Ratio of price to income? - Posted by Alex

Posted by Ronald * Starr(in No CA) on May 12, 2003 at 23:21:43:


Please do not pigeonhole me as being unwilling to learn. I wrote to you on this thread because I wanted to see if there were some other category to add. The categories are broad. Each one encompasses many possible techniques or strategies. If a new one comes up that is easy to categorize into one of C A T, then I think it is a good idea to do so. Allows for bringing in general principals under each category to analyze the proposed investment strategy.

As I said, what you have to say about investing is valuable to think about and remember. You are talking about a level down from the three categories, about stategies or methods of making money that fit within one category. The same with the reselling of two parcels separately after buying them as one. That is a good idea. Good profit soon. It is a technique that does not involve tax benefits. It does not involve cash flow, understood to be periodic payments coming in for a term of months or years.

Does it fit under appreciation? I think so, sure, why not. There are three forms of appreciation, remembered by thinking “FIN”–F=forced; I=instant; N= natural.

This technique comes under the heading of F–you are doing something to cause the property to be worth more at resale than it was worth when you purchased it. In this case, the “something” is pretty simple, just sell each of the two separately, without having to do much. You might need to locate the corners of the two lots or something, but it should not be very difficult or expense to do that.

Good InvestingRon Starr*********

Ratio of price to income? - Posted by Alex

Posted by Alex on May 10, 2003 at 19:18:54:

For multi-family units, is there a rule of thumb to judge if the price of a building is reasonable given the amount of rental income that can be generated? Is it based on available yield on other investment vehicles such as stocks or treasuries or something else?

Re: Ratio of price to income? - Posted by GL - ON

Posted by GL - ON on May 11, 2003 at 11:13:15:

Investment properties should be bought on the basis of yeild, and as such deserves comparison to other investments. Why would you invest in apartments to make 5% if you can do as well with no risk or work or worry in another investment?

Do an archive search for GRM ( the quick easy way) and cap rate ( the more complicated accurate way).

Don’t forget that there are many ways to profit from real estate. Cash flow, appreciation, tax shelter,and several others.

Search comm. forum - “cap rate” - NTXT - Posted by Brent_IL

Posted by Brent_IL on May 10, 2003 at 19:36:42:


Re: Ratio of price to income? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on May 11, 2003 at 12:22:16:


You got me excited here. You say: “Don’t forget that there are many ways to profit from real estate. Cash flow, appreciation, tax shelter,and several others.” Boy oh boy. I’ve been preaching the worship of fat CAT for some time now–C ash flow, A ppreciation, T ax benefits. Now you say there are “several others.” Are you talking about economic benefits here or such things as personal use, contribution to others or the community, etc? What are the “several others” that you know about and I have missed.

Good InvestingRon Starr***

Re: Ratio of price to income? - Posted by GL - ON

Posted by GL - ON on May 12, 2003 at 09:33:13:

Ron I think you are kidding me a little bit. As if I could teach you anything about investing in real estate.

I was talking strictly about economic benefits. Some that are not obvious to beginners but which I am sure you are aware of.

One is equity buildup from paying down of the principal of the mortgage. This is often overlooked. You could have a property that just breaks even, yet each year you are gaining thousands of dollars of “hidden” assets, as the property pays itself off, and in 20 years you will own it outright.

While we are talking about mortgages it is possible to soup up your return by refinancing and in more than one way. If you buy a property with so - so cash flow, that has high interest rate mortgages on it, what if you refinance at a lower interest rate and a lower payment? That saving goes right into your pocket. There is also the possibility if you have secondary financing from a private lender that you can pay off the mortgage at a discount and reduce the capital cost of the building by thousands of dollars.

There are also many ways of increasing income. Adding laundry facilities, raising rent, converting to a more valuable use.

And reducing expenses increases your net income. Many properties are badly managed. Your personal attention to business can save a lot of money.

There are a few ideas to start the ball rolling. I’m sure you can think up a lot more.

Re: Ratio of price to income? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on May 12, 2003 at 13:16:23:


Thanks for the response and the clarification of what you were talking about. You are probably a tab bit too self-effacing, as I suspect you could teach me a lot.

What has happened is that I have settled on the C A T categories in discussion of the financial benefits of property ownership. My contention is that virtually all of the financial benefits can be fitted into one of the three categories. I am willing to consider that there are other categories and I was hoping you were going to provide some new insights.

You are right to point out these features of property investing, I think. I would categorize them all as falling within one of the other three C, A, or T.

Equity buildup I see as part of the cash flow. It is the forced savings part of the cash flow. It is not an independent dimension, as are the CATs. You could have a property with no equity build up if you had no loan or you had an interest-only loan.

When you talking about refinancing a loan, I see that as part of C also. You are altering your expenses so that C becomes bigger.

Discounting an obligation to make a profit is certainly a good idea and it is good that you mention it to help beginners understand another potential profit center. I am inclined to not make up a new category for this suggestion, but that is tentative. I am thinking right now that this is similar to pay down on the obligation and probably should be included as a subcategory of the cash flow category, like the forced savings of equity build up from paying down an obligation. However, if you have a different notion, I?d be interested in hearing it. I am not interested in having weird categories where one has to torture things into them.

When you talk about ?increasing your net income. ?? I think you are talking clearly about the C portion of the financial benefits of real estate investing.

Well, I certainly think what you say is accurate and valuable. I just don?t see them as being ?other? benefits than C A and T. Now, you clearly mentioned those three benefits and then suggested there were others. I believe that the ?others? you were talking about best seen as subcategories of the three C, A, and T, that you already mentioned, not being separate benefits on the same level of abstraction as are they.

Good Investing and Good Educating**********Ron Starr**************

Re: Ratio of price to income? - Posted by GL - ON

Posted by GL - ON on May 12, 2003 at 21:28:49:

Well Ron I guess it doesn’t matter what I say. You have already decided that every profit idea in the whole world can be put into either the C, A or T pigeonhole and you already know all about them.

Here is one more idea that doesn’t get discussed much. Sometimes you run into a situation where two or more houses or rental properties are on the same lot. If they could be sold separately they would be worth a lot more money. But it usually takes a year or more and thousands of dollars to get a legal severance. Well I have seen properties being sold in this way that were ALREADY SEVERED. I don’t know why they were being sold as one lot, when the owner could have easily sold them separately, but they were.

We are talking about properties that can be bought for say $150,000 with $35,000 down and IMMEDIATELY resold for $300,000. In other words a profit of $150,000 on a $35,000 investment in a couple of months.

The only way to find out about these properties is to look them up at the registry office (court house) when they come up for sale. You find out a lot of interesting things when you do your homework, but most people don’t bother.