Originally posted by @Gavin D.:
@Jon Schwartz Oh... Wow... Ok. So instead of tearing down that whole thing....Im going to point out the most obvious oversight...
You stated 100k is 25% down.
If he follows your plan, it means he is not only going to put his money in a
"non-interest" bearing,
non-early withdrawable,
non FDIC insured,
game of risk roulette with
yearly "in-game" spending requirements for scheduled maintenance costs,
an "out of state" renters rights water heater repair concierge premium,
"4 months same as burned cash" eviction moratorium,
and carries a "non-reimbursable" tenant hunt cashflow loss during game vacancies
and last but not least, a profit reduction coefficient of negative (300k * ((mortgage interest rate) +(2nd home interest rate modifier))...Aka interest on a 300k loan.
Interesting...
Wow, taking some big swings there, Gavin. I love it! I love the energy.
Let me address your points specifically and, in the process, make my argument more clear and try to understand what in the world you're talking about.
You stated 100k is 25% down.
Actually, the original poster asked about using $100K for down payments, and I'm using the standard, conservative 25% down for non-owner-occupied residential property.
If he follows your plan, it means he is not only going to put his money in a
"non-interest" bearing,
non-early withdrawable,
non FDIC insured,
Gavin, you appear to be describing a savings account here. The best rate I can find for an interest-bearing, liquid, FDIC-insured savings account is 1% (source: https://www.bankrate.com/banki...). Are you suggesting the original poster should put his $100K into a savings account? That's only going to yield $1000 in cashflow per year -- and he'll only get that much if he doesn't withdraw any funds. That's an awfully conservative approach! Are you aware of any real estate investment vehicles that bear interest, are liquid, and are FDIC-insured? If so, let us know!!
game of risk roulette with
Game of risk roulette? How do you mean? Are you saying that expecting appreciation gains is playing risk roulette? Since 1975, the Los Angeles MSA has achieve a longterm average appreciation rate of 6.7% according to the FHFA home price index. Here's the chart:
https://fred.stlouisfed.org/se...
In my example, I was accounting for an average appreciation rate of 5%. So I was being conservative by LA standards! I was also using a Midwest cash-on-cash return of 15% -- which I think is aggressive if the original poster is trying to run his portfolio from Hong Kong. Perhaps appreciation is uncommon in your town, but in Los Angeles, where we're surrounded by ocean on two sides and mountains on the other two, it's a fact of life. It won't be a consistent 6.7% each year, but jeez, this ain't Indianapolis!
yearly "in-game" spending requirements for scheduled maintenance costs,
an "out of state" renters rights water heater repair concierge premium,
I should have been more clear: in my example, when I said the appreciating property would have no cashflow, I meant no positive or negative cashflow. In other words, the income from the property covers all expenses, including property management and mortgage and capex reserves, but doesn't deliver a cent of cashflow beyond that. These properties exist in LA. Folks outside of California seem to think that appreciation is only possible on properties that have negative cashflow, or that properties in California only produce negative cashflow. Such is not the case; I don't buy anything with negative cashflow. So these maintenance costs are accounted for in my scenario.
"4 months same as burned cash" eviction moratorium,
You've probably heard by now that the CDC has ordered a national eviction moratorium (source: https://www.cdc.gov/coronaviru...), so this dilemma exists in any scenario. But let's address this, anyway. Our Los Angeles property would need a GRM of, say, 16 to be cashflow neutral. That means four months of rent would be $10,416. That's not enough to tip the scales; appreciation still wins.
and carries a "non-reimbursable" tenant hunt cashflow loss during game vacancies
Vacancy is accounted for in the cashflow neutral proposition, though I will take this moment to point out that LA has one of the lowest vacancy rates in the country. It was 4% pre-COVID, and with COVID and the unprecedented unemployment in LA right now, we're at about 6.5%. The national average pre-COVID, FYI, was 9%.
and last but not least, a profit reduction coefficient of negative (300k * ((mortgage interest rate) +(2nd home interest rate modifier))...Aka interest on a 300k loan.
Again, the debt service is accounted for in the cashflow neutral proposition. And anyway, both scenarios carried the same interest cost, so they negate each other. But here's my question, Gavin: are you against leverage? Are you arguing that the original poster is best served by buying a property in cash?
Let me expand that question: what are you proposing, Gavin? The oversights you pointed out where not oversights at all. (I should mention that the cashflowing property carried the same assumptions: that expenses, debt service, and vacancy were accounted for in the 15% cash-on-cash). What's your suggestion for the original poster?
Also, what's the argument behind your post? It seems to boil down to your not liking appreciating assets. Is that right?
Best,
Jon
