Saw his article - can anyone explain it?

Question

http://www.lifestylesunlimited.com/how_15_rent_houses_can_retire_you_faster_than_a_million_dollar_401k/

Can someone explain what he means when, for instance, he goes from year 1 putting 5k of saved money down and buying a house with a "hard money loan" (I assume that means a normal mortgage loan?), and then says for year 2 save 5k and extract 5k from the first house?  What does he mean by that?  How is he getting money out of the first house?

Simon Campbell · Answer

Yeah this guy is on something. It just doesn't work that way. Let me show you why:

Year 1 - the hard money loan is not from a bank but from a private investor. Ever hear of loan sharks? We are looking at a down payment of around 30% (5K =  $16,700 house). The interest is between 10 - 18%. You are not going to come ahead on this. (Here is a BiggerPocket explaination of hard money loans: http://www.biggerpockets.com/renewsblog/2008/02/21/10-questions-on-hard-money-loans/)

Year 2...5 requires a refinance each year. First, conventional lenders just will not do this. It will trash your credit and the refinance costs will pretty much eat up whatever appreciation you gained over the past 12 months.  Second, even if you took a home equity loan (which is very hard to get on investment properties), you cannot continue to cash out $5,000 per year without paying it back. Nor can you assume that you will be able to see that kind of sustained annual appreciation.

Real estate investment is not a get rich quick scheme. Yes there is money to be made in real estate - that is for sure. But it is the slow compounding of secure wealth that makes one rich.

Paul Doherty · Answer

Thanks for explaining it - it sounds WAY too good to be true and now I know it is.

Slow and steady wins the race...