All Forum Posts by: Marcus Johnson

If you don't understand this, then I'm sorry, but you don't understand leverage or the power of multiplication. More power to you, and I hope you use the leverage that you don't understand to make you more money than would be possible leaving your capital idle.  

  There is simply no way, for most people, that they have enough years to work another job and save enough cash to have this method of building wealth make sense. Even you realize this, unless you just like carrying notes of 75% of the cost of your units. The "DR" strategy - and it's not even his strategy, just his profit center - only works given enough years or enough outside income earned to save enough cash to purchase enough units to make this strategy work. Time is not your friend with this method; time is your enemy.

Of course it's possible as I've laid out in my last post.  With a decent job, working extra jobs and saving, you can easily get your first Duplex in 5 years paid for with cash.  And the next one even sooner with help from the cash flow from the first.   I would have gone with this strategy if I hadn't wasted my 20's on having fun.  By now I could have had 5 all paid for properties in my 40's.  Now I'm married with a kid and soon to be another, so it isn't realistic now, because I need the cash flow from my current duplex to buy the next one with 25% DP.  

The real estate investors who truly grow the largest, are the ones who leverage debt. Gaining 5% appreciation on a $300,000 house where you owe debt, grows your equity pretty significantly vs having a $50,000 SFR in a C class neighborhood that cashflows $400 per month

 I'm not going to bother with the numbers, only to point out that everything you posted about Buyer A is true for Buyer B but multiplied by a factor of however many units he/she has minus the incremental cost of the leverage. There is simply no way, for most people, that they have enough years to work another job and save enough cash to have this method of building wealth make sense. Even you realize this, unless you just like carrying notes of 75% of the cost of your units. The "DR" strategy - and it's not even his strategy, just his profit center - only works given enough years or enough outside income earned to save enough cash to purchase enough units to make this strategy work. Time is not your friend with this method; time is your enemy.  

@JD Martin, ah, it looks like the vote police have waived their objections...

@Marcus Johnson, according to the cash-only philosophy/religion, there will be NO borrowing allowed by Buyer A. If the market won't bear more than $100k when access is needed to its value, then it's $100k LOST!

Not if it helps to prevent a foreclosure, plus the property can simply be sold for 100k if need be.  

Buyer B (who had $200k in the first place but didn't use it for just one property), still had a large enough cash reserve to keep their loans paid on time, and thus was able to ride out the crisis.

Marcus, just what "gain" are you talking about? 

 Whoops sorry, I didn't mean to use the word gain. I meant to use equity. Unless the house has completely tanked and isn't worth $1, you'd have equity to be able to sell it if you got into a rough spot, unlike someone who borrows and takes a huge mortgage out, they would be completely screwed not being able to sell at a loss, because they don't have any money to make up the loss. Plus they still owe the mortgage.  

Consider this scenario: you bought your home in 2006 for $200k cash and then in 2008 can't pay your taxes and got foreclosed upon. You then ended up with just $50k that your home was then sold for. You hardly got rich that way! You took a risk with your $200k cash, and got burned! What's Dave got to say about that?

Not possible.  The person who has the mortage 99% of the time is the one who defaults and declares bankruptcy.  In your scenario, why wouldn't the cash buyer just sell the property to prevent the foreclosure or better yet borrow against the paid for property.   

Let's use your scenario as an example for the differences between a cash buyer and someone taking out a mortgage.   If two individuals buy an investment property for the purchase price of 200k.  Buyer A has the money saved up and pays cash for the property.   The closing costs are minimal because it's a cash purchase.   Buyer B doesn't have the money, except for 10% down and has to take a mortgage out for 180k, plus 6% closing costs which is the average for my area.   Now the market takes a huge downturn and both properties are now worth 100k and like you said in 2008 both individuals cannot make the tax payments and are being threatened with foreclosure.  

Buyer A can just sell the property worst case or borrow against the property to cover expenses until things improve like the housing market has to the present time.  Buyer B, because they borrowed 180k cannot sell because they owe 180k and have no equity to borrow against.  So they foreclose and now their credit score is damaged and are unable to borrow money on real estate for 5 to 7 years..   Plus they are probably going to be sued for the difference of what the auction brings for the sale of the house.  

Buying any kind of real estate entails risk, whether you leverage or pay cash. Anyone who has fooled themselves into believing they are playing risk-averse or risk-free because they paid cash is a fool. There is no such thing as owning your properties free and clear; there is always property taxes, insurance, capital expenditures, and maintenance to be paid. The only thing leverage does is add a note to the aforementioned list. If the note takes $200/month from a $500/month free and clear property, but allows for purchase of another $500/month free & clear property, who is running the bigger risk? The guy who now brings in $800/month F&C and has cut his vacancy risk by 50%, or the guy with all his cash sunk in one property? And anyone that is bringing in 7 figures of income and is over leveraged is a fool; if you have made it to that bar, common sense tells you to eliminate some risk or build one hell of a war chest.