Build equity on positive cashflow properties?? - Posted by Al

import · April 20, 2003, 2:52am

Posted by Ronald * Starr(in No CA) on April 20, 2003 at 06:44:45:

Al------------------------

I’d check carefully the numbers. Here in the San Fran Bay Areas, all properties appreciate the same amount over the long run–say 10 years or more. There was a discussion of appreciation a couple of months ago whereby somebody in the midwest claimed that the appreciation in some neighborhoods there was higher than in other neighborhoods. I have not seen the statistics to verify this, however. Jack Reed is of the same opinion that I am, that the rate of increase in property values is about the same, over the long term, for properties of different values. His data was different, though–he used appreciation in different cities of different average value in the Midwest.

Here in the San Fran Bay Area, there will be short periods, say three or four years when some neighborhoods will surge in value vs others. Could be low-priced ones going up faster. Could the high-priced ones going up faster. Then, for a while the lesser-appreciating neighborhoods will “catch up” by appreciating faster.

You might consider, if you want to build up a portfolio faster, concentrating on buying properties with the help of owner financing, with low down payments. Then you will not have to worry about the appreciation on the ones that you already own.

If you go that route, try to target the rental properties, not the owner-occupied ones, as they usually need their equity to buy another one. The exception might be older owner-occupants who have saved money. Still, the rental properties are probably your best target.

Good InvestingRon Starr**

import · April 20, 2003, 2:52am

Build equity on positive cashflow properties?? - Posted by Al

Posted by Al on April 20, 2003 at 02:52:57:

Hi,

I have recently located a few positive cashflow properties that are in the lower quarter of the market but unfortuantely are in areas where there is a very low capital growth.

I would like to use 100% financing if possible to build property portfolio. One way that I can think of is that I use the growing equity of my existing properties as a collateral in order to buy more properties.

Since most positive cashflow properties are located in areas which suffers from low capital growth, what would be the best way to build equity on positive cashflow properties besides adding improvements or waiting for the property to appreciate in value?

Is it advisable to pay off the mortgage of the positive cashflow property ie get principal and interest loan to speed up ownership and build equity that way since adding too much improvement on low priced property risk over capitalization and at the same time it is going to be a long wait for my properties in the lower quarter of the market to appreciate in value? Eventhough the principal payment is not tax deductable.

Or should I just simply sacrifice the cashflow in order to get a property in a good location that has a better chance of experiencing capital growth?

Any advice please?

Thanks in advance.

Al

import · April 20, 2003, 3:48pm

If you want to be really shrewd… - Posted by GL - ON

Posted by GL - ON on April 20, 2003 at 15:48:30:

… buy positive cash flow in places with a TEMPORARY problem. That means one that will go away in a few years. Like a factory closes down, hundreds are laid off, and you can buy property for a song… for 6 months. Then a year or 2 later prices are higher than ever.

Another example: a widely publicised tire dump fire (Hagerstown Ontario) and you couldn’t sell a house in that town - except to one investor, who bid 25% less than FMV and bought 22 houses with low or no down payment in one day. A year later everyone forgot and prices were right back where they started.

If a town has low prices and positive cash flow, ask yourself: Is the problem chronic or will it blow over? If it will blow over, don’t be afraid to buy. In a few years the market will correct itself.

Sometimes this works even where the problem is chronic. I bought property cheap because it was near the railroad - no one wanted it. I love its positive cash flow, even though I know it will never be considered “prime real estate”. Even so, it is now worth twice what I paid for it.

Guess what? I heard the other day that the railroad is going to buy up the whole street to build a new station. Sweet.

Your idea of using your collateral to buy more properties is good. Sometimes a seller won’t take back a second mortgage to make a deal, but he will take one on another property you own. This also gets around the banks’ disapproval of buying for nothing down.

“What would be the best way to build equity on positive cashflow properties besides adding improvements or waiting for the property to appreciate in value?” I don’t think there are any.

But if you can buy for no or low down with pos cash flow, who cares? Just keep buying until you have enough income from the rents. If you don’t buy in an outright disaster area, it will come around eventually.

And who cares if it doesn’t? If prices don’t go up a dime, you still have pos cash flow, and in 20 years your mortgages will be paid off, your cash flow will go up by the amount of the payments, and you will have 100% equity.

But prices always do go up don’t they? Ask any tenant if they think rent and house prices will be higher or lower in 10 years LOL.

Buy low and sell high still works but first you have to have the courage to buy low (when no one else is buying) or as Sir John Templeton puts it “Get 'em while they’re cold”.