Why Brethren of the Buy & Beholders Church want to burn a heretic

[Account Closed]

Buy and Hold is promoted by most property investors as the Holy Grail. How can so many people with money be so wrong?

Although many created their investment capital by wholesaling houses they now choose to become investors in rental properties instead of continuing to make a lot more profit sticking with wholesaling. The loss of vision appears to stem from their previous habit of handing properties on to investors and thereby giving up 90% of the profit on each deal they unearthed.

Some disbelievers dispute the fact that RE Wholesalers are able to get a 30% discount off house prices. Houses still can be bought at discounts regularly. Maybe no longer at 40% and 30% below market value - for the exercise choose a number that you can accept as an achievable discount and do the numbers for the following alternative to Buy and Hold. 

Another area of contention is that it is possible to sell a home at market value. After all Market Value can not be what people pay - or is it? Anyone who knows how valuations are made should be familiar with the concept that Market Value is what people are prepared to pay for properties today in the market for homes they wish to live in. Of course Investors do not pay Market Value - or at least rarely do. However the average family buys their residence paying full market price!

Are you familiar with the idea of a Business based on buying at wholesale and selling at retail? Heard of any businesses which do that? Like a Grocery Store, Most Retailers, and even Real Estate Traders (a variant of the wholesalers and investors in the housing sector)?

While it was common practice a few years back for RE Wholesalers and Investors to buy homes at distressed prices (40% off and more), today with improved market conditions that is a rare occurrence. However it is not uncommon for a house to be picked up at a 20% discount still.

As an example based on what is more than achievable consider the prospect of getting just a 10% discount on a home. Not every home up for sale - but certainly a large percentage of them - can be bought at a slight discount. This may be in view of the seller not having to pay an agent the 6% commission, or just being eager to dispose of their home in a timely manner.

To make the numbers easy say the Market Value of a Home is $500,000. A 10% discount results in the Buyer paying $450,000. If you want to dispute this possibility go in to the market place and make some offers!

A retail buyer - such as a family - will pay Market Price for that same house. In which case the Investor/Wholesaler will make $50,000 profit - before expenses and tax. Choose your own numbers so you will not argue what is do-able.

(You do not have to use the particular tax approach that I prefer - you can just adjust the numbers according to your tax wishes. I have a particular strategy which allows Tax to be deferred - and paid out in the distant future from subsequent borrowings against assets, which will have appreciated significantly. This is not an original concept - George Soros steered me on to it.

 The interest on the borrowed funds employed to pay the tax is even tax deductible and the actual annual interest expense on the borrowings for tax is paid out of earnings in subsequent years on the assets whose gains have not yet had to be realized. The deferred tax is actually invested (do not spend it unless you have a death wish) - compounded to produce untaxed capital gains (as long as they are not cashed out) - and the rental income and dividends pay the servicing cost of loans used to actually pay tax when the deferral is up. This will be explained in detail to disciples later on.)

Assume there is $45,000 profit left after costs (ignore the tax - or make a deduction of what you wish to pay if you insist on paying it). Look at the $45,000 in your hand and refer back to the dollars you actually paid for the property. Notice the symmetry? For an outlay in cash of $450,000 you made $45,000. That amounts to an immediate return of 10%, which you could get every month - and your capital would double every 7 months. Project returns forward 5 or 10 years - what are the numbers?

Okay - let's simplify the mechanics and only look at making $45,000 per deal each month and then end of year reinvesting ALL cash to compound at slightly less than what is an achievable rate.

When I say an immediate return, expect it will take about a month to complete a deal, so the beginning of each subsequent month you should have $445,000 to reinvest in another property - rinse and repeat. The capital compounding each month will see you with more than $900,000 after 10 months and more than $990,000 after ONE YEAR!

Let's assume you did not have $450,000 or $500,000 to begin with. Is that a realistic assumption? Even if you do have that money; say you are smart enough to understand how leverage works. If you have $500,000 - instead of buying just One House for $500,000 you could buy 5 houses - worth in total $2,500,000 - based on an LVR of 80%.

Just looking at you not having any money - you could borrow ALL the money needed - the initial deposit of 20% plus the balance to complete the purchase, meaning you can do the first deal using no money of your own. You can dispute the possibility as much as you like - that will not alter the fact that this strategy is being used every day!

The rental income is available when a house must be held, but as the business model is based on an immediate flip there is virtually little cost of borrowing money short term to complete the deals.

Thus it is possible to make $45,000 per deal - irrespective of whether you use your own money or borrow what is needed. Hence within 12 months you can have $1million sitting in your hand ready to go again for the next year. With the $1million in cash you could do 2 similar deals a month *paying ALL CASH each time. Continue to do one deal a month the same way as you started in year one with no cash. You should be able to accomplish 3 deals a month and make close to $3million in year 2. It is too early in the day for you to do the exercise gearing your cash and doing 10 cash deals a month using leverage (with a gearing ratio of 4 to 1). You might like to try those numbers after you have had a nap and are refreshed. As you receive $45,000 extra each month and reinvest that compounds - so in addition to 12 X $45,000 by year's end there will be compound growth on each month's profit. Okay the numbers are a bit wobbly so until you do it you can not see what the actual cash is at the end of each 12 months.

At the start of year 3 you should have $4million cash in your hand. Following the same format - investing All the cash so it compounds and doing one no cash deal each month 9 deals could be made every month that year to produce a profit of $9million. Which would see you then with $13million cash by end of year 3.

Track back to examine what the deal profit is per property. If you do not like the notion of deferring tax then pay it. Do all the sums over again working on a net profit of around $30,000 per deal instead of $45,000. Project the figures forward in time to 5 or 10 years.

[Don Konipol]

Along with the 10,000 other wild, exaggerated and wholly incorrect assumptions the "Lawyer/Professor/Economist/Investment Advisor/Financial Consultant/Mortgage Broker/Tax Attorney/Tax Lawyer OP (read his profile page) makes, perhaps the most obviously glaring is the assumption that one can find, buy and sell a house purchased at 10% under market value at full market value (without a broker) every thirty days!.

In most markets it takes 6 - 7 months to sell a house at market value, WITH a broker and MLS.

So, let's say you have the 20% down the OP banters about. You buy a house you believe is worth $500,000 for $450,000. And let's say, unbelievably, the house needs no fixup to sell at full market value. In order to get your 80% loan (assuming you qualify) you will have to pay a minimum of 1 points ($4,000), and financing will take a minimum of 30 days (more likely 45-60). Additional closing costs set you back an additional $2,000 (appraisal, inspection, application fee, etc.). So now it's 45 days later, and you're in the property for $456,000. Now, let's say you are able to sell it fsbo, and let's say it only takes you the same time it takes if it was on MLS - a totally u realistic assumption but let's go with it. So, after 7 months of ownership, you have a contract at full market value. The buyer will go through at least an additional 45 days to close. So IF closing occurs quickly, and if it occurs at all, you will have 10 months elapse from the time you had a property under purchase contract to the time it sold.

Now let's look at your profitability.  Assuming a 5% investor mortgage, you would have paid about $14,000 in interest.  Property taxes across the US are 1 to 3%, so let's use 2%.  So during your time of ownership your share of taxes are say $7,000.   In almost all jurisdictions, seller pays for title insurance.  Another $2500.  Other seller closing costs $1000.  Insurance while you owned the property $1500.  Total costs $32000.  So with no problems, complications, miscalculations, or plain bad luck, you cleared $18,000 in 10 months.  Not quite $50,000 per month.

But what if you had paid all cash?  You would have saved the $4000 in points and $14,000 in interest, right?  Then your profitability would have been $36,000.  On a $464,000 Investment, in 10 months, or about $9% annually.

Mark TwIn said that there are three kind of lies, direct lies, indirect lies and statistics.  Beware of posters who sound arrogant, claim unverifiable education and experience and treat the compounding of interest as if they personally discovered the secret of the Universe.  All the OP did was combine the formula for compound interest with a totally unrealistic, unworkable, and undoable investment system and add some unverifiable academic and unverifiable professional credentials to the mix.