Posted by Will on July 08, 2005 at 19:53:22:
Goldilocks’ porridge!
I love it!
more important–discount or cash flow? - Posted by Will
Posted by Will on July 07, 2005 at 20:13:14:
I know that many investors–even buy-and-hold landlord types–feel like they make their money on a property when they BUY. This makes some sense, of course, since if you buy a property for 70% of it’s retail value, you have some instant equity–maybe even cash back at closing, depending on your financing.
But what if one could buy a property that cash flows very nicely, but one can’t really get it at a discount? Let’s just look at two properties:
Property A: FMV is $50,000. Rent is $450. Buying at a 20% discount for $40,000 and financing $36K at 6% for 20 years, the payment (including escrow) is $322. That’s $128 cash flow. At this rate, it takes 2.5 years to get back the down payment.
Property B: FMV is $22,000. Buying AT FMV and financing $20K at 6% for 20 years, the payment is $179. Rent is $400. Cash flow is $221 per month. At this rate, it takes only 9 months to get back the down payment.
Which one looks better to most of you buy-and-hold types? Maybe neither? I’m going to look at a property like Property B next week. I just think that with cash flow, many things are possible…
mesa grill - Posted by mesa grill
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Re: more important–discount or cash flow? - Posted by Don (VA)
Posted by Don (VA) on July 09, 2005 at 24:53:45:
Other considerations (besides the valid issues of warzones, tenants, etc.) is rate of appreciation of the properties and how long you’re going to hold them. Or, put another way, your total return on investment.
For instance, very roughly, if each property appreciates 10% a year, you’ll gain $5,000 in equity (from your $4,000 down) from appreciation alone on Property A, versus $2,200 a year (from your $2,200 down) on Property B. Somewhat bigger bang for the buck from Property A.
True, cash flow from Property B is roughly $1,200 a year greater than from Property A. But equity growth from rising values (assuming a 10% increase on both) is $2,800 more on Property A. On the other hand, if property values remain absolutely flat, that equation shifts to favor Property B.
And we haven’t considered whether, and to what extent, rents could be raised in either property over time.
So, there’s no real simple answer. My preference–choosing one or the other–would be Property A. I’d get $10,000 in instant equity up front, a modest positive cash flow, greater leverage from my down payment, and more rapid equity buildup if property values rise, even if only modestly.
Re: more important–discount or cash flow? - Posted by Sean
Posted by Sean on July 07, 2005 at 22:41:30:
The first… a house worth 50 on the open market is in a nicer neighborhood (USUALLY) than the one worth 20. THis means you will get a better quality of tenant, AND have a property worth something when you are done paying off the mortgage.
What good is having a free and clear property if when you buy it it is on the verge or even in a warzone? By the time its paid off it will be in the warzone and it won’t appreciate, attract generally a lower class of tenant which means you will spend more time managing it, have higher vacancies… etc etc etc.
Re: more important–discount or cash flow? - Posted by dealmaker
Posted by dealmaker on July 07, 2005 at 21:38:17:
And I thought I lived in a place with low prices!
The only problem I see is you’re not getting that kind of financing on those low prices.
Obviously B is the better buy, all other things being equal. I used to tell wannabes that with $100K to invest there were three options; (A) one unit @ $100K, (B) two units @ $50K each, or (C) 4 units @ $25K each.
A might rent for $1K/month, B probably rent for $650/month each, C probably rents for $450 each.
A gets you the lowest return, but the fewest MANAGEMENT HEADACHES.
C gets you far and away the best returns but you need to figure in the management headaches and the cost of the sidearm to carry when you go to collect your rent.
B gets you Goldilocks’ porridge.
I’d buy B all day long.
dealmaker
Re: more important–discount or cash flow? - Posted by Dave T
Posted by Dave T on July 07, 2005 at 21:23:25:
If two properties get the same rental income, then the less expensive property always looks better on paper.
Is the property a deferred maintenance challenge?
Is the property in a war zone, known drug area?
Is the property value appreciating, holding steady, or in decline?
Are there environmental factors that make the property unappealing to potential renters?
lds mingles - Posted by lds mingles
Posted by lds mingles on January 17, 2006 at 08:58:01:
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Re: more important–discount or cash flow? - Posted by Chuck Rosenberg
Posted by Chuck Rosenberg on September 05, 2005 at 10:47:04:
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