Cash flow or equity paydown!

[Lucy]

The title of this thread is cash flow or equity paydown.

Well equity paydown increases and ensures cash-flow.

I am surprised how many here do not see that the so called cash flow most here are enjoying , is temporarily gifted to them by the government in the form of stimulus through rock bottom interest rates, creation of new bank products like the 30, 35, 40 year amm, high loan to value HELOC's etc.

When I started investiing, out of town properties needed 10-13% CAP rates and in town required 8-10% just to compete with the banks prime rate. Now newbie investors are piling into Hamitlton investments at 5% CAP rates.
The CAP rate constantly competes with monies in the bank.

Interest rates are more likely to go up than down. The Govt has even warned on this many times.
What will happen to your equity and temporary cash flow when the expected CAP rates rise?
Oh! I know. Rent will increase to compensate!?!? Lol!
What if it doesn't? Last time I checked, when supply increases, prices fall hard.

Many of you here, have been drinking from the punch bowl of declining interest rates for the past decade or more. Well, having rising interest rates will change the economics course you have been attending and make you throw out your textbooks.

Right now, one can't tell the difference between between a true millionaire and a wannabe. Nothing lasts forever!

 

[OurRealtor]

[quote user=ThomasBeyer][quote user=SpecialEd]What do you think is an appropriate cash reserve for say a one bedroom condominium unit?


3-6 months is a good rule of thumb .. depending on age of property, your other income and vacancy potential of city.



Mortgage paydown or more property purchase also depends on your goals. Is it "wealth creation" or "wealth preservation + live off cash-flow" ?



If you chose mortgage paydown, you make 3% to 4%, i.e. the interest you save. Usually you can do FAR BETTER owning more real estate, as with a 70-75% mortgage and no cash-flow and an average 3% value appreciation you can make about 14-15%/year without big risk !





Please describe how you have calculated /arrived at making 3% to 4%, and then equalling it to the interest saved.

Isn't 3% is yearly appreciation , then how one can make 14-15% /year as you posted?

[quote user=ThomasBeyer]

[Math: 30% down with a 70% mortgage, and no cash-flow, mortgage paydown is about 10% of the mortgage in 5 years .. add 15% to this 7% and you have 22% equity over a 30% downpayment i.e. 70% ROI in 5 years in a very normal low risk average real estate investment .. and if you buy in faster growing regions and have a bit of cash-flow you can do far better



Is this 15% added as you posted earlier.

 

[bizaro86]

[quote user=OurRealtor]Please describe how you have calculated /arrived at making 3% to 4%, and then equalling it to the interest saved.

Isn't 3% is yearly appreciation , then how one can make 14-15% /year as you posted?





The math for this is pretty simple. If you put 20% down on a 100,000 property, you've invested 20,000. If that property appreciates by 3% in one year, it has appreciated by 3,000. Since your investment is 20,000, your ROI 3,000/20,000*100% = 15%.



This can be added to mortgage paydown and cash-flow, if purchased well. I don't count on it upfront, but rather consider it a downstream profit centre.



Regards,



Michael

 

[Lucy]

I think 2 things are happening here. Posters are assuming that price appreciation is a given/guaranteed for the next 10-20 years of their lifetime and they are underestimating how difficult it is to paydown debt should they need to.
Our government has repeatedly warned that Canadians should not get used to low interest rates and that Canadians are overly indebted. This includes large juicy mortgages.

My best plan is to build a base of income properties, less is more, to duplicate, replace my income or a reasonable income so I can live the same lifestyle as I have now or slightly better when I no longer want to work or god forbid, I no longer can work. I choose duplicating my current income as I feel this will account for some inflation when that time comes.

Once this base has been laid, I would work hard to pay the base down by a target date. Say, an amortization of 10 years.
Obviously, once they are paid down, you can always refinance a little to buy something else if you really want to.
But trust me, it's not easy to pay down enough real estate for a passive $100, $200, or $300,000 a year income.

You may not live forever, so it would be wise to have a solid, large, passive income well before you think you will need it. That day mat be sooner than you planned.

Pay off the cow and the Milk is Free.

 

[bizaro86]

[quote user=Lucy]I think 2 things are happening here. Posters are assuming that price appreciation is a given/guaranteed for the next 10-20 years of their lifetime and they are underestimating how difficult it is to paydown debt should they need to.


The thing you're missing is that different stages of life make different choices appropriate. I can have all 30 year mortgages, and my entire portfolio will be paid off with no extra payments when I'm 55. By keeping the amortizations long, if rents stay stagnant and interest rates go up, I'll still be able to make my (new, higher on refinance) payments, even though my positive cashflow would decrease. I never bank on appreciation when I'm doing numbers on purchases, only cashflow and equity paydown. If appreciationihappens (and real estate usually grows with inflation, maybe more in better areas) then it's a bonus. My goal is to have a portfolio paid off by the time I retire throwing off enough cashflow to replace my employment income. Appreciation has nothing to do with it, and I still prefer long amortizations/more cashflow.



Ultimately, the only way one can pay off enough real estate to have a 1,2 or 300k passive income is to have that much real estate operating income first, and then pay off the debt associated with it. For those of us collecting less than 100k per year of total rent, more properties are obviously needed, and longer amortizations are the only way that is possible. If I refinanced my current portfolio to 10 year amortizations, I'd only be able to qualify for 1 more property, and then I'd have to spend the next 10 years paying them off without buying anything new. While it would be great to have those properties paid off in my 30s, it wouldn't be enough to retire on, so I wouldn't really be better off.



Regards,



Michael

 

[johnsu]

In my opinion, depending on portfolio size, I'd have 2%-3% of purchase price as a reserve fund. Some would say that's too much sitting in bank but sometimes "piece of mind" is priceless. This reserve fund should be healthy enough to carry you through a 5 year hold unless some major stuff goes wrong. This is the low risk, low stress way. May not get your best ROI but it definitely gives NICE QUALITY OF LIFE! This was advice given to me from Arlen Dahlin who's one of REIN's heaviest hitters.

 

[Lucy]

What am I missing here. How is a tiny reserve fund of 3% of purchase price going help as a reserve fund for a 5 year hold?

 

[Lucy]

Micheal, obviously my post was not geared towards the few 25 year olds in this thread. So, no, I am not missing something here. I commend you for starting so young. Keep it up and I wish you luck.

 

[Thomas Beyer]

Speaking of cows .. Are you in the beef cow or milk cow business ?

If you have many cows it is ok to sell (or refinance) one once in a while !

Milk is not the only purpose of a cow !!

 

[Lucy]

Why sell a cash cow? Especially if it's a good one and you worked so hard to acquire it and pay it off? Unless you are trading it for a better cow!

A very wealthy 70 year old concrete laborer who personally owned multiple properties of land, multi family income properties made this statement to me about 15 years ago.

"Lucy, do you know when the right time to sell real estate is?"

"when?" I asked

"NEVER!!". was his answer.

This still resonates with me years and years later.

 

[Thomas Beyer]

[quote user=Lucy]"NEVER!!".


indeed .. unless



a) you find a better deal after all sales and purchase costs are factored in

b) you see little upside due to market

c) your co-investors want to sell / exit

d) you need serious cash beyond cash-flow or even a re-finance

 

[OurRealtor]

Thomas if you are online , please reply to post:

ThomasBeyer



http://myreinspace.com/public_forums1/f/62/p/21096/106200.aspx#106200



Moreover, what do you think about investing in this GP region 711 km north of your city.

 

[housingrental]

Hi Lucy

Please start posting more

Many readers could be a lot safer in the future if they don't immediately dismiss what you have to say....



[quote user=Lucy]The title of this thread is cash flow or equity paydown.
Well equity paydown increases and ensures cash-flow.
I am surprised how many here do not see that the so called cash flow most here are enjoying , is temporarily gifted to them by the government in the form of stimulus through rock bottom interest rates, creation of new bank products like the 30, 35, 40 year amm, high loan to value HELOC's etc.
When I started investiing, out of town properties needed 10-13% CAP rates and in town required 8-10% just to compete with the banks prime rate. Now newbie investors are piling into Hamitlton investments at 5% CAP rates.
The CAP rate constantly competes with monies in the bank.
Interest rates are more likely to go up than down. The Govt has even warned on this many times.
What will happen to your equity and temporary cash flow when the expected CAP rates rise?
Oh! I know. Rent will increase to compensate!?!? Lol!
What if it doesn't? Last time I checked, when supply increases, prices fall hard.
Many of you here, have been drinking from the punch bowl of declining interest rates for the past decade or more. Well, having rising interest rates will change the economics course you have been attending and make you throw out your textbooks.
Right now, one can't tell the difference between between a true millionaire and a wannabe. Nothing lasts forever!

 

[housingrental]

6%+ should be a start.....viewing 2-3% as safe should be a wake up call to you - try running some calculations when you have a few vacancies, few defaulting payments, capital item at end of lifespan, and unexpected repair come up (maybe unplanned for foundation issue...) - How far will your reserve fund really go....





Ohh and the kickerà - the operation issues are MORE likely to happen around the same time that your sotck market portfolio and job income also gets battered from a downturn......





[quote user=johnsu]In my opinion, depending on portfolio size, I'd have 2%-3% of purchase price as a reserve fund. Some would say that's too much sitting in bank but sometimes "piece of mind" is priceless. This reserve fund should be healthy enough to carry you through a 5 year hold unless some major stuff goes wrong. This is the low risk, low stress way. May not get your best ROI but it definitely gives NICE QUALITY OF LIFE! This was advice given to me from Arlen Dahlin who's one of REIN's heaviest hitters.