Your second example answers your first question. confused ? I will try to explain only my experience.
Your first question relating to selling and buying.
it is true that the only time you make (cash in hand) money is to sell, but for example if you purchase a 100,000 home the last 20% or 20,000 is what is commonly called a “dead zone” for investment it looks good when you tell friends and family or do infomercials about “net worth”. This last 20% is useless until you sell. This is why money is made when you purchase. You must purchase at least below that 80% LTV 70% is more of what we look for, and again if your parents were in the position of 70-80% LTV they would not have to sit on the property they could unload quickly.
Pat
Posted by Melissa on January 04, 1999 at 16:01:05:
There are some basic C. Sheets fundamentals that I don’t understand. If anyone can help me I’d really appreciate an explanation here or at MelissaOTP@aol.com. The two ideas I don’t get are:
“You make money in real estate when you BUY not when you SELL.” Isn’t equity like stocks in that profits are only on paper until you actually sell for cash? I might have a $15,000 difference between what my house is worth vs what I paid, but I can’t take my equity to the grocery store and buy dinner with it. I may make money ON PAPER when I buy real estate, but don’t you only make ACTUAL MONEY when you sell? And, related to that. . .
Isn’t net worth just a paper exercise also? I have some family members who own a condo worth $90,000. I don’t know what they paid for it, but let’s say they owe $75,000 on it. That would add $15,000 to their net worth, right? The problem is, they can’t unload the property. No one is even LOOKING at buying it. It seems to me that they don’t have a positive $15,000 to their net worth. It seems like a big 'ole $75,000 LIABILITY. If property is worth what people are willing to pay, isn’t this property worth NOTHING?
Please help me. I can see potential in RE investing, but I’m still stuck understanding the basics.
Re: Questions on Fundamentals - Posted by Stacy (AZ)
Posted by Stacy (AZ) on January 04, 1999 at 17:35:50:
This is really just a saying to help keep your investments sound. You really must make your “profit” when you buy, meaning, don’t get stuck buying properties at or about FMV, and expect appreciation to make you money. Buy low, very low if possible, and your profit is already built-in to your deal. You then realize your profit when you do something with the equity.
You don’t need to sell to realize a profit. You can get a home equity line of credit for the equity amount, you could refi to get cash, trade your equity into another property, rent it out for a positive cash flow, etc. So, yes, you actually could take your asset and buy groceries. Leaving it as “dead equity” doesn’t make you a cent, you are correct there.
Net worth is of limited use, definately. It’s just a summary of one’s financial condition. But, without looking at the assets and liabilities in detail, it does not tell a complete story.
In your example, certainly the real value of the condo is less than the $90K FMV if they can’t sell it at that price. This is where the “net worth” number is deceiving unless the details are known. However, I really doubt that it’s a $75K liability. If your parents had to, they could certainly sell for $75K and break even. If $75K is all they could ever hope to get out of it, they really don’t have a $15K asset. But $15K sure looks good on paper.