[QUOTE=midlifeman;885567]I’m not a flipper of real estate as i believe it’s risky and a lot of headache to find that needle in a haystack that is 40% below market value.
So my question is does anyone invest solely for the purpose of receiving net cash flow and if so what ROI are you expecting from your downpayment. 10-20% ROI?
It seems like you need a lot of 20% down payment financing properties to cash flow enough to live off. Having the tenant pay down the mortgage is great but it seems like a slow way to build equity. What say ye?[/QUOTE]
its depends to you sir midlifeman how you intend to gain your ROI as for me if you intend to gain a continues income then look for fast investment in real estate example condos. today more condos are on it. some investors invest on it and the income return flows every month. the decisions is yours how you want to invest. ^^
Seems like a good time to invest now that prices and interest rates are low. A dip in the market if you will. I’m looking for a 10% cap rate. And close to 20% roi with a 20% downpayment. For me it’s all about cash flow.
[QUOTE=midlifeman;885742]Seems like a good time to invest now that prices and interest rates are low. A dip in the market if you will. I’m looking for a 10% cap rate. And close to 20% roi with a 20% downpayment. For me it’s all about cash flow.[/QUOTE]
midlifeman,
For the sake of argument, what are your views on the following.
You buy properties using your model above. Then interest rates rise to more normal levels. You can pick what you feel is ‘normal’. What do you expect to see in terms of property values? Will the properties you buy now fall in value. stay flat or rise when interest rates return to normal?
Are you expecting to hold long term? If so, short term interest rate moves matter a lot less overall.
I guess I don’t give much thought to what interest rates do. If they fall you refinance, if they rise then there might be less buyers , but that doesn’t change your ROI from a current cash flow perspective. I buy and hold unless the market gives me a reason to sell (like the boom from 2002-2007)
If rates rise I think the values will go down. High unemployment and stricter lending standards are already putting pressure on sellers. If this creates more renters than so be it…time to raise the rent which increases my present value ROI!
[QUOTE=midlifeman;885792]I guess I don’t give much thought to what interest rates do. [/QUOTE]
If you are a buy and hold investor who rarely sells, the value of the property matters a lot less. As you were indicating that you were focused on the the capitalization rate (cap rate), an interest rate movement has a big impact. Rising interest rates forces up cap rates. As the rents do not move in perfect alignment you will see the value of the existing property fall when measured by the cap rate. If you are not selling and not refinancing, it will not matter too much.
If you have a loan agreement that is on traditional commercial terms a fall in the asset value could trigger a cash call where you have to pay down the debt. That will be spelled out in the loan agreement so something your will know about before you take out the loan.
Real estate tends to go up in value, and as the saying goes, “They aren’t making any more of it”. As long as the population in the USA continues to rise, more housing will be needed, and every year it gets more expensive to build a home as natural resources and energy become more espensive. Sometimes appreciation can go too far too fast, and then a correction is needed. However, real estate tends to follow a long term upward trend line.
[QUOTE=bellaswan;885937]Real estate tends to go up in value, and as the saying goes, “They aren’t making any more of it”. As long as the population in the USA continues to rise, more housing will be needed, and every year it gets more expensive to build a home as natural resources and energy become more espensive. Sometimes appreciation can go too far too fast, and then a correction is needed. However, real estate tends to follow a long term upward trend line.[/QUOTE]
Two points or questions.
Does real estate actually rise in value or does the currency fall in value? Real estate is priced in a currency so if the currency is falling in value, it takes more of it to buy the property.
Second, the value of real estate will fall even if the over all trend is up. That happens when there is a fall in demand or when the buying power of a community falls. The rust best has both. In some communities the total population has fallen so they just do not need as many homes. This has been happening even while the USA population has been rising. A different example is when the number of people in an area remains largely stable yet the number who are working falls. The buying power is dropping so people can not afford to pay for the housing and they shift down market. Values will be sticky and then start falling when the lack of buyers puts pressure on sellers who must sell.
Real estate business is very convenient to every person who are interested to enter in this market.
Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development.
Does real estate actually rise in value or does the currency fall in value? Real estate is priced in a currency so if the currency is falling in value, it takes more of it to buy the property.
[/QUOTE]
I second J. Corey’s question. For the last 75 years (Up to 1999), the “Real” value of real estate has not returned anything inflation adjusted. There have been fantastic gains in the last ten years but, investor’s should not come to rely on such returns. It would seem that strategies like flipping and those that create value (rehabilitation) seems to be ways to secure value. That said, those ways are merely occupations whereas, if you aren’t working, you are not getting paid. Although I own several units, I much like J. Corey, question real estate’s true return. Is it true appreciation or merely the weakening currency. In the long haul when the property is free of debt, the economics are much different however, that is an horizon that many may not see…or personally enjoy.
Because real estate asset is one of the best committing business where you can buy or offer property anywhere. There are many assistance and ability providing by this type of organization as well as people like to get actual property.
[QUOTE=midlifeman;885567]I’m not a flipper of real estate as i believe it’s risky and a lot of headache to find that needle in a haystack that is 40% below market value.
So my question is does anyone invest solely for the purpose of receiving net cash flow and if so what ROI are you expecting from your downpayment. 10-20% ROI?
It seems like you need a lot of 20% down payment financing properties to cash flow enough to live off. Having the tenant pay down the mortgage is great but it seems like a slow way to build equity. What say ye?[/QUOTE]
I mostly agree with you… If you won’t hunt for the needles, buy and hold is not great returns, and is a slow road to wealth. If you do hunt for the needles, however, anything is possible. I have about 35 rentals, quit my full time job over 5 years ago, and I love it. Finally get to make what I am really worth (which I can now determine). I hunt for the needles. Currently, my angle is using a private lender, and buying decent REOs and short sales off MLS, that are good houses in working class neighborhoods, with repairs/clean up that take from 2 days to 1 month (no major rehabs). In Central Florida, I have been buying in the $20-30K range, most including fix up, borrowing 70-90% on 7.5 year mortgages at 8.75%, and renting them in the $600-800/month range. The 10-15 I bought from 1998-2002 provide the cash flow I live on, and in the last 2 years I bought 20 using the numbers shown. I currently have a low 6 figure income, and if I quit buying today, in the next 5-7 years, my income and net worth should both double or better. I am slowing down, but I don’t plan to quit buying any time soon. Some of my deals are mediocre, but some are excellent. On a few, I got all of my initial investment back on a rent to own initial payment (from tenant-buyer), have positive cash flow from day one, will own the property free and clear 7.5 years from purchase, and rent to own sell price is more than double my purchase price. Talk about having your cake and eating it too! My opinion: it is worth hunting for needles… I will go further and say, with my method, finding good houses and good prices with good buy and hold numbers is fairly easy (I may spend 1-5 hours per week finding) - the real needle was finding the one good private lender with deep enough pockets to continue financing me over and over and over again. Once I did that (which took over a year of continuous searching), the rest was easy! Good luck finding what you are searching for!
You have got my attention. So what is the strategy for finding that needle in a haystack? Tell me about your process? From a number stand point how much net cash flow do you need after you pay that 8.75% note?
As an investor to buy/hold how would you like an infinite return?
You get that by not using your own money in the investment. Focus on rehabbing your financing, not the house so you can use OPM (other peoples money).
Consider not using banks at all and none of your own money and that will maximize the leverage that real estate allows and maximize the ROI. Instead of money, you will use your sweat equity, experience and knowledge to create cash flow and equity.
In re the discussion about return measures for real estate, e.g. “infinite returns”:
In my view ROI is not a valid measurement for a buy-and-hold investment after the first year. The appropriate performance measure for decision-making is Return on Equity (ROE). (the following does not apply to flips, that’s another subject)
The ROE formula is simple:
Cash Flow/(Market Value - debt) = ROE
(Note: Cash flow = gross revenue - expenses - debt service. Can be calculated either pre- or post-tax, or both)
Once the asset is held over a year the property plan is in force, which may include forced appreciation via capital improvements or improved operations, whatever market appreciation that may accrue (very little in the last few years), or expansion and renovation plans.
I want to know ROE because I know that as equity grows through mortgage paydown and appreciation, and cash flow increases, the ROE will fall.
When ROE gets to single digits it is time to consider a cashout refinancing, sale, exchange, or re-structuring. I may decide to do nothing and let the asset build equity until way in the future (perhaps to fund retirement). I may also decide to revise the depreciation schedules to alter tax benefits.
I like to review the ROE of every property owned annually, tweak the investment plan as needed, and decide what’s next.
As said in a previous post, you have my attention as well. Not so much on how you find your deals but, how difficult is it to rent a $20K house? Frankly, my mind is having difficulty grasping what a $20K property looks like. I’d imaging that it is located in an area which is difficult to rent (Crime, school issues). Are credit checks used or do you just use your gut? I get your math but, not the execution. Could you elaborate on the type of tenants you have and some of the issues (deposits, longevity, damage, collection, late pays, etc) …or do you pawn the work off to a management company?
Real estate is one of the most reliable ways to build long-term wealth. It’s a tangible asset; people will always need housing, and property values tend to grow over time. You can earn rental income, benefit from appreciation, and even improve the property to increase its value.
From what we’ve seen at Comfort Homes here in Evansville, real estate continues to be a steady and dependable investment when approached with patience and a long-term mindset.
I invest in real estate because housing is not optional. People always need a place to live. That demand does not disappear. But you have to approach it the right way. It is not a hobby and it is not a get rich quick idea. It is a business. You buy right, you manage right, and you protect your downside.