Main things to avoid or look out for when investing
Member since 2020 · 56 posts · 38 votes
Main things to avoid or look out for when investing
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNegative cash flow, too high of a down payment,...and negative cash flow...and did I mention too high of a down payment?
130 Replies
- Los Angeles, CA · Member since 2018 · 86 posts · 86 votes5y
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.Okay I'll go piece by piece -
"An investment isn't a cost..."? What? So you get into investments for free? Of course an investment has a cost to it. It's called the "cost of the investment".
More equity = more risk because the equity is what is at risk. Just ask any lender.
3 - Appreciation isn't profit until you can access it. It's profit in theory, but until it becomes real, it's just theory. I say this because you don't lose cash flow once you are paid it, but you can lose equity within the hour after you calculate it in. Besides, when you go to sell the property (access it), what happens if you can't sell it for the needed amount? Equity is a number that to realize it you depend on future events you have no control over. It's not profit until it's realized.
4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?
6 - See #4 above. Same answer.
8 - ...and by the time the persons refinances, the person that invested using leverage from the start has already been making their profits...exponentially.
9 - once again, see #4 above.
@Joe Villeneuve It's been a pleasure sparring with you but this will be the furthest I go down this rabbit hole. I suggest you read a basic book on accounting, investing, or both. Like the real fundamentals, nothing soft - maybe a textbook or take a course at your local community college. I promise you will learn something.
Anyways - A cost is an expense that runs through income. Some examples would be insurance on your property, or taxes, or a repair bill for a plumber. An investment takes cash and converts it into something that hopefully generates cash over time, such as a real estate purchase, a stock purchase, a buy into an LP, etc.
Of course, if you are only putting up 20k it is less risky than 100K. But apples to apples is a 100k investment into 500k of MV vs 100k investment unlevered.
Appreciation you haven't accessed is called an unrealized gain. Just because it isn't realized doesn't mean it isn't real. Of course you may not know exactly what it is worth until you sell it but you can always get an appraiser to slap a value on it and tap your equity through a loan, this is real estate 101.
This is where you lose me and you need to go back to fundamentals....
"4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?"
In the case you have a 500k and the value drops 10% to 450k your equity position goes from 100k to 50k because you still owe the bank 400k, meaning if you were to sell you would only retain 50k. In the case where you didn't lever, if you lose 10% you only lose 10k and if you were to sell you would recoup 90k. Thus the point that leverage is a double edged sword.
Point is.... leverage is a trade off between risk and reward. For instance - if your 65 and approaching retirement and have 5 paid off homes, it may not make sense to lever them 4 or 5 to 1 and go purchase 5 more homes because you are increasing your risk. What if the prices go down? What if the tenants don't pay? This is very different than the person who is 25 and just starting their investment career where they have a longer time horizon to recover if things go south.
Here's where you lose me...and many others. You are approaching REI from a Stock Market mentality. When you do, you lose out on most of the advantages that REI has to offer, that don't exist in the SM.
What I am talking about has nothing to do with stock market vs real estate market; I am talking about core principals of finance and investing. Those principals don't magically "disappear" in the world of real estate. If your deal criteria is limited to payback period and cash flow you are missing out on value add opportunities which are really powerful wealth building tools, probably the most powerful, in my opinion. Not to say you can't make a lot of money investing just based on those two criteria I am just saying to be aware of the leverage trade off that is driving your returns - which you clearly aren't.
Clearly you are not understanding what I'm saying. You appear to be so wrapped up in the "principles" that the specific applications REI has available. I'm not eliminating the basic principles of investing. The way I explain this is I live on the left side of the equal sign and not the right. The right side has the answer, but the left side has the equation, and it's the equation...and the rearranging the signs, variables, constants, etc...that offers the ability to take the same basic numbers and principles of investing and reassign where the appear on that left side of the equal sign. This rearranging in no way changes the answer (the right side).
I have no clue what any of this statement says because it has no actual meaning. Nice try though.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.Okay I'll go piece by piece -
"An investment isn't a cost..."? What? So you get into investments for free? Of course an investment has a cost to it. It's called the "cost of the investment".
More equity = more risk because the equity is what is at risk. Just ask any lender.
3 - Appreciation isn't profit until you can access it. It's profit in theory, but until it becomes real, it's just theory. I say this because you don't lose cash flow once you are paid it, but you can lose equity within the hour after you calculate it in. Besides, when you go to sell the property (access it), what happens if you can't sell it for the needed amount? Equity is a number that to realize it you depend on future events you have no control over. It's not profit until it's realized.
4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?
6 - See #4 above. Same answer.
8 - ...and by the time the persons refinances, the person that invested using leverage from the start has already been making their profits...exponentially.
9 - once again, see #4 above.
@Joe Villeneuve It's been a pleasure sparring with you but this will be the furthest I go down this rabbit hole. I suggest you read a basic book on accounting, investing, or both. Like the real fundamentals, nothing soft - maybe a textbook or take a course at your local community college. I promise you will learn something.
Anyways - A cost is an expense that runs through income. Some examples would be insurance on your property, or taxes, or a repair bill for a plumber. An investment takes cash and converts it into something that hopefully generates cash over time, such as a real estate purchase, a stock purchase, a buy into an LP, etc.
Of course, if you are only putting up 20k it is less risky than 100K. But apples to apples is a 100k investment into 500k of MV vs 100k investment unlevered.
Appreciation you haven't accessed is called an unrealized gain. Just because it isn't realized doesn't mean it isn't real. Of course you may not know exactly what it is worth until you sell it but you can always get an appraiser to slap a value on it and tap your equity through a loan, this is real estate 101.
This is where you lose me and you need to go back to fundamentals....
"4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?"
In the case you have a 500k and the value drops 10% to 450k your equity position goes from 100k to 50k because you still owe the bank 400k, meaning if you were to sell you would only retain 50k. In the case where you didn't lever, if you lose 10% you only lose 10k and if you were to sell you would recoup 90k. Thus the point that leverage is a double edged sword.
Point is.... leverage is a trade off between risk and reward. For instance - if your 65 and approaching retirement and have 5 paid off homes, it may not make sense to lever them 4 or 5 to 1 and go purchase 5 more homes because you are increasing your risk. What if the prices go down? What if the tenants don't pay? This is very different than the person who is 25 and just starting their investment career where they have a longer time horizon to recover if things go south.
Here's where you lose me...and many others. You are approaching REI from a Stock Market mentality. When you do, you lose out on most of the advantages that REI has to offer, that don't exist in the SM.
What I am talking about has nothing to do with stock market vs real estate market; I am talking about core principals of finance and investing. Those principals don't magically "disappear" in the world of real estate. If your deal criteria is limited to payback period and cash flow you are missing out on value add opportunities which are really powerful wealth building tools, probably the most powerful, in my opinion. Not to say you can't make a lot of money investing just based on those two criteria I am just saying to be aware of the leverage trade off that is driving your returns - which you clearly aren't.
Clearly you are not understanding what I'm saying. You appear to be so wrapped up in the "principles" that the specific applications REI has available. I'm not eliminating the basic principles of investing. The way I explain this is I live on the left side of the equal sign and not the right. The right side has the answer, but the left side has the equation, and it's the equation...and the rearranging the signs, variables, constants, etc...that offers the ability to take the same basic numbers and principles of investing and reassign where the appear on that left side of the equal sign. This rearranging in no way changes the answer (the right side).
I have no clue what any of this statement says because it has no actual meaning. Nice try though.
Figured as much
- Investor · USA · Member since 2015 · 325 posts · 447 votes5y
@Joe Villeneuve
This discussion has left me less informed than before. I have a little “princess” that needs a canopy bed put together and then after that I will probably stare at the ceiling...
I am out on this conversation
@Matthew M.
Joe really does not know what cashflow is. There are so many responses on this thread to show that. If he doesn't know the answer, he will either not respond or post what he found from a quick google search. Look at how he explains IRR... you think he has any idea?
There is a reason all these markets in the middle of nowhere are going up in price (I can’t even say value). Folks are chasing terrible deals, based off of poor analysis and information.
What understanding cashflows does is help you look at the entire cycle of an investment. Most of these areas that “investors” are getting the 1% rule are areas where a property has depreciated in value and is currently selling for less than replacement cost. What does that tell you? The property value does not even keep up with inflation. I get someone else is paying for it but it has to be worth it as an investment.
- 5yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
@Antony Charlier
Get great at negotiation. Never Split The Difference Book is a great place to start.
Goodluck man
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