150-$80k, remaning mortgage is $120-$140k with 40-55% LTV.When I paid $1400 in 2023, it is not inflation adjusted, if it's inflation adjusted, I shall pay $2,000 instead.
In US of A , with current mortgage process, the advantage is with the borrower, the disadvantage is with lender (precisely reason why BAC/SVB is falling because they are the holder of our notes).
Now the following is still true in US of A:
1. home price is still rising albeit slowing down
2. fixed mortgage rate is still available and sometimes we could get the rate BELOW inflation rate
3. actual Fed real rate compare to inflation is still zero.
Now when people do leverage in mortgage, after 8-10 years, you could pay off one of the property, with the equity from other house.
With cash you can't do that.
This is why I'm saying, If I live in Manchester i would buy with cash, If I live in New Jersey, I would buy with 15 or 30YFRM. This is just no brainer.
My way of thinking is for the CF to recover my cash/cost, and for my equity build up (from appreciation, not paydown) to be my free cash to move forward and buy more properties. My trigger to sell this property is when my CF has recovered all my cash/cost, and my appreciated equity equals my paid for equity (DP). Then I sell, because I start losing money from that point forward. Why? If I now have $120k in equity (plus the paydown), my equity is only buying me a $360k property. If I sell the property and take out the $160k, the equity as a 20% DP should be buying me a property worth $800k...and the added CF that would come along with it.
The mistake many REI make is thinking the equity build up is profit, when in fact if it is left in the property it is growing in, it is actually the cost of the property.That's good approach as well, for me I would sell when it reach 50% LTV or after 8-10 year. By doing this I could pay my principal of my primary/rental from other primary/rental. People may ask why not pay it off fully, couple reason:
1. when we buy/sell rental in the same neighborhood as primary, we still have the same future's appreciation trajectory so the actual cash position actually doesn't differ too much if we decide to move to one house or not.
2. The cashflow would be there still avaiable paid by the renter.
The bottom line is this, for strategy that works for me.
1. If I have 200k cash at the beginning, investing in multiple home on the same neighborhood with 30YFRM, do not buy only one, there's more advantage when buying 2 or more properties. You would never lose money if you buy direct real estate, even without cash.
2. Sell later at the peak or year 8th-10th
3. Get the mortgage rate where the rate is lower than inflation.
4. Invest in the place where the appreciation rate is > inflation and > mortgage rate and do leverage in mortgage
So in our are with the last 12 years track record:
1. appreciation rate = 5.875% annually
2. Inflation = 3%
3. mortgage rate = 3%
Now in 2023, story is bit different because the formula is different
1. appreciation rate forecast=4%
2. Inflation=5%
3. mortgage rate = 6%
In 2023 fresh new formula is required LOLThis is now probably flying over the head's of several persons, and that's A-OK for those, nobody is born with knowledge of how to ride a bike, or about all the intricacies on math of investment capital.
So, I am going to simplify all this into 2 simple pictures of "what-if".
Say a person has $250k cash just chillazin, what-to-do. Than can either:
(A) Buy "A" property, one single family rental (let's pretend all homes are $250k), and get rents of $2,250mnth. Assuming a very conservative vacancy of 4%, annual maint/cap-x of 5% combined (I know it's low but follow me here) and PM of only 5% (i don't care if you self-manage, nobody works for free and neither should YOU!). So we have annual rev of "as-much-as" $27k, less expenses bringing that too $23,200.... doing math quick so if I mess-up forgive me.
NOW..... Uncle Sam happily strolls over and says "thanks, YOINK" and get's his cut because guess what, paid-off = MAXIMUM tax exposure doesn't it. So less 30% (yeah, I am pretty sure if you could save $250k your at least into that tax bracket) leaving "as-much-as" $16,254 in pocket.
So congratulations, you made "as much as" 6.5% RETURN, yes return NOT profit because, until you clear that INVESTED capital it's NOT profit is it, no no no, it's RETURNED capital. This is where I think soooo many miss the math of it all. So after 10 years, you you have "as much as" 65/70 maybe 75% of your capital RETURNED....... yeah, that sucks.
And as your controlling 1 property, that means if you have, let's say 20% appreciation in the years, it's $50k equitable profits.
NOW, vs FINANCED.
Where that $250k gets 5 properties. After all debt payments etc. yeah, your "only" making $300 per door RETURN per month, but, we are now using multiplication my dear Watson. That's $1,500 per month or $18k per year. Now Uncle Sammy strolls over and "yoinks" his share BUT, it's a share of that lessor amount, isn't it. So now it's $13,500 left over. OR 5.5% return.
Yup, it's 1 full point LESS than free & clear, but but but..... let's follow the math to it's end.
Your controlling 5, not 1 property. So, at that exact same 20% appreciation, vs $50k, you're not with $250k equitable profits. That is a 100% return on JUST equitable profits is it not? Vs 20%.
100% return seems a whole ton better than 20%, does it not? And that's the magic of LEVERAGE.
Not to mention now you can do a 1031 to kick that tax-can in perpetuity for tax's on those profits can't you. And kick it again, and again, and again. And oh, what about retirement time? yeah, using the mortgage and refi-cycle one can kick it into eternity. Setup entity right and transfer the can-kicking unto kids to kick-away until their kids take over and kick, kick, kick.
Leverage changes EVERYTHING.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @James Hamling:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Leverage changes EVERYTHING.
That is the basic math hahaha
As summary :
If cost of money is cheap then you should over-leverage your investment into investment that yield higher risk/reward ratio(using mortgage).
mortgage is just tools for leverage.This is why lot of baby boomer that purchased the (CA/WA/HI) house in 90's or 2000 are all millionaire, regardless they work in USPS or in tech company LOL ; as long as they invest at the correct time /and/ at the right place LOL
now the party is almost over except if uncle Powell changed their mind in 2025 LOL
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThere's more. Take that leveraged option into the following years/returns, and you have the potential for an exponential return and profit.
Quote from @James Hamling:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Have to agree, but here's one of my main reason I feel this way. Let's take your example of the $300k house bought in 2010. The DP (cash spent = cost to REI) was $60k (20% of $300k), and the Cash flow should be around $850/month ($k/yr). That means the REI would recover all of their cash/cost in about 10 years...and would be pure profit from that point forward.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Brilliantly stated!!Quote from @Carlos Ptriawan:
Quote from @Judy Parker:
I paid all cash for quite a few of my properties. I like being able to sleep at night, knowing I have no debt hanging over my head.
Haha , my brain works in reverse ; I can't sleep if I have ton of 100% paid-off property. All the risk is mine.
When 30Y FRM is lower than inflation, why in the world people (in US) is buying cash is beyond me. Like in UK they may have only 5YARM. If this country only offer 5Y ARM then I would buy cash. Buying cash just mathematically doesn't make sense when 30Y *fixed* rate available.Think about it.
When they bought $300K house in 2010, the down is only $40k. Mortgage is only $1400 with 4% rate, inflation is 3%
Fast forward to 2023, same house is $1 mil ; principal paid is about $150-$80k, remaning mortgage is $120-$140k with 40-55% LTV.When I paid $1400 in 2023, it is not inflation adjusted, if it's inflation adjusted, I shall pay $2,000 instead.
In US of A , with current mortgage process, the advantage is with the borrower, the disadvantage is with lender (precisely reason why BAC/SVB is falling because they are the holder of our notes).
Now the following is still true in US of A:
1. home price is still rising albeit slowing down
2. fixed mortgage rate is still available and sometimes we could get the rate BELOW inflation rate
3. actual Fed real rate compare to inflation is still zero.
Now when people do leverage in mortgage, after 8-10 years, you could pay off one of the property, with the equity from other house.
With cash you can't do that.
This is why I'm saying, If I live in Manchester i would buy with cash, If I live in New Jersey, I would buy with 15 or 30YFRM. This is just no brainer.
My way of thinking is for the CF to recover my cash/cost, and for my equity build up (from appreciation, not paydown) to be my free cash to move forward and buy more properties. My trigger to sell this property is when my CF has recovered all my cash/cost, and my appreciated equity equals my paid for equity (DP). Then I sell, because I start losing money from that point forward. Why? If I now have $120k in equity (plus the paydown), my equity is only buying me a $360k property. If I sell the property and take out the $160k, the equity as a 20% DP should be buying me a property worth $800k...and the added CF that would come along with it.
The mistake many REI make is thinking the equity build up is profit, when in fact if it is left in the property it is growing in, it is actually the cost of the property.That's good approach as well, for me I would sell when it reach 50% LTV or after 8-10 year. By doing this I could pay my principal of my primary/rental from other primary/rental. People may ask why not pay it off fully, couple reason:
1. when we buy/sell rental in the same neighborhood as primary, we still have the same future's appreciation trajectory so the actual cash position actually doesn't differ too much if we decide to move to one house or not.
2. The cashflow would be there still avaiable paid by the renter.
The bottom line is this, for strategy that works for me.
1. If I have 200k cash at the beginning, investing in multiple home on the same neighborhood with 30YFRM, do not buy only one, there's more advantage when buying 2 or more properties. You would never lose money if you buy direct real estate, even without cash.
2. Sell later at the peak or year 8th-10th
3. Get the mortgage rate where the rate is lower than inflation.
4. Invest in the place where the appreciation rate is > inflation and > mortgage rate and do leverage in mortgage
So in our are with the last 12 years track record:
1. appreciation rate = 5.875% annually
2. Inflation = 3%
3. mortgage rate = 3%
Now in 2023, story is bit different because the formula is different
1. appreciation rate forecast=4%
2. Inflation=5%
3. mortgage rate = 6%
In 2023 fresh new formula is required LOLThis is now probably flying over the head's of several persons, and that's A-OK for those, nobody is born with knowledge of how to ride a bike, or about all the intricacies on math of investment capital.
So, I am going to simplify all this into 2 simple pictures of "what-if".
Say a person has $250k cash just chillazin, what-to-do. Than can either:
(A) Buy "A" property, one single family rental (let's pretend all homes are $250k), and get rents of $2,250mnth. Assuming a very conservative vacancy of 4%, annual maint/cap-x of 5% combined (I know it's low but follow me here) and PM of only 5% (i don't care if you self-manage, nobody works for free and neither should YOU!). So we have annual rev of "as-much-as" $27k, less expenses bringing that too $23,200.... doing math quick so if I mess-up forgive me.
NOW..... Uncle Sam happily strolls over and says "thanks, YOINK" and get's his cut because guess what, paid-off = MAXIMUM tax exposure doesn't it. So less 30% (yeah, I am pretty sure if you could save $250k your at least into that tax bracket) leaving "as-much-as" $16,254 in pocket.
So congratulations, you made "as much as" 6.5% RETURN, yes return NOT profit because, until you clear that INVESTED capital it's NOT profit is it, no no no, it's RETURNED capital. This is where I think soooo many miss the math of it all. So after 10 years, you you have "as much as" 65/70 maybe 75% of your capital RETURNED....... yeah, that sucks.
And as your controlling 1 property, that means if you have, let's say 20% appreciation in the years, it's $50k equitable profits.
NOW, vs FINANCED.
Where that $250k gets 5 properties. After all debt payments etc. yeah, your "only" making $300 per door RETURN per month, but, we are now using multiplication my dear Watson. That's $1,500 per month or $18k per year. Now Uncle Sammy strolls over and "yoinks" his share BUT, it's a share of that lessor amount, isn't it. So now it's $13,500 left over. OR 5.5% return.
Yup, it's 1 full point LESS than free & clear, but but but..... let's follow the math to it's end.
Your controlling 5, not 1 property. So, at that exact same 20% appreciation, vs $50k, you're not with $250k equitable profits. That is a 100% return on JUST equitable profits is it not? Vs 20%.
100% return seems a whole ton better than 20%, does it not? And that's the magic of LEVERAGE.
Not to mention now you can do a 1031 to kick that tax-can in perpetuity for tax's on those profits can't you. And kick it again, and again, and again. And oh, what about retirement time? yeah, using the mortgage and refi-cycle one can kick it into eternity. Setup entity right and transfer the can-kicking unto kids to kick-away until their kids take over and kick, kick, kick.
Leverage changes EVERYTHING.
Einstein referred to compound interest, exponential grown, as the greatest invention of the 20th century. What was more profound was what he said after that. "Those that understand it, will live off of those that don't". - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Joe Villeneuve:
There's more. Take that leveraged option into the following years/returns, and you have the potential for an exponential return and profit.Quote from @James Hamling:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Have to agree, but here's one of my main reason I feel this way. Let's take your example of the $300k house bought in 2010. The DP (cash spent = cost to REI) was $60k (20% of $300k), and the Cash flow should be around $850/month ($k/yr). That means the REI would recover all of their cash/cost in about 10 years...and would be pure profit from that point forward.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Brilliantly stated!!Quote from @Carlos Ptriawan:
Quote from @Judy Parker:
I paid all cash for quite a few of my properties. I like being able to sleep at night, knowing I have no debt hanging over my head.
Haha , my brain works in reverse ; I can't sleep if I have ton of 100% paid-off property. All the risk is mine.
When 30Y FRM is lower than inflation, why in the world people (in US) is buying cash is beyond me. Like in UK they may have only 5YARM. If this country only offer 5Y ARM then I would buy cash. Buying cash just mathematically doesn't make sense when 30Y *fixed* rate available.Think about it.
When they bought $300K house in 2010, the down is only $40k. Mortgage is only $1400 with 4% rate, inflation is 3%
Fast forward to 2023, same house is $1 mil ; principal paid is about $150-$80k, remaning mortgage is $120-$140k with 40-55% LTV.When I paid $1400 in 2023, it is not inflation adjusted, if it's inflation adjusted, I shall pay $2,000 instead.
In US of A , with current mortgage process, the advantage is with the borrower, the disadvantage is with lender (precisely reason why BAC/SVB is falling because they are the holder of our notes).
Now the following is still true in US of A:
1. home price is still rising albeit slowing down
2. fixed mortgage rate is still available and sometimes we could get the rate BELOW inflation rate
3. actual Fed real rate compare to inflation is still zero.
Now when people do leverage in mortgage, after 8-10 years, you could pay off one of the property, with the equity from other house.
With cash you can't do that.
This is why I'm saying, If I live in Manchester i would buy with cash, If I live in New Jersey, I would buy with 15 or 30YFRM. This is just no brainer.
My way of thinking is for the CF to recover my cash/cost, and for my equity build up (from appreciation, not paydown) to be my free cash to move forward and buy more properties. My trigger to sell this property is when my CF has recovered all my cash/cost, and my appreciated equity equals my paid for equity (DP). Then I sell, because I start losing money from that point forward. Why? If I now have $120k in equity (plus the paydown), my equity is only buying me a $360k property. If I sell the property and take out the $160k, the equity as a 20% DP should be buying me a property worth $800k...and the added CF that would come along with it.
The mistake many REI make is thinking the equity build up is profit, when in fact if it is left in the property it is growing in, it is actually the cost of the property.That's good approach as well, for me I would sell when it reach 50% LTV or after 8-10 year. By doing this I could pay my principal of my primary/rental from other primary/rental. People may ask why not pay it off fully, couple reason:
1. when we buy/sell rental in the same neighborhood as primary, we still have the same future's appreciation trajectory so the actual cash position actually doesn't differ too much if we decide to move to one house or not.
2. The cashflow would be there still avaiable paid by the renter.
The bottom line is this, for strategy that works for me.
1. If I have 200k cash at the beginning, investing in multiple home on the same neighborhood with 30YFRM, do not buy only one, there's more advantage when buying 2 or more properties. You would never lose money if you buy direct real estate, even without cash.
2. Sell later at the peak or year 8th-10th
3. Get the mortgage rate where the rate is lower than inflation.
4. Invest in the place where the appreciation rate is > inflation and > mortgage rate and do leverage in mortgage
So in our are with the last 12 years track record:
1. appreciation rate = 5.875% annually
2. Inflation = 3%
3. mortgage rate = 3%
Now in 2023, story is bit different because the formula is different
1. appreciation rate forecast=4%
2. Inflation=5%
3. mortgage rate = 6%
In 2023 fresh new formula is required LOLThis is now probably flying over the head's of several persons, and that's A-OK for those, nobody is born with knowledge of how to ride a bike, or about all the intricacies on math of investment capital.
So, I am going to simplify all this into 2 simple pictures of "what-if".
Say a person has $250k cash just chillazin, what-to-do. Than can either:
(A) Buy "A" property, one single family rental (let's pretend all homes are $250k), and get rents of $2,250mnth. Assuming a very conservative vacancy of 4%, annual maint/cap-x of 5% combined (I know it's low but follow me here) and PM of only 5% (i don't care if you self-manage, nobody works for free and neither should YOU!). So we have annual rev of "as-much-as" $27k, less expenses bringing that too $23,200.... doing math quick so if I mess-up forgive me.
NOW..... Uncle Sam happily strolls over and says "thanks, YOINK" and get's his cut because guess what, paid-off = MAXIMUM tax exposure doesn't it. So less 30% (yeah, I am pretty sure if you could save $250k your at least into that tax bracket) leaving "as-much-as" $16,254 in pocket.
So congratulations, you made "as much as" 6.5% RETURN, yes return NOT profit because, until you clear that INVESTED capital it's NOT profit is it, no no no, it's RETURNED capital. This is where I think soooo many miss the math of it all. So after 10 years, you you have "as much as" 65/70 maybe 75% of your capital RETURNED....... yeah, that sucks.
And as your controlling 1 property, that means if you have, let's say 20% appreciation in the years, it's $50k equitable profits.
NOW, vs FINANCED.
Where that $250k gets 5 properties. After all debt payments etc. yeah, your "only" making $300 per door RETURN per month, but, we are now using multiplication my dear Watson. That's $1,500 per month or $18k per year. Now Uncle Sammy strolls over and "yoinks" his share BUT, it's a share of that lessor amount, isn't it. So now it's $13,500 left over. OR 5.5% return.
Yup, it's 1 full point LESS than free & clear, but but but..... let's follow the math to it's end.
Your controlling 5, not 1 property. So, at that exact same 20% appreciation, vs $50k, you're not with $250k equitable profits. That is a 100% return on JUST equitable profits is it not? Vs 20%.
100% return seems a whole ton better than 20%, does it not? And that's the magic of LEVERAGE.
Not to mention now you can do a 1031 to kick that tax-can in perpetuity for tax's on those profits can't you. And kick it again, and again, and again. And oh, what about retirement time? yeah, using the mortgage and refi-cycle one can kick it into eternity. Setup entity right and transfer the can-kicking unto kids to kick-away until their kids take over and kick, kick, kick.
Leverage changes EVERYTHING.
Einstein referred to compound interest, exponential grown, as the greatest invention of the 20th century. What was more profound was what he said after that. "Those that understand it, will live off of those that don't".
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesIt was an extensive answer when he was asked the question, "What was the greatest invention of the 20th century".
Quote from @James Hamling:
Quote from @Joe Villeneuve:
There's more. Take that leveraged option into the following years/returns, and you have the potential for an exponential return and profit.Quote from @James Hamling:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Have to agree, but here's one of my main reason I feel this way. Let's take your example of the $300k house bought in 2010. The DP (cash spent = cost to REI) was $60k (20% of $300k), and the Cash flow should be around $850/month ($k/yr). That means the REI would recover all of their cash/cost in about 10 years...and would be pure profit from that point forward.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Brilliantly stated!!Quote from @Carlos Ptriawan:
Quote from @Judy Parker:
I paid all cash for quite a few of my properties. I like being able to sleep at night, knowing I have no debt hanging over my head.
Haha , my brain works in reverse ; I can't sleep if I have ton of 100% paid-off property. All the risk is mine.
When 30Y FRM is lower than inflation, why in the world people (in US) is buying cash is beyond me. Like in UK they may have only 5YARM. If this country only offer 5Y ARM then I would buy cash. Buying cash just mathematically doesn't make sense when 30Y *fixed* rate available.Think about it.
When they bought $300K house in 2010, the down is only $40k. Mortgage is only $1400 with 4% rate, inflation is 3%
Fast forward to 2023, same house is $1 mil ; principal paid is about $150-$80k, remaning mortgage is $120-$140k with 40-55% LTV.When I paid $1400 in 2023, it is not inflation adjusted, if it's inflation adjusted, I shall pay $2,000 instead.
In US of A , with current mortgage process, the advantage is with the borrower, the disadvantage is with lender (precisely reason why BAC/SVB is falling because they are the holder of our notes).
Now the following is still true in US of A:
1. home price is still rising albeit slowing down
2. fixed mortgage rate is still available and sometimes we could get the rate BELOW inflation rate
3. actual Fed real rate compare to inflation is still zero.
Now when people do leverage in mortgage, after 8-10 years, you could pay off one of the property, with the equity from other house.
With cash you can't do that.
This is why I'm saying, If I live in Manchester i would buy with cash, If I live in New Jersey, I would buy with 15 or 30YFRM. This is just no brainer.
My way of thinking is for the CF to recover my cash/cost, and for my equity build up (from appreciation, not paydown) to be my free cash to move forward and buy more properties. My trigger to sell this property is when my CF has recovered all my cash/cost, and my appreciated equity equals my paid for equity (DP). Then I sell, because I start losing money from that point forward. Why? If I now have $120k in equity (plus the paydown), my equity is only buying me a $360k property. If I sell the property and take out the $160k, the equity as a 20% DP should be buying me a property worth $800k...and the added CF that would come along with it.
The mistake many REI make is thinking the equity build up is profit, when in fact if it is left in the property it is growing in, it is actually the cost of the property.That's good approach as well, for me I would sell when it reach 50% LTV or after 8-10 year. By doing this I could pay my principal of my primary/rental from other primary/rental. People may ask why not pay it off fully, couple reason:
1. when we buy/sell rental in the same neighborhood as primary, we still have the same future's appreciation trajectory so the actual cash position actually doesn't differ too much if we decide to move to one house or not.
2. The cashflow would be there still avaiable paid by the renter.
The bottom line is this, for strategy that works for me.
1. If I have 200k cash at the beginning, investing in multiple home on the same neighborhood with 30YFRM, do not buy only one, there's more advantage when buying 2 or more properties. You would never lose money if you buy direct real estate, even without cash.
2. Sell later at the peak or year 8th-10th
3. Get the mortgage rate where the rate is lower than inflation.
4. Invest in the place where the appreciation rate is > inflation and > mortgage rate and do leverage in mortgage
So in our are with the last 12 years track record:
1. appreciation rate = 5.875% annually
2. Inflation = 3%
3. mortgage rate = 3%
Now in 2023, story is bit different because the formula is different
1. appreciation rate forecast=4%
2. Inflation=5%
3. mortgage rate = 6%
In 2023 fresh new formula is required LOLThis is now probably flying over the head's of several persons, and that's A-OK for those, nobody is born with knowledge of how to ride a bike, or about all the intricacies on math of investment capital.
So, I am going to simplify all this into 2 simple pictures of "what-if".
Say a person has $250k cash just chillazin, what-to-do. Than can either:
(A) Buy "A" property, one single family rental (let's pretend all homes are $250k), and get rents of $2,250mnth. Assuming a very conservative vacancy of 4%, annual maint/cap-x of 5% combined (I know it's low but follow me here) and PM of only 5% (i don't care if you self-manage, nobody works for free and neither should YOU!). So we have annual rev of "as-much-as" $27k, less expenses bringing that too $23,200.... doing math quick so if I mess-up forgive me.
NOW..... Uncle Sam happily strolls over and says "thanks, YOINK" and get's his cut because guess what, paid-off = MAXIMUM tax exposure doesn't it. So less 30% (yeah, I am pretty sure if you could save $250k your at least into that tax bracket) leaving "as-much-as" $16,254 in pocket.
So congratulations, you made "as much as" 6.5% RETURN, yes return NOT profit because, until you clear that INVESTED capital it's NOT profit is it, no no no, it's RETURNED capital. This is where I think soooo many miss the math of it all. So after 10 years, you you have "as much as" 65/70 maybe 75% of your capital RETURNED....... yeah, that sucks.
And as your controlling 1 property, that means if you have, let's say 20% appreciation in the years, it's $50k equitable profits.
NOW, vs FINANCED.
Where that $250k gets 5 properties. After all debt payments etc. yeah, your "only" making $300 per door RETURN per month, but, we are now using multiplication my dear Watson. That's $1,500 per month or $18k per year. Now Uncle Sammy strolls over and "yoinks" his share BUT, it's a share of that lessor amount, isn't it. So now it's $13,500 left over. OR 5.5% return.
Yup, it's 1 full point LESS than free & clear, but but but..... let's follow the math to it's end.
Your controlling 5, not 1 property. So, at that exact same 20% appreciation, vs $50k, you're not with $250k equitable profits. That is a 100% return on JUST equitable profits is it not? Vs 20%.
100% return seems a whole ton better than 20%, does it not? And that's the magic of LEVERAGE.
Not to mention now you can do a 1031 to kick that tax-can in perpetuity for tax's on those profits can't you. And kick it again, and again, and again. And oh, what about retirement time? yeah, using the mortgage and refi-cycle one can kick it into eternity. Setup entity right and transfer the can-kicking unto kids to kick-away until their kids take over and kick, kick, kick.
Leverage changes EVERYTHING.
Einstein referred to compound interest, exponential grown, as the greatest invention of the 20th century. What was more profound was what he said after that. "Those that understand it, will live off of those that don't". - 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Quote from @Tim J.:
Quote from @Eliott Elias:
Why are you looking for an investor buying all cash? That is likely the least sophisticated investor you will meet.
That's a pretty naive statement. Can you explain?Not going to argue for or against all-cash investing, but it seems to me that you're taking on all of the risk with your money, so if property values tank you're taking a big hit.
For those who just want to "park/preserve capital" for the long term it's a fine strategy to use, but leveraging a lender's money gets you more bang for your buck. On top of that buying all-cash means you're not getting to write off your interest expense which increases cash flow and dilute your depreciation.
To each their own, though. Just depends on if you want to park capital or make increased returns (potentially non-taxed) returns.
- 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Quote from @James Hamling:
Steve, I appreciate your presenting this and I cite it as a GREAT example, although not in how your maybe thinking.Quote from @Steve Ehrman:
@James Hamling. It is the process where all cash can win a great deal. Recently we purchased a duplex with two 3/1 units with a split basement, tenants pay all utilities. The owner had owned it for 4 years, had put work into it, but never managed it properly.
The city had done their 3 year inspection and found a moderate number of violations, including some safety violations which needed to be corrected in 10 days. The inspector came back in 10 days and couldn't even get in. The owner was ticketed.
He put it up for sale for $150K.
My analysis said it was worth $147K to me. I made 2 offers. A. Seller finance a $145K price for 5 years with 25% down. We would assume all repairs and take over management. B. $130K cash, 48 hours to do inspection.
My agent tried to get us to come up on the cash offer, I said no. The seller accepted a full price offer contingent on financing. When they asked the buyer to show them the 25%, he couldn't.
They came back to us. We bought it, had it re-inspected by the city, got a more reasonable inspection, and finished the work we wanted to do forn$22K.
Now rented for $1200 per unit, appraised for $205K, and refied for $150. Cash can work.
This is a GREAT example of TERMS.
I know, you think it's about "cash-offer", yet read your example here, everything is in discussing a situation of TERMS, offers structured on TERMS< seller consideration on TERMS, how you landed it was based on TERMS, and how your profited was, yet again, TERMS.
Every example anyone ever gives where they "think" it was won from muttering the words "cash-offer" then goes into a description of TERMS significance.
TERMS are what does it, why, because ALL OFFERS ARE CASH AT CLOSING.
So a person who's property has issues, won't pass an inspection, won't appraise, is NOT taking a "cash-offer" because it's a "cash-offer", there taking it because knowledge/fear it won't pass inspection/appraise. That's a TERM issue.When I hear "Terms" I think "Solutions To Seller's Problem".
When you say all offers are cash at closing, @James Hamling, can you elaborate on that a bit more? Not sure I understand how a seller carry-back is cash at closing. Seems to be straight terms.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Scott Johnson:
Quote from @James Hamling:
Steve, I appreciate your presenting this and I cite it as a GREAT example, although not in how your maybe thinking.Quote from @Steve Ehrman:
@James Hamling. It is the process where all cash can win a great deal. Recently we purchased a duplex with two 3/1 units with a split basement, tenants pay all utilities. The owner had owned it for 4 years, had put work into it, but never managed it properly.
The city had done their 3 year inspection and found a moderate number of violations, including some safety violations which needed to be corrected in 10 days. The inspector came back in 10 days and couldn't even get in. The owner was ticketed.
He put it up for sale for $150K.
My analysis said it was worth $147K to me. I made 2 offers. A. Seller finance a $145K price for 5 years with 25% down. We would assume all repairs and take over management. B. $130K cash, 48 hours to do inspection.
My agent tried to get us to come up on the cash offer, I said no. The seller accepted a full price offer contingent on financing. When they asked the buyer to show them the 25%, he couldn't.
They came back to us. We bought it, had it re-inspected by the city, got a more reasonable inspection, and finished the work we wanted to do forn$22K.
Now rented for $1200 per unit, appraised for $205K, and refied for $150. Cash can work.
This is a GREAT example of TERMS.
I know, you think it's about "cash-offer", yet read your example here, everything is in discussing a situation of TERMS, offers structured on TERMS< seller consideration on TERMS, how you landed it was based on TERMS, and how your profited was, yet again, TERMS.
Every example anyone ever gives where they "think" it was won from muttering the words "cash-offer" then goes into a description of TERMS significance.
TERMS are what does it, why, because ALL OFFERS ARE CASH AT CLOSING.
So a person who's property has issues, won't pass an inspection, won't appraise, is NOT taking a "cash-offer" because it's a "cash-offer", there taking it because knowledge/fear it won't pass inspection/appraise. That's a TERM issue.When I hear "Terms" I think "Solutions To Seller's Problem".
When you say all offers are cash at closing, @James Hamling, can you elaborate on that a bit more? Not sure I understand how a seller carry-back is cash at closing. Seems to be straight terms.
I love that way to put things; ...."Terms" I think "Solutions To Seller's Problem".
I sell a lot more properties than the "average" agent, or so I am told. Working to try find a way to automate some things in one of my systems I noticed a counter on there, and it says just over 90 sales in last 24 months. I share that to say my opinion comes from not my personal feelings but that of representing many sellers and the experience of such.Interestingly the most recent experience was about 4 hours ago. No joke. We have an FHA offer, and in comes an "ohh-ooh look at me, all-cash offer at only $65k discount from FHA offer". The decision to laugh off the "all-cash" offer took all of 4 seconds.
"Cash" is the slang term of USD (U.S. Dollars). As of yet I have never sat at a closing where anything else was transferred to a buy. I have never seen a home purchased in Kohl's cash, nor beads, chickens or cows, no, it's ALWAYS been USD better known as "cash".
A conventional offer becomes cash at closing, FHA becomes cash at closing, every offer becomes cash. The 1 exception is when there is no payment, and that is a pure terms deal but most have no clue what those are or look like so I omitted that to save from muddying the waters of comprehension for most.
I wrote earlier in this the problem is people have a completely WRONG definition of what a "Cash-Offer" meant. And they are taking the old stories being regurgitated from 2nd, 4th, 17th hand retelling. As the person who was doing "cash-offers" in '08', '09', '10" and beyond, being 1st hand information as one of the contributors who made "cash-offer" a thing, I can give the insight that it means a completely different thing.
"Cash-Offer" was about the TERMS, not payment structure of the deal. I know, it sounds like it's about payment terms but honestly, I don't think any of us thought people would think there is any other method of currency. The term defined NO contingencies, no other costs, no anything, a here and now, done deal, this exact amount I say is the exact amount paid to you at closing "cash-offer'. It was meant in a way as if to say this for that DONE.
But now, today, we have noobs galore taking a snippet of info and assuming an entire narrative from it, empowered by novice agents galore with experience measured in weeks or months. Feeding this Urban Myth that if one mutters "cash-offer" sellers will just hand out properties with big discounts.
It's goofy.
What matters is TERMS. All the time, every time.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @James Hamling:
Quote from @Scott Johnson:
Quote from @James Hamling:
Steve, I appreciate your presenting this and I cite it as a GREAT example, although not in how your maybe thinking.Quote from @Steve Ehrman:
@James Hamling. It is the process where all cash can win a great deal. Recently we purchased a duplex with two 3/1 units with a split basement, tenants pay all utilities. The owner had owned it for 4 years, had put work into it, but never managed it properly.
The city had done their 3 year inspection and found a moderate number of violations, including some safety violations which needed to be corrected in 10 days. The inspector came back in 10 days and couldn't even get in. The owner was ticketed.
He put it up for sale for $150K.
My analysis said it was worth $147K to me. I made 2 offers. A. Seller finance a $145K price for 5 years with 25% down. We would assume all repairs and take over management. B. $130K cash, 48 hours to do inspection.
My agent tried to get us to come up on the cash offer, I said no. The seller accepted a full price offer contingent on financing. When they asked the buyer to show them the 25%, he couldn't.
They came back to us. We bought it, had it re-inspected by the city, got a more reasonable inspection, and finished the work we wanted to do forn$22K.
Now rented for $1200 per unit, appraised for $205K, and refied for $150. Cash can work.
This is a GREAT example of TERMS.
I know, you think it's about "cash-offer", yet read your example here, everything is in discussing a situation of TERMS, offers structured on TERMS< seller consideration on TERMS, how you landed it was based on TERMS, and how your profited was, yet again, TERMS.
Every example anyone ever gives where they "think" it was won from muttering the words "cash-offer" then goes into a description of TERMS significance.
TERMS are what does it, why, because ALL OFFERS ARE CASH AT CLOSING.
So a person who's property has issues, won't pass an inspection, won't appraise, is NOT taking a "cash-offer" because it's a "cash-offer", there taking it because knowledge/fear it won't pass inspection/appraise. That's a TERM issue.When I hear "Terms" I think "Solutions To Seller's Problem".
When you say all offers are cash at closing, @James Hamling, can you elaborate on that a bit more? Not sure I understand how a seller carry-back is cash at closing. Seems to be straight terms.
I love that way to put things; ...."Terms" I think "Solutions To Seller's Problem".
I sell a lot more properties than the "average" agent, or so I am told. Working to try find a way to automate some things in one of my systems I noticed a counter on there, and it says just over 90 sales in last 24 months. I share that to say my opinion comes from not my personal feelings but that of representing many sellers and the experience of such.Interestingly the most recent experience was about 4 hours ago. No joke. We have an FHA offer, and in comes an "ohh-ooh look at me, all-cash offer at only $65k discount from FHA offer". The decision to laugh off the "all-cash" offer took all of 4 seconds.
"Cash" is the slang term of USD (U.S. Dollars). As of yet I have never sat at a closing where anything else was transferred to a buy. I have never seen a home purchased in Kohl's cash, nor beads, chickens or cows, no, it's ALWAYS been USD better known as "cash".
A conventional offer becomes cash at closing, FHA becomes cash at closing, every offer becomes cash. The 1 exception is when there is no payment, and that is a pure terms deal but most have no clue what those are or look like so I omitted that to save from muddying the waters of comprehension for most.
I wrote earlier in this the problem is people have a completely WRONG definition of what a "Cash-Offer" meant. And they are taking the old stories being regurgitated from 2nd, 4th, 17th hand retelling. As the person who was doing "cash-offers" in '08', '09', '10" and beyond, being 1st hand information as one of the contributors who made "cash-offer" a thing, I can give the insight that it means a completely different thing.
"Cash-Offer" was about the TERMS, not payment structure of the deal. I know, it sounds like it's about payment terms but honestly, I don't think any of us thought people would think there is any other method of currency. The term defined NO contingencies, no other costs, no anything, a here and now, done deal, this exact amount I say is the exact amount paid to you at closing "cash-offer'. It was meant in a way as if to say this for that DONE.
But now, today, we have noobs galore taking a snippet of info and assuming an entire narrative from it, empowered by novice agents galore with experience measured in weeks or months. Feeding this Urban Myth that if one mutters "cash-offer" sellers will just hand out properties with big discounts.
It's goofy.
What matters is TERMS. All the time, every time.
This reminds me of my parents selling their house in Cupertino CA. Apple headquater land and transitioning to a tech heavy Asian heavy population. this was about 89 or so.. I listed the property put it on MLS.. and once it was for sale we would get Chinese folks knocking at our door and offering to buy the home in Cash literally Cash and even in 89 for Cupertino this was 500k plus. I would explain to these Buyers that once the buyers loans come through we get cash there is no incentive to discount just because your paying cash. Folks in Cupertino that are engineers for Apple have no issue with financing :) .. So point well taken and reminded me of that .. My wife in 2021 was the top producer for her brokerage out of 600 plus agents.. And so she does a lot of volume and while she will get some cash offers if they were less than list price she would make sure her sellers countered both contracts to make sure she got the highest price for the seller.. Of course she would bet the lender.. But in her market and price points sale fails for financing falling through simply does not happen. my experience personally in other markets were strength of average home owner buyer is much weaker financing for sure will fall through on occasion. - Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Jay Hinrichs:
This reminds me of my parents selling their house in Cupertino CA. Apple headquater land and transitioning to a tech heavy Asian heavy population. this was about 89 or so.. I listed the property put it on MLS.. and once it was for sale we would get Chinese folks knocking at our doorQuote from @James Hamling:
Quote from @Scott Johnson:
Quote from @James Hamling:
Til these days any super rich Asian still coming to cupertino to bid whatever left from the market. All with Cash LOL
Maybe your parent house is 4 mil by now lol - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Joe Villeneuve:
It was an extensive answer when he was asked the question, "What was the greatest invention of the 20th century".Quote from @James Hamling:
Quote from @Joe Villeneuve:
There's more. Take that leveraged option into the following years/returns, and you have the potential for an exponential return and profit.Quote from @James Hamling:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Have to agree, but here's one of my main reason I feel this way. Let's take your example of the $300k house bought in 2010. The DP (cash spent = cost to REI) was $60k (20% of $300k), and the Cash flow should be around $850/month ($k/yr). That means the REI would recover all of their cash/cost in about 10 years...and would be pure profit from that point forward.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Brilliantly stated!!Quote from @Carlos Ptriawan:
Quote from @Judy Parker:
I paid all cash for quite a few of my properties. I like being able to sleep at night, knowing I have no debt hanging over my head.
Haha , my brain works in reverse ; I can't sleep if I have ton of 100% paid-off property. All the risk is mine.
When 30Y FRM is lower than inflation, why in the world people (in US) is buying cash is beyond me. Like in UK they may have only 5YARM. If this country only offer 5Y ARM then I would buy cash. Buying cash just mathematically doesn't make sense when 30Y *fixed* rate available.Think about it.
When they bought $300K house in 2010, the down is only $40k. Mortgage is only $1400 with 4% rate, inflation is 3%
Fast forward to 2023, same house is $1 mil ; principal paid is about $150-$80k, remaning mortgage is $120-$140k with 40-55% LTV.When I paid $1400 in 2023, it is not inflation adjusted, if it's inflation adjusted, I shall pay $2,000 instead.
In US of A , with current mortgage process, the advantage is with the borrower, the disadvantage is with lender (precisely reason why BAC/SVB is falling because they are the holder of our notes).
Now the following is still true in US of A:
1. home price is still rising albeit slowing down
2. fixed mortgage rate is still available and sometimes we could get the rate BELOW inflation rate
3. actual Fed real rate compare to inflation is still zero.
Now when people do leverage in mortgage, after 8-10 years, you could pay off one of the property, with the equity from other house.
With cash you can't do that.
This is why I'm saying, If I live in Manchester i would buy with cash, If I live in New Jersey, I would buy with 15 or 30YFRM. This is just no brainer.
My way of thinking is for the CF to recover my cash/cost, and for my equity build up (from appreciation, not paydown) to be my free cash to move forward and buy more properties. My trigger to sell this property is when my CF has recovered all my cash/cost, and my appreciated equity equals my paid for equity (DP). Then I sell, because I start losing money from that point forward. Why? If I now have $120k in equity (plus the paydown), my equity is only buying me a $360k property. If I sell the property and take out the $160k, the equity as a 20% DP should be buying me a property worth $800k...and the added CF that would come along with it.
The mistake many REI make is thinking the equity build up is profit, when in fact if it is left in the property it is growing in, it is actually the cost of the property.That's good approach as well, for me I would sell when it reach 50% LTV or after 8-10 year. By doing this I could pay my principal of my primary/rental from other primary/rental. People may ask why not pay it off fully, couple reason:
1. when we buy/sell rental in the same neighborhood as primary, we still have the same future's appreciation trajectory so the actual cash position actually doesn't differ too much if we decide to move to one house or not.
2. The cashflow would be there still avaiable paid by the renter.
The bottom line is this, for strategy that works for me.
1. If I have 200k cash at the beginning, investing in multiple home on the same neighborhood with 30YFRM, do not buy only one, there's more advantage when buying 2 or more properties. You would never lose money if you buy direct real estate, even without cash.
2. Sell later at the peak or year 8th-10th
3. Get the mortgage rate where the rate is lower than inflation.
4. Invest in the place where the appreciation rate is > inflation and > mortgage rate and do leverage in mortgage
So in our are with the last 12 years track record:
1. appreciation rate = 5.875% annually
2. Inflation = 3%
3. mortgage rate = 3%
Now in 2023, story is bit different because the formula is different
1. appreciation rate forecast=4%
2. Inflation=5%
3. mortgage rate = 6%
In 2023 fresh new formula is required LOLThis is now probably flying over the head's of several persons, and that's A-OK for those, nobody is born with knowledge of how to ride a bike, or about all the intricacies on math of investment capital.
So, I am going to simplify all this into 2 simple pictures of "what-if".
Say a person has $250k cash just chillazin, what-to-do. Than can either:
(A) Buy "A" property, one single family rental (let's pretend all homes are $250k), and get rents of $2,250mnth. Assuming a very conservative vacancy of 4%, annual maint/cap-x of 5% combined (I know it's low but follow me here) and PM of only 5% (i don't care if you self-manage, nobody works for free and neither should YOU!). So we have annual rev of "as-much-as" $27k, less expenses bringing that too $23,200.... doing math quick so if I mess-up forgive me.
NOW..... Uncle Sam happily strolls over and says "thanks, YOINK" and get's his cut because guess what, paid-off = MAXIMUM tax exposure doesn't it. So less 30% (yeah, I am pretty sure if you could save $250k your at least into that tax bracket) leaving "as-much-as" $16,254 in pocket.
So congratulations, you made "as much as" 6.5% RETURN, yes return NOT profit because, until you clear that INVESTED capital it's NOT profit is it, no no no, it's RETURNED capital. This is where I think soooo many miss the math of it all. So after 10 years, you you have "as much as" 65/70 maybe 75% of your capital RETURNED....... yeah, that sucks.
And as your controlling 1 property, that means if you have, let's say 20% appreciation in the years, it's $50k equitable profits.
NOW, vs FINANCED.
Where that $250k gets 5 properties. After all debt payments etc. yeah, your "only" making $300 per door RETURN per month, but, we are now using multiplication my dear Watson. That's $1,500 per month or $18k per year. Now Uncle Sammy strolls over and "yoinks" his share BUT, it's a share of that lessor amount, isn't it. So now it's $13,500 left over. OR 5.5% return.
Yup, it's 1 full point LESS than free & clear, but but but..... let's follow the math to it's end.
Your controlling 5, not 1 property. So, at that exact same 20% appreciation, vs $50k, you're not with $250k equitable profits. That is a 100% return on JUST equitable profits is it not? Vs 20%.
100% return seems a whole ton better than 20%, does it not? And that's the magic of LEVERAGE.
Not to mention now you can do a 1031 to kick that tax-can in perpetuity for tax's on those profits can't you. And kick it again, and again, and again. And oh, what about retirement time? yeah, using the mortgage and refi-cycle one can kick it into eternity. Setup entity right and transfer the can-kicking unto kids to kick-away until their kids take over and kick, kick, kick.
Leverage changes EVERYTHING.
Einstein referred to compound interest, exponential grown, as the greatest invention of the 20th century. What was more profound was what he said after that. "Those that understand it, will live off of those that don't".All newer investors, those seeking to break-in, they should really focus and meditate on this nugget of information.
Of all the MASSIVE advents of the 20th century; rockets, jet engine, harnessing nuclear energy, hell harnessing energy and electricity itself, automobiles, REFRIGERATION! And Albert Einstein declares Compounded Interest as the 8th "wonder of the world" with the detail of those harnessing and reaping from such, and everyone else who is SUFFERING/paying such......
It's THAT big of a "deal".
I know Dave Ramsey is a smart guy, but an A.Einstein he is far-from. Just because D.Ramsey had no self-control with credit doesn't mean nobody can. (Oh yeah, guy went bust big time, hence the swearing off any/all debt).
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesHello!!!ll
Quote from @James Hamling:
Quote from @Joe Villeneuve:
It was an extensive answer when he was asked the question, "What was the greatest invention of the 20th century".Quote from @James Hamling:
Quote from @Joe Villeneuve:
There's more. Take that leveraged option into the following years/returns, and you have the potential for an exponential return and profit.Quote from @James Hamling:
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Have to agree, but here's one of my main reason I feel this way. Let's take your example of the $300k house bought in 2010. The DP (cash spent = cost to REI) was $60k (20% of $300k), and the Cash flow should be around $850/month ($k/yr). That means the REI would recover all of their cash/cost in about 10 years...and would be pure profit from that point forward.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Brilliantly stated!!Quote from @Carlos Ptriawan:
Quote from @Judy Parker:
I paid all cash for quite a few of my properties. I like being able to sleep at night, knowing I have no debt hanging over my head.
Haha , my brain works in reverse ; I can't sleep if I have ton of 100% paid-off property. All the risk is mine.
When 30Y FRM is lower than inflation, why in the world people (in US) is buying cash is beyond me. Like in UK they may have only 5YARM. If this country only offer 5Y ARM then I would buy cash. Buying cash just mathematically doesn't make sense when 30Y *fixed* rate available.Think about it.
When they bought $300K house in 2010, the down is only $40k. Mortgage is only $1400 with 4% rate, inflation is 3%
Fast forward to 2023, same house is $1 mil ; principal paid is about $150-$80k, remaning mortgage is $120-$140k with 40-55% LTV.When I paid $1400 in 2023, it is not inflation adjusted, if it's inflation adjusted, I shall pay $2,000 instead.
In US of A , with current mortgage process, the advantage is with the borrower, the disadvantage is with lender (precisely reason why BAC/SVB is falling because they are the holder of our notes).
Now the following is still true in US of A:
1. home price is still rising albeit slowing down
2. fixed mortgage rate is still available and sometimes we could get the rate BELOW inflation rate
3. actual Fed real rate compare to inflation is still zero.
Now when people do leverage in mortgage, after 8-10 years, you could pay off one of the property, with the equity from other house.
With cash you can't do that.
This is why I'm saying, If I live in Manchester i would buy with cash, If I live in New Jersey, I would buy with 15 or 30YFRM. This is just no brainer.
My way of thinking is for the CF to recover my cash/cost, and for my equity build up (from appreciation, not paydown) to be my free cash to move forward and buy more properties. My trigger to sell this property is when my CF has recovered all my cash/cost, and my appreciated equity equals my paid for equity (DP). Then I sell, because I start losing money from that point forward. Why? If I now have $120k in equity (plus the paydown), my equity is only buying me a $360k property. If I sell the property and take out the $160k, the equity as a 20% DP should be buying me a property worth $800k...and the added CF that would come along with it.
The mistake many REI make is thinking the equity build up is profit, when in fact if it is left in the property it is growing in, it is actually the cost of the property.That's good approach as well, for me I would sell when it reach 50% LTV or after 8-10 year. By doing this I could pay my principal of my primary/rental from other primary/rental. People may ask why not pay it off fully, couple reason:
1. when we buy/sell rental in the same neighborhood as primary, we still have the same future's appreciation trajectory so the actual cash position actually doesn't differ too much if we decide to move to one house or not.
2. The cashflow would be there still avaiable paid by the renter.
The bottom line is this, for strategy that works for me.
1. If I have 200k cash at the beginning, investing in multiple home on the same neighborhood with 30YFRM, do not buy only one, there's more advantage when buying 2 or more properties. You would never lose money if you buy direct real estate, even without cash.
2. Sell later at the peak or year 8th-10th
3. Get the mortgage rate where the rate is lower than inflation.
4. Invest in the place where the appreciation rate is > inflation and > mortgage rate and do leverage in mortgage
So in our are with the last 12 years track record:
1. appreciation rate = 5.875% annually
2. Inflation = 3%
3. mortgage rate = 3%
Now in 2023, story is bit different because the formula is different
1. appreciation rate forecast=4%
2. Inflation=5%
3. mortgage rate = 6%
In 2023 fresh new formula is required LOLThis is now probably flying over the head's of several persons, and that's A-OK for those, nobody is born with knowledge of how to ride a bike, or about all the intricacies on math of investment capital.
So, I am going to simplify all this into 2 simple pictures of "what-if".
Say a person has $250k cash just chillazin, what-to-do. Than can either:
(A) Buy "A" property, one single family rental (let's pretend all homes are $250k), and get rents of $2,250mnth. Assuming a very conservative vacancy of 4%, annual maint/cap-x of 5% combined (I know it's low but follow me here) and PM of only 5% (i don't care if you self-manage, nobody works for free and neither should YOU!). So we have annual rev of "as-much-as" $27k, less expenses bringing that too $23,200.... doing math quick so if I mess-up forgive me.
NOW..... Uncle Sam happily strolls over and says "thanks, YOINK" and get's his cut because guess what, paid-off = MAXIMUM tax exposure doesn't it. So less 30% (yeah, I am pretty sure if you could save $250k your at least into that tax bracket) leaving "as-much-as" $16,254 in pocket.
So congratulations, you made "as much as" 6.5% RETURN, yes return NOT profit because, until you clear that INVESTED capital it's NOT profit is it, no no no, it's RETURNED capital. This is where I think soooo many miss the math of it all. So after 10 years, you you have "as much as" 65/70 maybe 75% of your capital RETURNED....... yeah, that sucks.
And as your controlling 1 property, that means if you have, let's say 20% appreciation in the years, it's $50k equitable profits.
NOW, vs FINANCED.
Where that $250k gets 5 properties. After all debt payments etc. yeah, your "only" making $300 per door RETURN per month, but, we are now using multiplication my dear Watson. That's $1,500 per month or $18k per year. Now Uncle Sammy strolls over and "yoinks" his share BUT, it's a share of that lessor amount, isn't it. So now it's $13,500 left over. OR 5.5% return.
Yup, it's 1 full point LESS than free & clear, but but but..... let's follow the math to it's end.
Your controlling 5, not 1 property. So, at that exact same 20% appreciation, vs $50k, you're not with $250k equitable profits. That is a 100% return on JUST equitable profits is it not? Vs 20%.
100% return seems a whole ton better than 20%, does it not? And that's the magic of LEVERAGE.
Not to mention now you can do a 1031 to kick that tax-can in perpetuity for tax's on those profits can't you. And kick it again, and again, and again. And oh, what about retirement time? yeah, using the mortgage and refi-cycle one can kick it into eternity. Setup entity right and transfer the can-kicking unto kids to kick-away until their kids take over and kick, kick, kick.
Leverage changes EVERYTHING.
Einstein referred to compound interest, exponential grown, as the greatest invention of the 20th century. What was more profound was what he said after that. "Those that understand it, will live off of those that don't".All newer investors, those seeking to break-in, they should really focus and meditate on this nugget of information.
Of all the MASSIVE advents of the 20th century; rockets, jet engine, harnessing nuclear energy, hell harnessing energy and electricity itself, automobiles, REFRIGERATION! And Albert Einstein declares Compounded Interest as the 8th "wonder of the world" with the detail of those harnessing and reaping from such, and everyone else who is SUFFERING/paying such......
It's THAT big of a "deal".
I know Dave Ramsey is a smart guy, but an A.Einstein he is far-from. Just because D.Ramsey had no self-control with credit doesn't mean nobody can. (Oh yeah, guy went bust big time, hence the swearing off any/all debt).
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Carlos Ptriawan:
Quote from @Jay Hinrichs:
This reminds me of my parents selling their house in Cupertino CA. Apple headquater land and transitioning to a tech heavy Asian heavy population. this was about 89 or so.. I listed the property put it on MLS.. and once it was for sale we would get Chinese folks knocking at our doorQuote from @James Hamling:
Quote from @Scott Johnson:
Quote from @James Hamling:
Til these days any super rich Asian still coming to cupertino to bid whatever left from the market. All with Cash LOL
Maybe your parent house is 4 mil by now lol
No doubt but I would think mid to high 2s for their home it did have a built in pool !! - 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Okay, I believe what you're saying is that every transaction is denominated in dollars, but where those dollars come has a large bearing on the outcome. What I'll add is this is completely dependent on the risk the investor is willing to take on. Higher cash outlay means higher risk, which is offset by a lower purchase price (partially). FHA , VA, and Conventional lending puts a large portion of the risk on the lender. Since the buyer has less risk, they are willing to pay more.
The perversion of the term "Cash-Offer" is a totally different conversation, but I believe we're on the same page, especially since that "cash" is normally coming from a private/hard money lender since the name of the game for investors is limiting risk.
On the "narrative", it tends to be easier for people who are excited to get the best sounding information and run with it. Once they've been in the game for a while and have gotten their face punched in they start to understand what we truly do.
@Scott Johnson I don't agree with that taking on debt reduces risk. If you are saying that if things don't work out you just hand it back to the lender than you are saying your word means nothing. I'd rather take on the risk and not have that failure option. We all end up with pieces of sh!t from time to time kind of Peer Street lending.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesRisk is defined by three parts:
Quote from @Jeff S.:
@Scott Johnson I don't agree with that taking on debt reduces risk. If you are saying that if things don't work out you just hand it back to the lender than you are saying your word means nothing. I'd rather take on the risk and not have that failure option. We all end up with pieces of sh!t from time to time kind of Peer Street lending.
1 - What is at risk? This is always the cash that was put into the deal. Another was of saying this, is this is what a person has to lose. You don't lose debt, you lose cash. The debt represents the risk the person (bank) is putting into the deal, and that they expect to recover...with interest.
2 - Who is the risk? This is always the person, in the case of paying back the cash (as in loan/mortgage) that is responsible to pay back the debt, or in the case of a loan, the mortgage.
3 - Who is at risk? This is always the person that is putting in the cash. How much risk a person takes on is based on how much cash they are putting in. When a lender puts up 80% and the buyer puts up 20% (DP), those percentages represent the amount of risk they are taking on. - 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Quote from @Joe Villeneuve:
Risk is defined by three parts:Quote from @Jeff S.:
@Scott Johnson I don't agree with that taking on debt reduces risk. If you are saying that if things don't work out you just hand it back to the lender than you are saying your word means nothing. I'd rather take on the risk and not have that failure option. We all end up with pieces of sh!t from time to time kind of Peer Street lending.
1 - What is at risk? This is always the cash that was put into the deal. Another was of saying this, is this is what a person has to lose. You don't lose debt, you lose cash. The debt represents the risk the person (bank) is putting into the deal, and that they expect to recover...with interest.
2 - Who is the risk? This is always the person, in the case of paying back the cash (as in loan/mortgage) that is responsible to pay back the debt, or in the case of a loan, the mortgage.
3 - Who is at risk? This is always the person that is putting in the cash. How much risk a person takes on is based on how much cash they are putting in. When a lender puts up 80% and the buyer puts up 20% (DP), those percentages represent the amount of risk they are taking on.^^^ This, @Jeff S.
@Scott Johnson ok Scott. I certainly understand that viewpoint. I have watched builders give everything back to the bank then turn right around and get financing to start new. That simply is not how I care to do business. To each his own.
- 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Quote from @Jeff S.:
@Scott Johnson ok Scott. I certainly understand that viewpoint. I have watched builders give everything back to the bank then turn right around and get financing to start new. That simply is not how I care to do business. To each his own.
And the bank was able to retrieve the asset and re-sell it to recover their loss. If they didn't, then that was their underwriting decision, just like an investor buying a dog of a property was an analysis issue.
Let's call it what it is. We're spreading out the risk (reducing ours and increasing the bank's). The bank is willing to take on substantially more risk because they're return is substantial ($43,541.04 of interest and $10,418.76 of their capital back over five years [$150,000 loan at 6% amortized over 30 years... After 30 years they'll have made $173,754.89 and gotten back their $150,000]).
I'm seeing no problem at all with this relationship, but if peeps want to throw cash at things and take on the risk more power to them. 😄
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Scott Johnson:
Quote from @Jeff S.:
@Scott Johnson ok Scott. I certainly understand that viewpoint. I have watched builders give everything back to the bank then turn right around and get financing to start new. That simply is not how I care to do business. To each his own.
And the bank was able to retrieve the asset and re-sell it to recover their loss. If they didn't, then that was their underwriting decision, just like an investor buying a dog of a property was an analysis issue.
Let's call it what it is. We're spreading out the risk (reducing ours and increasing the bank's). The bank is willing to take on substantially more risk because they're return is substantial ($43,541.04 of interest and $10,418.76 of their capital back over five years [$150,000 loan at 6% amortized over 30 years... After 30 years they'll have made $173,754.89 and gotten back their $150,000]).
I'm seeing no problem at all with this relationship, but if peeps want to throw cash at things and take on the risk more power to them. 😄
not only that, but lender is actually always on lose-lose position if appreciation rate is greater than inflation and bank's interest. It's like lender is throwing us money from the money that's coming from government.
for us buying house with low rate is eventually almost riskless, all the risk is with the bank. Even if we default so what the equity run up so fast higher than interest accumulation.
this very basic 30YFRM is so basic people don't understand, if the gov. open 30YFRM to the whole internaional buyer in no time everyone in the world is going to buy house in US with fixed rate.
- 3yScott JohnsonBusiness MemberSpecialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
Quote from @Carlos Ptriawan:
Quote from @Scott Johnson:
Quote from @Jeff S.:
@Scott Johnson ok Scott. I certainly understand that viewpoint. I have watched builders give everything back to the bank then turn right around and get financing to start new. That simply is not how I care to do business. To each his own.
And the bank was able to retrieve the asset and re-sell it to recover their loss. If they didn't, then that was their underwriting decision, just like an investor buying a dog of a property was an analysis issue.
Let's call it what it is. We're spreading out the risk (reducing ours and increasing the bank's). The bank is willing to take on substantially more risk because they're return is substantial ($43,541.04 of interest and $10,418.76 of their capital back over five years [$150,000 loan at 6% amortized over 30 years... After 30 years they'll have made $173,754.89 and gotten back their $150,000]).
I'm seeing no problem at all with this relationship, but if peeps want to throw cash at things and take on the risk more power to them. 😄
not only that, but lender is actually always on lose-lose position if appreciation rate is greater than inflation and bank's interest. It's like lender is throwing us money from the money that's coming from government.
for us buying house with low rate is eventually almost riskless, all the risk is with the bank. Even if we default so what the equity run up so fast higher than interest accumulation.
this very basic 30YFRM is so basic people don't understand, if the gov. open 30YFRM to the whole internaional buyer in no time everyone in the world is going to buy house in US with fixed rate.
Truth! A majority of loans are backed by 'The Full Faith And Credit of the US' (I'll let everyone draw their own conclusions as to their level of faith) i.e. Fannie/Freddie
I wouldn't necessarily say "lose-lose" since they've been bailed out for their terrible lending practices in the recent past, but they're certainly in a precarious position when interest rates spike since people are paying back their debt with cheaper dollars.
It seems like the "end-all-be-all" is that both the investors and the bank do their own due diligence on a deal. The bank could get a larger reward along with having the backstop of Fannie/Freddie, so they're willing to take on more risk (skin in the game). The investor can either take on that full risk themselves by buying a property for cash or spread out their risk by leveraging a bank loan via a third party who's willing to participate).
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