Paying cash
- Thread starter scottw
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QUOTE (scottw @ Oct 4 2008, 04:40 AM) does it make sense to buy a building outright. I am considering buying a building outright and putting a ELOC on it. The NOI is around 10%, to me is a good investment.
Scott
Why would you do that if you can leverage it and spread your cash over a number of different buildings.
It does not make sense to me
Scott
Why would you do that if you can leverage it and spread your cash over a number of different buildings.
It does not make sense to me
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QUOTE Why would you do that if you can leverage it and spread your cash over a number of different buildings.
Risk-aversion. Lifestyle.
Buying a building outright gives you immediate access to (presumably) a strong, stable, persistent income stream. You can also, like he said, take out an ELOC if you want to invest in other dwellings, at virtually any time.
If I had the cash - that`s surely something that I`d consider. You could use the income stream to finance travels around the world for as long as you`d like. Sounds like a pretty decent way of life to me.
I guess it`s all dependent on what you want, but just because you`ll (in theory) get a higher ROI by leveraging yourself to the max and investing in more cash-producing properties, doesn`t mean that`s the right path for everyone. If you are to do this, you`ll suddenly have absolute control over your money and absolute control over your time, which is presumably the goal of most entrepreneurs.
Risk-aversion. Lifestyle.
Buying a building outright gives you immediate access to (presumably) a strong, stable, persistent income stream. You can also, like he said, take out an ELOC if you want to invest in other dwellings, at virtually any time.
If I had the cash - that`s surely something that I`d consider. You could use the income stream to finance travels around the world for as long as you`d like. Sounds like a pretty decent way of life to me.
I guess it`s all dependent on what you want, but just because you`ll (in theory) get a higher ROI by leveraging yourself to the max and investing in more cash-producing properties, doesn`t mean that`s the right path for everyone. If you are to do this, you`ll suddenly have absolute control over your money and absolute control over your time, which is presumably the goal of most entrepreneurs.
QUOTE (Jack @ Oct 4 2008, 07:33 AM) Risk-aversion. Lifestyle.
Buying a building outright gives you immediate access to (presumably) a strong, stable, persistent income stream. You can also, like he said, take out an ELOC if you want to invest in other dwellings, at virtually any time.
If I had the cash - that`s surely something that I`d consider. You could use the income stream to finance travels around the world for as long as you`d like. Sounds like a pretty decent way of life to me.
I guess it`s all dependent on what you want, but just because you`ll (in theory) get a higher ROI by leveraging yourself to the max and investing in more cash-producing properties, doesn`t mean that`s the right path for everyone. If you are to do this, you`ll suddenly have absolute control over your money and absolute control over your time, which is presumably the goal of most entrepreneurs.
Thanks for the insight.
For me, it is the right thing, however, I wanted to hear other thoughts; I do have other properties that are leveraged but cash flow is minimal. The property I want to buy is in an area where appreciation is low but the rental market is fairly stable.
Scott
Buying a building outright gives you immediate access to (presumably) a strong, stable, persistent income stream. You can also, like he said, take out an ELOC if you want to invest in other dwellings, at virtually any time.
If I had the cash - that`s surely something that I`d consider. You could use the income stream to finance travels around the world for as long as you`d like. Sounds like a pretty decent way of life to me.
I guess it`s all dependent on what you want, but just because you`ll (in theory) get a higher ROI by leveraging yourself to the max and investing in more cash-producing properties, doesn`t mean that`s the right path for everyone. If you are to do this, you`ll suddenly have absolute control over your money and absolute control over your time, which is presumably the goal of most entrepreneurs.
Thanks for the insight.
For me, it is the right thing, however, I wanted to hear other thoughts; I do have other properties that are leveraged but cash flow is minimal. The property I want to buy is in an area where appreciation is low but the rental market is fairly stable.
Scott
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I echo Jarrett`s question.
The answer is, "It depends." What are your long term goals?
As a general rule, investment property should be leveraged to the maximum to get the greatest return on your money. It allows the greatest tax write off, through tax deductible interest payments. It also spreads your risk over several properties, rather than holding one. Let`s assume you can buy 20 units with your ELOC. With 25% down, in theory, you could buy 80 units with the same money, thereby spreading your risk. And, as mortgages get paid down, and rents and value of your buildings rise, your ROI is greater than using 100% of your ELOC to purchase one property.
But, if you are reaching the end of your investing career, and cash flow is the determining factor, not ROI, than I would say your thesis is a good one.
The answer is, "It depends." What are your long term goals?
As a general rule, investment property should be leveraged to the maximum to get the greatest return on your money. It allows the greatest tax write off, through tax deductible interest payments. It also spreads your risk over several properties, rather than holding one. Let`s assume you can buy 20 units with your ELOC. With 25% down, in theory, you could buy 80 units with the same money, thereby spreading your risk. And, as mortgages get paid down, and rents and value of your buildings rise, your ROI is greater than using 100% of your ELOC to purchase one property.
But, if you are reaching the end of your investing career, and cash flow is the determining factor, not ROI, than I would say your thesis is a good one.
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QUOTE (scottw @ Oct 4 2008, 06:40 AM) does it make sense to buy a building outright. I am considering buying a building outright and putting a ELOC on it. The NOI is around 10%, to me is a good investment.
Scott
yes it makes sense for some, but with CHMC or FannieMae money around 4.5% to 6% fixed rate mortgages it USUALLY makes MORE sense to get a sensibly leveraged property as the ROI is higher and the cash can be used for more assets !
Scott
yes it makes sense for some, but with CHMC or FannieMae money around 4.5% to 6% fixed rate mortgages it USUALLY makes MORE sense to get a sensibly leveraged property as the ROI is higher and the cash can be used for more assets !
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It truly depends on what you want. A $100,000 property with 20% down and annual appreciation of 6% average, provides a ($6000 minus interest)/$20,000 rate of return. Assume an interest rate of 5.5% that would mean $6000-$4000=2,000/20,000=10%. If you have a renter and you break even on cash flow (including interest) then your profit would be $6000/$20,000 = 30%. This also assumes you don`t sell in the first year and have to pay lawyer and real estate costs.
On the other extreme, if you have no loan, and your profit would be: $6000 appreciation plus a tax free rental income of $4000 (i.e. the interest you would otherwise have to pay to the bank with 20% down). Your total profit would be $10,000/100,000 of 10%. I say tax free rental income because you can commonly offset the rental income with building depreciation. For me, that is a pretty good rate of return and low risk. Everything in between is kind of like a sliding scale.
Of course, you can also have down years. Suppose the market goes down 6%. In that case, your appreciation is -$6000 and your loss (with neutral cash flow) would be $6000/$20000= -30%. Wow, that is like a bear market in the stock market!! If such losses continued for a couple of years you are wiped out. Chances are that won`t happen, but you would need at least 1.5 - 2 years to make up for the losses.
In case of an all cash deal, your loss would be $4000-$6000= -$2000 or 2%. That can be easily recovered even by GIC standards in under a year. And remember, if you don`t sell you don`t incur the loss (right away) while having still $4000 income.
Now you have to look at your investment objective. What do you want to achieve: appreciation, or cash flow, or something in between (i.e. the sliding scale)?
For me, cash flow is important, but I don`t mind some appreciation as well. I have also learned, the hard way, how traumatic it can be if the housing market collapses and you can`t rent out the place or get a rent that is even less than the mortgage. So I seldom have 80% leverage - I feel more comfortable at 60% or in some cases no leverage at all (depending on how reliable the rental income stream of a property is).
It does not matter that you can sit out the bad times if your temporary losses are making you lose sleep at night. Peace of investment mind is very important - it stops you from panicking and from making emotional decisions. Also, it depends on what you do with your positive cash flow - do you need it to cover your cost of living or can you do without?
I think, for you to make a decision as to how much leverage you want to use requires the kind of analysis above. Use a spreadsheet for various `what-if` scenarios and see how the various scenario results would affect you. Then you can make a truly informed decision. As all ways, before you jump: "Investor know your self"
Hope this helps.
On the other extreme, if you have no loan, and your profit would be: $6000 appreciation plus a tax free rental income of $4000 (i.e. the interest you would otherwise have to pay to the bank with 20% down). Your total profit would be $10,000/100,000 of 10%. I say tax free rental income because you can commonly offset the rental income with building depreciation. For me, that is a pretty good rate of return and low risk. Everything in between is kind of like a sliding scale.
Of course, you can also have down years. Suppose the market goes down 6%. In that case, your appreciation is -$6000 and your loss (with neutral cash flow) would be $6000/$20000= -30%. Wow, that is like a bear market in the stock market!! If such losses continued for a couple of years you are wiped out. Chances are that won`t happen, but you would need at least 1.5 - 2 years to make up for the losses.
In case of an all cash deal, your loss would be $4000-$6000= -$2000 or 2%. That can be easily recovered even by GIC standards in under a year. And remember, if you don`t sell you don`t incur the loss (right away) while having still $4000 income.
Now you have to look at your investment objective. What do you want to achieve: appreciation, or cash flow, or something in between (i.e. the sliding scale)?
For me, cash flow is important, but I don`t mind some appreciation as well. I have also learned, the hard way, how traumatic it can be if the housing market collapses and you can`t rent out the place or get a rent that is even less than the mortgage. So I seldom have 80% leverage - I feel more comfortable at 60% or in some cases no leverage at all (depending on how reliable the rental income stream of a property is).
It does not matter that you can sit out the bad times if your temporary losses are making you lose sleep at night. Peace of investment mind is very important - it stops you from panicking and from making emotional decisions. Also, it depends on what you do with your positive cash flow - do you need it to cover your cost of living or can you do without?
I think, for you to make a decision as to how much leverage you want to use requires the kind of analysis above. Use a spreadsheet for various `what-if` scenarios and see how the various scenario results would affect you. Then you can make a truly informed decision. As all ways, before you jump: "Investor know your self"
Hope this helps.
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One of the strategies that you can use as part of your outright cash strategy.
Some sophisticated investors DO pay all cash for their multi-family properties with one proviso... they have a plan to increase the income, fix the deferred maintenance and curb appeal. Then, once that work is done, they finance it against the NEW appraised value rather than the purchase price.
There are, of course, other ways of attaining the same outcome (financing options) however this all-cash deal can assist you in negotiating the purchase.
Some sophisticated investors DO pay all cash for their multi-family properties with one proviso... they have a plan to increase the income, fix the deferred maintenance and curb appeal. Then, once that work is done, they finance it against the NEW appraised value rather than the purchase price.
There are, of course, other ways of attaining the same outcome (financing options) however this all-cash deal can assist you in negotiating the purchase.
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A HELOC offers much flexability but do realise that a HELOC IS a mortgage.