I can’t disagree with that, David, and thanks for pointing out that you
can’t just buy anywhere and hold and expect appreciation. You have to
buy selectively. I think it’s interesting to note that Schumacher tells of
many years (4-5 seems average) of negative cash flow before his
purchases began to break even. That certainly takes courage,
especially when he probably could have bought other properties with
better cash flow. I’m betting that those alternate “cash flow” properties
he passed up did not appreciate nearly as much as the ones he bought.
People like to talk about the wisdom of getting cash flow from the
beginning, and of course that’s exciting and tangible, but I’ve also
heard that the biggest wealth in real estate comes from appreciation,
not cash flow.
Case in point: In 1988 I bought a duplex for $125,000, and sold it six
months later for $156,000. I thought I had done pretty well, and
thought the person who bought it from $156,000 was a fool for paying
that much. 15 years later that property was worth about $600,000,
and I was kicking myself for taking such an early profit. But I was fairly
young, naive, and pretty broke at the time, so I really needed the
money. But if I had to do it over again, I’d hang on. Buy and Hold does
work!!! Handsomely!
I am glad I conveyed my thoughts in an logicl and understandable way. Now that there is no misunderstanding, we can move on. I enjoy the discussion. Now, your 1%, 100% has a meaning related to cost. Do you know what a “blended rate” is? First of all, you are correct on loan terms and I have done the same thing. However, my overall cost of funds ie blended rate would have to reach a balance and it can get quite complicated. A larger loan will have more than just a higher rate. It will have higher closing costs as well. I go by my adjusted APR to get a total cost of the loan. This determines my % of down payment. Then I look at my HELOC costs, my current ROI of personal funds and maybe use it or any combination thereof. Again, borrowed funds for 100% financing. When I use any portion of my personal funds I am borrowing from myself and charge myself interest equal to my current rate of return. I will adjust accordingly and then I now can calculate a blended rate, factor in other costs and compute a maximum and much more acurate cashflow. I hope you’ve enjoyed this.
Posted by David Krulac on March 11, 2007 at 14:52:35:
There’s the saying that flipping will make you rich, but buy and hold will make you wealth.
There’s another saying about real estate investors always regretting the good properites that they sold, perhaps too soon.
There are cash flow properties that I bought fully (not fooly) knowing that they were not going to appreciate much if any.
For beginning investors I always recommend that they buy positive cashflow, because negative gash flow will eat up the new investor and spit them out, leaving a bad taste in their mouth, and often casuing them to drop out of REI.
But after you get your feet wet and know more about REI and can weather the negative cash flow then there’s nothing wrong with buying a property that is in a good area and will appreciaite greater than the average property.
I think that one person can have both positive cashflow properties that don’t appreciate AND negative cashflow properties that will appreciate until the cows come home. The cashflow properties generate the income to feed the negative allagator.
I bought a house once that was 20 feet from 4 railroad tracks. It was real cheap. It was a cheap house when it was built over 100 years ago, and its still a cheap house today. I was there once working and heard this horrific noise like I never heard before. I ran outside and saw this railroad locamotive sanding & polishing the railroad tracks. It was cheap to buy, and had positive cash flow. It was literally the wrst house in town. But the idea is to buy the worst house in the BEST NEIGHBORHOOD, I forgot the last part. And that last part is the part that David Schumacher remembered.