Housing crash deniers ???
Most Popular Reply
Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesThe market may correct, but I firmly believe there won't be a crash. The reason is simple, equity.
Before 2008 people with no income could get liars loans and buy much more real estate than they could afford. We heard stories of cleaning ladies buying multiple million dollar homes. When home prices starting falling, the whole thing collapses like a house of cards because nobody had any equity. They couldn't sell and get out. We had cascading foreclosures creating a downward spiral.
Recently, prices have been surging. Given the laws passed after the Great Recession, appraisals and lending is highly restricted. Appraisals have not been keeping up with prices and lenders won't lend above appraised value. We sold a house in 2021 and in one day had 20 offers. Several of them had acceleration clauses stating they would pay more than anyone else up to $X. Both of them waived any financing contingency because they KNEW the house wouldn't appraise for what they were offering. They had to make up the difference with cash. Those people have a ton of equity in their homes. If they had to sell, they might take a haircut, but they aren't going to get foreclosed.
There is no house of cards here to come tumbling down.
2904 Replies
- Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes4y
I’ll let the chart do the talking here.
- Member since 2022 · 485 posts · 216 votes4y
Quote from @John Carbone:
I’ll let the chart do the talking here.
Some of you need to learn to post better pictures :). It’s been ever growing though. Also JOhn if ou chart it in say Europe like Germany/Switzerland etc.. You might be surprised. % of income on housing over there is quite a bit bigger also.
- Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes4yThis chart would look the same right now even if rates were 3 percent….it’s 7 now, double whammy. Housing is most expensive in history right now by a large magnitude relative to income. Yes, it’s not just in usa but I’m only invested in usa so that’s all I care about. It’s been zirp worldwide….and this is the result.
Quote from @Michael Wooldridge:
Quote from @John Carbone:
I’ll let the chart do the talking here.
Some of you need to learn to post better pictures :). It’s been ever growing though. Also JOhn if ou chart it in say Europe like Germany/Switzerland etc.. You might be surprised. % of income on housing over there is quite a bit bigger also.
- Member since 2022 · 485 posts · 216 votes4y
Quote from @John Carbone:
This chart would look the same right now even if rates were 3 percent….it’s 7 now, double whammy. Housing is most expensive in history right now by a large magnitude relative to income. Yes, it’s not just in usa but I’m only invested in usa so that’s all I care about. It’s been zirp worldwide….and this is the result.Quote from @Michael Wooldridge:
Quote from @John Carbone:
I’ll let the chart do the talking here.
Some of you need to learn to post better pictures :). It’s been ever growing though. Also JOhn if ou chart it in say Europe like Germany/Switzerland etc.. You might be surprised. % of income on housing over there is quite a bit bigger also.
Reason I said outside USA though is Europe has been fine with it for years at a higher level. NYC or Bay Area is another example. There’s going to be changes no doubt but just a lot of data to say nothing like 20%+.
Heck I’m hopeful east coast can stay below 10% the more data comes out (that however will depend on recession impacts).
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThere should never be a choice between CF and equity. ALL deals must have both. You're right when you suggest that equity is the secret to wealth building, but wrong when you also fade away from the importance of CF. They are both just as important, but they fill different roles in REI.
Quote from @Greg R.:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
Quote from @Carlos Ptriawan:
Ehh if you can cash flow good who cares what rates are. Not like we should be planning on selling quickly anyway.Cash flow is certainly good, but my strategy is starting to evolve and I'm beginning to be less focused on cash flow and more focused on appreciation. I'll always have cash flowing properties in my portfolio, but I'm seeing more wealth building strategies that are not focused on cash flow. Thanks @Joe Villeneuve
But to your point, I agree. I really don't care what the rates are when it's time to buy. My reasoning for focusing on rates right now is because that's what's going to drive prices down. Once the prices get where I want them, I'm getting in, I don't care if the rates are 10%.
1 - CF's initial job is to recover cost (the DP). Once that happens, the equity which now includes the DP and the appreciated gains is all profit...and the property is free,...as long as you retain positive CF.
2 - Equity's main job, is to double the original equity you bought (DP), and then move forward and repeat in the next property/deal, over and over, as fast as you can, until you have reached that magic number (in dollars) in your REI plan.
Once both number 1 and 2 above have been reached with each property, you flip it into the next, and repeat until you can start to buy properties for the CF (to replace your current income,...plus). Reinvest the equity with the CF for each move forward. This overall system allows the REI to maximize the profit growth over a very short period of time. How fast? Well, how much money do you need?
If you started with $50k in seed money (cash), doubled that money using the above method over an average of every 5 years, the timeline to your goal of $1M could look like this: Starting with $50k; $4k/yr CFYrs/Tot Equity Cash
5/5 $100k $150k
5/10 $300k $450k
5/15 $900k $1.8M - Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes4y
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
- Member since 2022 · 485 posts · 216 votes4y
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
@Joe Villeneuve how are you factoring in equity into your plan? or are you just working a flat 2% appreciation per year on average into your calcs or something along those lines? - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesYes,...about 3%
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
@Joe Villeneuve how are you factoring in equity into your plan? or are you just working a flat 2% appreciation per year on average into your calcs or something along those lines? - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes4y
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
Talk to a home flipper, all we do is not only build equity, but build it at net positive rates of return. We have to build equity to cover our costs of building that equity AND additional equity to cover all transactional, operational and profits.
Or, how about any syndicator out there doing value-add deals? That is also creating equity.
Or, or, or.... Equity creating is a component of many strategies, many. It is not only possible but common. Not easy, and results will vary wildly, not all have equal talent for certain results.
@Joe Villeneuve is spot-on in sharing the relationship of CF and equitable returns, and that equity is what makes wealth.
Any asking how to start, how to best get from start too financial freedom, how to build a portfolio, the #1 importance to learn is this fundamental and how Pyramiding works.
- Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes4y
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
Talk to a home flipper, all we do is not only build equity, but build it at net positive rates of return. We have to build equity to cover our costs of building that equity AND additional equity to cover all transactional, operational and profits.
Or, how about any syndicator out there doing value-add deals? That is also creating equity.
Or, or, or.... Equity creating is a component of many strategies, many. It is not only possible but common. Not easy, and results will vary wildly, not all have equal talent for certain results.
@Joe Villeneuve is spot-on in sharing the relationship of CF and equitable returns, and that equity is what makes wealth.
Any asking how to start, how to best get from start too financial freedom, how to build a portfolio, the #1 importance to learn is this fundamental and how Pyramiding works.
Obviously adding value to a property can increase the “value”, but speaking from a turn key pov, once you max out the usefulness of the property you are letting interest rates dictate the value. I don’t calculate my property value based off of what an appraiser will give it, I base it off of what my asset returns to me. This is a wildly different number than what a bank will say it is worth. CASH FLOW allows me to not care about interest rates and the negative impact on the “home equity”.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes4y
Quote from @Jay Hinrichs:
Quote from @Greg R.:
Completely agree about lessons learned and everything you said - especially when we're talking about the big picture. However, I don't think that there's much value in looking at things like the interest rate from 50 years ago.Quote from @Jay Hinrichs:
Quote from @Greg R.:
Couldn't agree more. A vast majority of these historical analogies don't have any practical relevance in the current market. The conditions 30-40 years ago are pretty irrelevant to the conditions we're seeing today (for the most part).Quote from @Carlos Ptriawan:
Interest rates are still below 40'ish year average. Slide is a little out dated as the are closer to 6.75 right now
Hahahaha dude when we're paying the mortgage NOW I don't care about what's the rate my grandpa got 50 years ago LOL LOL
I could also say today's rate is cheaper than 1928 :)
Perhaps some of you guys are either too much money or ignorant about the risk.
[ this is one reason I stopped asking in BP for investment advice and use other rationale-investor QP level board to discuss the economy ]
And before anyone starts attacking me for not learning from history, blah blah blah, I'm familiar with historical trends and don't think they're of much significance in this market.here is where i think history is important.. those that had very manageable leverage or free and clear assets got through the GFC.. if as some suggest here prices drop 30 to 40% this is going affect most every investor some markets rents will come way down and whats that going to do for the Max leverage investor or folks stop paying rent because no one is building houses and subs are out of work .. ?? so history does tell a tale of not getting maxed out on loans and not having SUBSTANTIAL reserves.. I mean just look at the threads during covid were those posting could only make 3 to 6 months if their rent did not come in. So historic data should skew folks to smart logical investing but also a dash of conservatism in the face of what's mathematically the best ROI or COC.
other than it appears history can repeat itself.. At least to a certain extent I highly doubt one year ago anyone could have imagine rates jumping up 4% in 4 months time.
The inflation was forecasted well in advance. I read several warning with increasing worry on the potential in '20' with the policies pumping out $, and then in '21' it raised to certainty of massive inflation. The 4 month speed of the interest rate raise, that was all self-inflicted, not a market action. Remember, they wasted months on end trying to first say there would be no inflationary actions from all the $ injections. Then months more say it's was "hyperbolic" statements saying there was inflation kicking in, which rapidly was walked back to the ever famous "don't worry, it's transient inflation". That was a lot of time wasted when the Fed should have been doing a measured easing into rate increases. Instead it was put off until it was absolutely impossible to ignore and then it became all this reactionary race to catch up and get ahead after inflation was allowed to run away.
When they started trying to sell "transient inflation", I recall a great many forecasting the reality of it and what was to come. Including that the longer they waited to do anything on it, the more panicked and extreme a response it will end up being. Which is what we got.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThis is very true, but CF returns will always be far less than equity returns (I'm assuming a property that is actually getting equity returns). You should never have one without the other. If you look at the math, the most important formula is how long it takes the REI to recover their cost...the DP,...in CASH, from the CF.
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
Talk to a home flipper, all we do is not only build equity, but build it at net positive rates of return. We have to build equity to cover our costs of building that equity AND additional equity to cover all transactional, operational and profits.
Or, how about any syndicator out there doing value-add deals? That is also creating equity.
Or, or, or.... Equity creating is a component of many strategies, many. It is not only possible but common. Not easy, and results will vary wildly, not all have equal talent for certain results.
@Joe Villeneuve is spot-on in sharing the relationship of CF and equitable returns, and that equity is what makes wealth.
Any asking how to start, how to best get from start too financial freedom, how to build a portfolio, the #1 importance to learn is this fundamental and how Pyramiding works.
Obviously adding value to a property can increase the “value”, but speaking from a turn key pov, once you max out the usefulness of the property you are letting interest rates dictate the value. I don’t calculate my property value based off of what an appraiser will give it, I base it off of what my asset returns to me. This is a wildly different number than what a bank will say it is worth. CASH FLOW allows me to not care about interest rates and the negative impact on the “home equity”.
Let's say it takes 8 years for this to happen, and the DP was $40k. That's a $200k PV at the start. If the property appreciated 4% over the that same 8 year period, the PV would then be $273k plus. That's an increase of $73k in Equity/PV, where as the cumulative CF over that same 8 years = only $50k.
Now, if you have both in that property, the once the cumulative CF = the DP, the property is now free to the REI, and when sold, the total equity is all profit (since the DP bought the initial equity, but the CF recovered it). This is also when the property is at its maximum value, and should be sold, or the REI will start losing money exponentially. The greater the appreciation, the more money is lost...if not sold. - Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes4y
Quote from @Joe Villeneuve:
This is very true, but CF returns will always be far less than equity returns (I'm assuming a property that is actually getting equity returns). You should never have one without the other. If you look at the math, the most important formula is how long it takes the REI to recover their cost...the DP,...in CASH, from the CF.Quote from @John Carbone:
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
Talk to a home flipper, all we do is not only build equity, but build it at net positive rates of return. We have to build equity to cover our costs of building that equity AND additional equity to cover all transactional, operational and profits.
Or, how about any syndicator out there doing value-add deals? That is also creating equity.
Or, or, or.... Equity creating is a component of many strategies, many. It is not only possible but common. Not easy, and results will vary wildly, not all have equal talent for certain results.
@Joe Villeneuve is spot-on in sharing the relationship of CF and equitable returns, and that equity is what makes wealth.
Any asking how to start, how to best get from start too financial freedom, how to build a portfolio, the #1 importance to learn is this fundamental and how Pyramiding works.
Obviously adding value to a property can increase the “value”, but speaking from a turn key pov, once you max out the usefulness of the property you are letting interest rates dictate the value. I don’t calculate my property value based off of what an appraiser will give it, I base it off of what my asset returns to me. This is a wildly different number than what a bank will say it is worth. CASH FLOW allows me to not care about interest rates and the negative impact on the “home equity”.
Let's say it takes 8 years for this to happen, and the DP was $40k. That's a $200k PV at the start. If the property appreciated 4% over the that same 8 year period, the PV would then be $273k plus. That's an increase of $73k in Equity/PV, where as the cumulative CF over that same 8 years = only $50k.
Now, if you have both in that property, the once the cumulative CF = the DP, the property is now free to the REI, and when sold, the total equity is all profit (since the DP bought the initial equity, but the CF recovered it). This is also when the property is at its maximum value, and should be sold, or the REI will start losing money exponentially. The greater the appreciation, the more money is lost...if not sold.I agree that the time to recover the cost is the most important component to the formula. I don’t follow on selling though. Maybe the way I look at it is a little different than you. So I’m into a rehabbed property for 350k (200k cash down) and it returns me a net profit of 70k a year. Break even is sub 3 years, and 5 years free and clear, with an annual dividend thereafter of 70k once paid off. If I get an appraisal at 400k why would I sell when I’m getting 70k a year. This is a 20 percent return on a 350k investment. The “equity” component is meaningless to me since most of my formula comes from cash flow, not equity. Maybe the smart thing is to cash out refi up to 80 percent at that point, if there is a need/to create interest expense for tax deductions, but I don’t understand why I would sell. My whole philosophy is to buy and never sell. What am I missing?
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @James Hamling:
Quote from @Jay Hinrichs:
Quote from @Greg R.:
Completely agree about lessons learned and everything you said - especially when we're talking about the big picture. However, I don't think that there's much value in looking at things like the interest rate from 50 years ago.Quote from @Jay Hinrichs:
Quote from @Greg R.:
Couldn't agree more. A vast majority of these historical analogies don't have any practical relevance in the current market. The conditions 30-40 years ago are pretty irrelevant to the conditions we're seeing today (for the most part).Quote from @Carlos Ptriawan:
Interest rates are still below 40'ish year average. Slide is a little out dated as the are closer to 6.75 right now
Hahahaha dude when we're paying the mortgage NOW I don't care about what's the rate my grandpa got 50 years ago LOL LOL
I could also say today's rate is cheaper than 1928 :)
Perhaps some of you guys are either too much money or ignorant about the risk.
[ this is one reason I stopped asking in BP for investment advice and use other rationale-investor QP level board to discuss the economy ]
And before anyone starts attacking me for not learning from history, blah blah blah, I'm familiar with historical trends and don't think they're of much significance in this market.here is where i think history is important.. those that had very manageable leverage or free and clear assets got through the GFC.. if as some suggest here prices drop 30 to 40% this is going affect most every investor some markets rents will come way down and whats that going to do for the Max leverage investor or folks stop paying rent because no one is building houses and subs are out of work .. ?? so history does tell a tale of not getting maxed out on loans and not having SUBSTANTIAL reserves.. I mean just look at the threads during covid were those posting could only make 3 to 6 months if their rent did not come in. So historic data should skew folks to smart logical investing but also a dash of conservatism in the face of what's mathematically the best ROI or COC.
other than it appears history can repeat itself.. At least to a certain extent I highly doubt one year ago anyone could have imagine rates jumping up 4% in 4 months time.
The inflation was forecasted well in advance. I read several warning with increasing worry on the potential in '20' with the policies pumping out $, and then in '21' it raised to certainty of massive inflation. The 4 month speed of the interest rate raise, that was all self-inflicted, not a market action. Remember, they wasted months on end trying to first say there would be no inflationary actions from all the $ injections. Then months more say it's was "hyperbolic" statements saying there was inflation kicking in, which rapidly was walked back to the ever famous "don't worry, it's transient inflation". That was a lot of time wasted when the Fed should have been doing a measured easing into rate increases. Instead it was put off until it was absolutely impossible to ignore and then it became all this reactionary race to catch up and get ahead after inflation was allowed to run away.
When they started trying to sell "transient inflation", I recall a great many forecasting the reality of it and what was to come. Including that the longer they waited to do anything on it, the more panicked and extreme a response it will end up being. Which is what we got.
Yup everyone and their brother knew rates could not stay at 0 and mortgages sub 3% or sub 4% there were adds on media day and day out from mortgage companies saying get while the gettin is good rates cant stay this low.. So that was true and they did not.. the issue is as you describe instead of a gentle easing into rates normalizing with slow methodical raises you have the shock factor and it has shocked the market there is NO doubt about that at least in certain markets and for sure for new construction SFR's Sales are still happening but its nowhere near a normal pace. At least what I have seen and other small builders like me with inventory in multiple states.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesWhat are you missing? Mega bucks. Here's why:
Quote from @John Carbone:
Quote from @Joe Villeneuve:
This is very true, but CF returns will always be far less than equity returns (I'm assuming a property that is actually getting equity returns). You should never have one without the other. If you look at the math, the most important formula is how long it takes the REI to recover their cost...the DP,...in CASH, from the CF.Quote from @John Carbone:
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
Talk to a home flipper, all we do is not only build equity, but build it at net positive rates of return. We have to build equity to cover our costs of building that equity AND additional equity to cover all transactional, operational and profits.
Or, how about any syndicator out there doing value-add deals? That is also creating equity.
Or, or, or.... Equity creating is a component of many strategies, many. It is not only possible but common. Not easy, and results will vary wildly, not all have equal talent for certain results.
@Joe Villeneuve is spot-on in sharing the relationship of CF and equitable returns, and that equity is what makes wealth.
Any asking how to start, how to best get from start too financial freedom, how to build a portfolio, the #1 importance to learn is this fundamental and how Pyramiding works.
Obviously adding value to a property can increase the “value”, but speaking from a turn key pov, once you max out the usefulness of the property you are letting interest rates dictate the value. I don’t calculate my property value based off of what an appraiser will give it, I base it off of what my asset returns to me. This is a wildly different number than what a bank will say it is worth. CASH FLOW allows me to not care about interest rates and the negative impact on the “home equity”.
Let's say it takes 8 years for this to happen, and the DP was $40k. That's a $200k PV at the start. If the property appreciated 4% over the that same 8 year period, the PV would then be $273k plus. That's an increase of $73k in Equity/PV, where as the cumulative CF over that same 8 years = only $50k.
Now, if you have both in that property, the once the cumulative CF = the DP, the property is now free to the REI, and when sold, the total equity is all profit (since the DP bought the initial equity, but the CF recovered it). This is also when the property is at its maximum value, and should be sold, or the REI will start losing money exponentially. The greater the appreciation, the more money is lost...if not sold.I agree that the time to recover the cost is the most important component to the formula. I don’t follow on selling though. Maybe the way I look at it is a little different than you. So I’m into a rehabbed property for 350k (200k cash down) and it returns me a net profit of 70k a year. Break even is sub 3 years, and 5 years free and clear, with an annual dividend thereafter of 70k once paid off. If I get an appraisal at 400k why would I sell when I’m getting 70k a year. This is a 20 percent return on a 350k investment. The “equity” component is meaningless to me since most of my formula comes from cash flow, not equity. Maybe the smart thing is to cash out refi up to 80 percent at that point, if there is a need/to create interest expense for tax deductions, but I don’t understand why I would sell. My whole philosophy is to buy and never sell. What am I missing?
1 - You don't own the equity...the property does, and you own the property. Not the same thing. The equity is actually what you are paying for this property. The fact that equity gained from appreciation is free to you just means you have a partner (the economy) as a form of a cash partner.
2 - The value of your equity isn't the face value of the equity...it's what that number is buying you in the form of property value...AND cash flow.
3 - The true asset you own is NOT the property...it's the cash in the property.
4 - Cash flow and equity are both forms of cash. One is liquid and real, and the other is frozen and virtual. Until you can "melt" the frozen asset (equity) is has no actual use/value to you. It's a trophy. The only/best way to "melt" it, is to sell the vehicle your equity is riding...the property.
...Now here comes the fun part,...the math...
5 - When you buy the property, that DP is actually the initial equity that you are paying for. If it's a 20% DP, that means you are getting a PV of 5 times what you're paying for the property. Also, as long as you have positive CF, that is ALL you are paying for the property.
6 - As your property appreciates, thank-you economy, the equity increases equally...dollar for dollar. This means, if your $100k property (that you paid $20k for) gains $20k in value, the PV now equals $120k...and the equity jumps up to $40k. Sounds great, and it is,...but you lost money. Here's why.
7 - When you buy the property (see #5 above), you are getting a PV of 5 times what you paid for it. When that property went up to $120k (see #6 above), that now $40k in equity is only buying a $120k property. Only you say? Yes, the equity is now only buying a property 3 times it's face value...cost.
8 - Now, if you sell the property, and move that equity forward, it once again has a buying power of 5 to 1, which translates to a new PV of $200k...not just $120k. Oooops?!
9 - Also, since that $40k in equity represents twice the $20k you paid for original property, could you not buy 2 of that same property, and thus double the CF as well?
10 - Buy and Hold, in my book, doesn't mean hold the property...it means hold the equity,...just keep it moving forward from one property to another (or more). Same equity, just living in a different location as it moves.
The power of the growth in equity (from appreciation) isn't in it's face value, its face value, its in the power it has to to buy...not sit and die. - Member since 2022 · 485 posts · 216 votes4y
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s a lot of variables. Still it’s an interesting dynamic to play with.
I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster.
- Thanks much Joe, this is gold. I've spent many years accumulating a ton of equity in my properties, occasionally pulling out cash for the next deal. However, that strategy will only go so far and with it I'm not getting more valuable properties. I'm basically getting more of the same, which is good. But w/ a cash out I'm not able to roll all of the equity into the next deal, I just tap a small amount of it due to LTV limitations.
Quote from @Joe Villeneuve:
What are you missing? Mega bucks. Here's why:Quote from @John Carbone:
Quote from @Joe Villeneuve:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @Michael Wooldridge:
1 - You don't own the equity...the property does, and you own the property. Not the same thing. The equity is actually what you are paying for this property. The fact that equity gained from appreciation is free to you just means you have a partner (the economy) as a form of a cash partner.
2 - The value of your equity isn't the face value of the equity...it's what that number is buying you in the form of property value...AND cash flow.
3 - The true asset you own is NOT the property...it's the cash in the property.
4 - Cash flow and equity are both forms of cash. One is liquid and real, and the other is frozen and virtual. Until you can "melt" the frozen asset (equity) is has no actual use/value to you. It's a trophy. The only/best way to "melt" it, is to sell the vehicle your equity is riding...the property.
...Now here comes the fun part,...the math...
5 - When you buy the property, that DP is actually the initial equity that you are paying for. If it's a 20% DP, that means you are getting a PV of 5 times what you're paying for the property. Also, as long as you have positive CF, that is ALL you are paying for the property.
6 - As your property appreciates, thank-you economy, the equity increases equally...dollar for dollar. This means, if your $100k property (that you paid $20k for) gains $20k in value, the PV now equals $120k...and the equity jumps up to $40k. Sounds great, and it is,...but you lost money. Here's why.
7 - When you buy the property (see #5 above), you are getting a PV of 5 times what you paid for it. When that property went up to $120k (see #6 above), that now $40k in equity is only buying a $120k property. Only you say? Yes, the equity is now only buying a property 3 times it's face value...cost.
8 - Now, if you sell the property, and move that equity forward, it once again has a buying power of 5 to 1, which translates to a new PV of $200k...not just $120k. Oooops?!
9 - Also, since that $40k in equity represents twice the $20k you paid for original property, could you not buy 2 of that same property, and thus double the CF as well?
10 - Buy and Hold, in my book, doesn't mean hold the property...it means hold the equity,...just keep it moving forward from one property to another (or more). Same equity, just living in a different location as it moves.
The power of the growth in equity (from appreciation) isn't in it's face value, its face value, its in the power it has to to buy...not sit and die.
Since we talked a couple weeks ago I listed one of my MF properties (1 week on the market and no offers yet). Seems like I might have missed the window to sell, but it is what it is. I have very strong CF and if I have to hold for a few years while the market recovers, so be it. Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s a lot of variables. Still it’s an interesting dynamic to play with.
I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster.
Yeah, Joe's method is the ticket IMO. Makes too much sense. Even though I've been able able to scale at a good pace and cash flow strongly, I think that I could have had much larger gains and more scalability with his method. I've been in this game almost 15 years and @Joe Villeneuve helped me to unlock my mind with what I consider to be a game changer.
Out of curiosity, what's the reason you're striving for retirement? I feel that I would be extremely bored and lose motivation. I can't see getting to a place to where RE investing would require all of my time, even if I scaled 5x. Especially if you have PMs, accountants, attorneys, etc. You're basically just managing a portfolio and looking for the next deal.
I should also preface this with the fact that I enjoy my W2 job, I have a great boss, great pay, flexibility, and a really good work environment. If I weren't in this situation I might have a different perspective.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesAs you said, "play with the numbers", do the math. You'll be very surprised. Einstein was once asked what he thought the greatest invention of the 20th Century was. His answer was "compound Interest". What he said after that was more important. "Those that understand it, will live off those that don't".
Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s a lot of variables. Still it’s an interesting dynamic to play with.
I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesIf you don't mind, I'll tell you my answer to the why. Actually, your last 2 sentences answer your question perfectly. When asked, I tell people the 2 reasons why I got into REI:
Quote from @Greg R.:
Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s a lot of variables. Still it’s an interesting dynamic to play with.
I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster.
Yeah, Joe's method is the ticket IMO. Makes too much sense. Even though I've been able able to scale at a good pace and cash flow strongly, I think that I could have had much larger gains and more scalability with his method. I've been in this game almost 15 years and @Joe Villeneuve helped me to unlock my mind with what I consider to be a game changer.
Out of curiosity, what's the reason you're striving for retirement? I feel that I would be extremely bored and lose motivation. I can't see getting to a place to where RE investing would require all of my time, even if I scaled 5x. Especially if you have PMs, accountants, attorneys, etc. You're basically just managing a portfolio and looking for the next deal.
I should also preface this with the fact that I enjoy my W2 job, I have a great boss, great pay, flexibility, and a really good work environment. If I weren't in this situation I might have a different perspective.
1 - Financial - To pay off all my personal debt, and to have income (CF) to cover all of my monthly bills...and then some.
2 - Personal - To have fun. If you're not having fun, you're not doing it right. This doesn't mean you won't run into problems along the way, but for me, solving those problems is a big part of the fun.
Like I said above, I think you answered your own question already. - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes4y
Quote from @Joe Villeneuve:
If you don't mind, I'll tell you my answer to the why. Actually, your last 2 sentences answer your question perfectly. When asked, I tell people the 2 reasons why I got into REI:Quote from @Greg R.:
Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s a lot of variables. Still it’s an interesting dynamic to play with.
I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster.
Yeah, Joe's method is the ticket IMO. Makes too much sense. Even though I've been able able to scale at a good pace and cash flow strongly, I think that I could have had much larger gains and more scalability with his method. I've been in this game almost 15 years and @Joe Villeneuve helped me to unlock my mind with what I consider to be a game changer.
Out of curiosity, what's the reason you're striving for retirement? I feel that I would be extremely bored and lose motivation. I can't see getting to a place to where RE investing would require all of my time, even if I scaled 5x. Especially if you have PMs, accountants, attorneys, etc. You're basically just managing a portfolio and looking for the next deal.
I should also preface this with the fact that I enjoy my W2 job, I have a great boss, great pay, flexibility, and a really good work environment. If I weren't in this situation I might have a different perspective.
1 - Financial - To pay off all my personal debt, and to have income (CF) to cover all of my monthly bills...and then some.
2 - Personal - To have fun. If you're not having fun, you're not doing it right. This doesn't mean you won't run into problems along the way, but for me, solving those problems is a big part of the fun.
Like I said above, I think you answered your own question already.Financial Freedom, which is not an end, it's a beginning. Once a person is financially free, that means that person can engage in pursuits of passion vs pursuits of necessity. Open a history book, tour a museum, are they filled with works of necessity or passion? All the greatest things in our lives have come from works of passion.
Space-X is set to change the trajectory of the Human Species, and it came from Financial Freedom. Without cashing out from PayPal, Tesla which was a work of passion, never would have happened. Space-X never would have happened. St. Jude Children's Research Hospital and the countless lives saved, breakthroughs made, it's all possible via those who achieved financial freedom and then were enabled to engage in such ventures and funding.
Life begins at Financial Freedom.
- Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes4y
Quote from @Joe Villeneuve:
As you said, "play with the numbers", do the math. You'll be very surprised. Einstein was once asked what he thought the greatest invention of the 20th Century was. His answer was "compound Interest". What he said after that was more important. "Those that understand it, will live off those that don't".Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s a lot of variables. Still it’s an interesting dynamic to play with.
I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster.
Isn't doing a cashout refi up to 80 percent the same thing though? Why sell the performing asset? I understand the math of doing 20 percent down payments for higher COC, but you are also using more leverage. Not saying leverage isn't a good thing, but it goes both ways. Granted, historically using leverage in real estate works out great as you describe, but until interest rates moderate and prices level off, I see no reason to jack up the real estate leverage. A 20 percent reversion in prices can knock you back multiple years.
I think the leverage aspect is misguided. I’m glad that investors in general follow this advice. When they are underwater and foreclose like has happened before in my area, I’ll purchase from their banks with leverage then.
- Member since 2019 · 7k+ posts · 4k+ votes4y
Fed is always wrong since the Covid started. The first issue is they print money too much. The second issue is the FLOW of the many is very wrong. What they did is like a kindergarten kid job.
What shall happen during covid is, all this money should be channeled to the WORKING CLASS ONLY and business owners. So PPP program is good. But since the fed give these to bank too and the bank can lend to anyone, the biggest beneficiary of Fed action is the wall street/financial sector and tech sectors. After cashing out the money, tech and financial folks just overbid the real estate sector (that has nothing to do with covid) which in the end causes inflations. For financial/tech guys we already settled and we don't need to have our asset to be inflated (again). We don't need Fed money actually. Without Fed, we can survive.
Now they increase the rate which is hurting the working class too. For tech/financial even in the worst scenario, we can still find jobs even if there's a layoff and we have real estate. It seems whatever the Fed / gov did is always wrong in 'channeling' the money. - Member since 2019 · 7k+ posts · 4k+ votes4y
Isn't doing a cashout refi up to 80 percent the same thing though? Why sell the performing asset? I understand the math of doing 20 percent down payments for higher COC, but you are also using more leverage. Not saying leverage isn't a good thing, but it goes both ways. Granted, historically using leverage in real estate works out great as you describe, but until interest rates moderate and prices level off, I see no reason to jack up the real estate leverage. A 20 percent reversion in prices can knock you back multiple years.
One thing about any investment whether it's real estate or coal mining asset class, the investment theory works when the asset class is either cheap or affordable. But after years or a decade of investment, those asset class is becoming expensive. When it's expensive, the "rule of the game" is no longer working. Sometimes, the best course of action is to sell it to another investor or institution that's bigger in size.
In 2008-2014 real estate as a class asset is def. cheap and we can do like above, but after the asset class is expensive like today. Different thinking is needed. In math numbers. The IRR for real estate between 2015-2019 is 9%. I guess, the IRR would be 5-7% from now on.
Any serious investor will just take a look at different asset classes that can be considered 'cheap' ; now if I look even at the same real estate sector. Public REITs generate more cash flow than direct investment. That's if you considering CF. But if we consider all asset classes and look for equity appreciation, tech sector is very cheap now as there's a lot of mispricing, and the potential IRR is more like > 25% conservatively. - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesHow are you increasing leverage? You have the same number of loans.
Quote from @John Carbone:
Quote from @Joe Villeneuve:
As you said, "play with the numbers", do the math. You'll be very surprised. Einstein was once asked what he thought the greatest invention of the 20th Century was. His answer was "compound Interest". What he said after that was more important. "Those that understand it, will live off those that don't".Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
I get @Joe Villeneuve point about rolling the equity forward into more properties faster. I’ll have to play with the numbers I think perhaps cashing out a bunch of equity about 41-53 would allow me to retire almost instantly instead of 55-56 as planned but there’s a lot of variables. Still it’s an interesting dynamic to play with.
I’ve never been a big fan of flipping and given that I have the income to invest 25% down consistently and quickly, my major goals has always been to replace the invoice to retire early. but it’s absolutely faster the way Joe is discussing. I’m just not sure how much faster.
Isn't doing a cashout refi up to 80 percent the same thing though? Why sell the performing asset? I understand the math of doing 20 percent down payments for higher COC, but you are also using more leverage. Not saying leverage isn't a good thing, but it goes both ways. Granted, historically using leverage in real estate works out great as you describe, but until interest rates moderate and prices level off, I see no reason to jack up the real estate leverage. A 20 percent reversion in prices can knock you back multiple years.
I think the leverage aspect is misguided. I’m glad that investors in general follow this advice. When they are underwater and foreclose like has happened before in my area, I’ll purchase from their banks with leverage then.
Pulling out more equity with a sale than a refi. Also, when you cash out, the mortgage payment goes up, and the cash flow goes down as a result.
Keep in mind that all appreciation is based on the PV, so increasing your total PV is exponentially increasing future gains from appreciation.
REFI is a linear return, with a step backwards. Selling and moving forward gets you an exponential return.
It's the power of the penny...and that has nothing to do with "every penny adds up". I don't want them adding,...I want them multiplying...like Gold(fish).
If you took a penny, and every day you doubled the previous day's total, (so day 1 would be 2c, day 2 would be 4c, etc...), how much money would you have if you did this for 30 straight days? Simple math formula.
