Why Won’t It Cash Flow?

kornel

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My apologies for not replying earlier (before the post high-jacking). Just wanted to sincerely thank everyone for taking the time to answer my question earlier (the original post a while back). The knowledge shared was very helpful in building confidence to invest through increased knowledge, and in getting a good dose of market realities.

Many thanks once again for your advice and guidance.

Sincerely,
Kornel Szrejber
skornel@rogers.com
 

gwasser

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QUOTE (bizaro86 @ Jun 14 2010, 08:41 AM) A properly diversified stock portfolio shouldn`t have gone down 50%, even during the worst of the crash. Secondly, the vast majority of companies have recovered. You`re taking an unbalanced approach to the debate by including only negative stories. If we get to pick and choose, can I pick my US REIT preferred shares, up from $2.05 to over $20 in less than a year? Or how about Teck, from 7.00 at the beginning of 2009 to $36 currently?

Michael


Michael your`re absolutely right. Investing is all about buying investments at an attractive price and having the means to get through the rough times. That means, avoiding a forced sale and having the financial stamina to wait for an investment to realize its financial potential.
 

gwasser

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QUOTE (RedlineBrett @ Jun 14 2010, 09:27 AM) What does Buffet advise? "Buy when there is blood on the streets" or something to that effect...


Right on. The risk that an investments loses 50% of its value is much higher at a market peak than after a market has already crashed. Thus many investors foolishly sell off after the market has fallen and buy during market euphoria. People seem to want to be part of a herd and buy when everyone else is buying. Instead you should be buying good quality investments when everyone else is running away.
Warren Buffett is the master in doing so; many others find it the toughest thing on earth: buying when no-one else is.
 

Rickson9

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QUOTE (gwasser @ Jun 16 2010, 12:08 AM) Warren Buffett is the master in doing so; many others find it the toughest thing on earth: buying when no-one else is.

The opposite is also difficult for the majority of individuals - to avoid buying when everybody else is.
 

ehazell

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When buying investment properties there are two fundamental issues to consider. Is the property any good, then how will I finance it.Some call the first part Net Operating Income (that the building generates before financing). This is very important. If there is money left over at this point it can be used to cover financing costs.

As previous comments indicate, the rent in your example is no where near high enough. One of the REIN rules of thumb is that annualized rental income divided by the property cost must be higher than 8%, this example JUST qualifies at a cost of $150,000. This property at this rental DOES NOT MAKE SENSE. Remember investing is not emotional. If the numbers don`t make sense keep looking until you find one that does. There is lots out there.

QUOTE (ThomasBeyer @ May 29 2010, 11:57 AM) First of all: where can you get 5% on your money ?

Secondly: yes opportunity cost
for both money and time should be considered .. but it is not an expense, just a comparison what else you could do with that cash or time !

Increased down payments increase cash-flow and lower risk !
 

gwasser

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QUOTE (ThomasBeyer @ Jun 12 2010, 11:53 AM) Where are some insights in risk or assessment of risk ?

Getting back to Thomas` earlier question. I have done (and posted here on the forum as well as on my blog) some `research` in comparing real estate and stock market risk. Over the last 30 or 40 years, both real estate and the stock market have appreciated annually between 6 and 8%. Also the cash on total investment (cap rate vs dividend yield) are not that far apart (around 4%).

When you compare the volatility, surprisingly it is similar as well (unless you use leverage which result in an amplification on your net worth - both positive and negative). The perception that the stock market is more volatile than real estate may be caused by stock market prices being reported on a daily basis versus monthly or even slower when dealing with real estate.

In fact, as a result, I personally have added some leverage to my stock market holdings. Especially on U.S. stocks. I buy when the Cdn dollar is low with borrowed money and I pay off the loan when the Cdn dollar is high vs the U.S. These dollar fluctutions are short term ( 2 to 3 months) and I can make 4 to 6% profit following this strategy. That is 4 to 6% per 3 months or 16 to 24% on an annual basis ( minus 5% interest on the borrowed money).

Right now, the stockmarket is more profitable for me than real estate. Calgary/Edmonton rents are falling and so is my cash flow. Real Estate prices are also still falling. The stock market is in slow recovery with temporary set backs such as last month`s European crises - i.e. buying oportunities and high dividend yields.

Risk or volatility are not an issue if you look at your overall portfolio over the long term. If you invest in stock market indexes or REITs it is easy to diversify. The real risk or volatility lies in when you are not enough diversified. When all your money is concentrated in this one dog property or stock. 5 to 10% citywide vacancy is not bad, but if you happen to own the one that is vacant you have a 100% vacancy. To concentrate your money all in BP stock is kind of similar.

With a stock market portfolio it is easier to diversify than with real estate. When you use leverage you need to be able to weather some big net worth or equity swings. So, from my personal experience, I think that real estate is just as risky if not riskier than the stock market. But you are in control of the asset and in the worst case you can actually live in it. I have nobody who because of bad cash flow moved into the offices of the Royal Bank or of any other stock issuing corporation.

It is also a lot easier and cheaper to get loans for real estate than for stocks. Most stock brokerages allow a max LTV of about 50% and at short term rates of around 5.25%; compare that to variable rate mortages (1.85%) and to investment properties where your LTV may go as high as 80% (with CMCH insurance).

I also think, as Thomas mentioned earlier, that it depends on the investor and his/her investment skills. For me right now, its as `toss-up` and it seems that no matter where you go, your return on PASSIVE investments (i.e. not including your labour), always hovers in the 9-12% range these days - that is the market rate in both real estate and in the stock market.
 

bizaro86

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QUOTE (gwasser @ Jun 17 2010, 11:44 AM) It is also a lot easier and cheaper to get loans for real estate than for stocks. Most stock brokerages allow a max LTV of about 50% and at short term rates of around 5.25%; compare that to variable rate mortages (1.85%) and to investment properties where your LTV may go as high as 80% (with CMCH insurance).

It`s cheaper to get Canadian dollar denominated margin loans. The broker I use (Scotia bank`s Itrade) charges prime +1.5 for its smallest tier of margin loan, down to prime for loans of 1 million+. Loans 10k-100k are prime+1.25 and 100k-999k is prime+0.5.

So no prime minus. But borrowing money at 3.75% isn`t exactly usurious either.

Michael

source: https://www.scotiaitrade.com/pages/home/fees1.shtml#MR
 

gwasser

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QUOTE (bizaro86 @ Jun 17 2010, 01:52 PM) It`s cheaper to get Canadian dollar denominated margin loans. The broker I use (Scotia bank`s Itrade) charges prime +1.5 for its smallest tier of margin loan, down to prime for loans of 1 million+. Loans 10k-100k are prime+1.25 and 100k-999k is prime+0.5.

So no prime minus. But borrowing money at 3.75% isn`t exactly usurious either.

Michael

source: https://www.scotiaitrade.com/pages/home/fees1.shtml#MR

Oops. Yes you`re right 5% is too high - must have fallen since the last time I checked. At my discount brokerage in U.S. funds, I have been charged 3.75% as well.

I guess that bank is right: I am richer than I think I am.
 

bizaro86

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QUOTE (gwasser @ Jun 17 2010, 02:14 PM) I guess that bank is right: I am richer than I think I am.

That`s better than the alternative!


Michael
 
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