Quote from @Jay Hinrichs:
Quote from @Joe Villeneuve:
Quote from @Scott Trench:
Quote from @Joe Villeneuve:
The CF mistake REI make is they think you can accumulate CF properties starting from the beginning. You can't, and you shouldn't. Even if you could (and you can) find a lot of PCF deals out there, how do you buy them? It's not like you have an unlimited source of DP's available to you, and buying all cash is foolish. If you think you are accomplishing something just because an all cash deal is PCF, it's an illusion. All you are doing is playing catch up to your cost,...you cost being the cash you put into every deal. That's your cost. The more you put in, the more you have to recover before the PCF is actually a profit. That's one of the big reasons to leverage. You can spread your cash out, and each property then accumulates CF to recover the same cash you might have used on one all cash deal.
Buying for accumulating equity is also an illusion. The equity is actually what you are paying for the property. It's a form of cash that is locked up and useless to you. Those that say it has value, I'll give you all of my sports trophies I've accumulated over the years. I'll even through in my daughter's. They are both the same value.
The power of the equity is the PV it buys. When you initially buy a property, ad 20% DP, you are buying a property that's worth 5 times what you are paying for it. As the equity grows, it's diluting the power of that equity since it grows on a 1 to 1 ratio to the PV growth. Remember, that equity started out as a 5 to 1 ratio.
Here's my take on the roles of CF and equity, and why I say you must have both:
Role of CF - To accumulate within a property to equal the cash you put into it. As long as you have PCF, this really means you have a clear property since the tenant is paying for the rest.
Role of Equity - To grow from appreciation to a point where the growth is equal to the original equity, thus doubling it.
When both things occur (order doesn't matter), I sell.
Banking only on either CF or equity is a loss. You have to have both, and to say you can't just means you are looking in the wrong markets, and/or using the wrong strategies.
Why is buying all cash foolish? I think that, right now, it offers excellent risk adjusted returns.
Thinking you are ahead with all cash deals are an illusion. It's bad, very bad, math.
If you buy a property with all cash for $200k, and that allows you to have PCF of $1000/month, that means it will take you 200 months before you break even. That's illogical.
Thinking that you can focus on the equity as an offset is even less logical, and worse math. The DP is the initial equity you buy. Added equity comes from appreciation, which has nothing to do with how much cash you have in, or how much equity you start out with. Added equity is gained from appreciation, which is based on the property value, which starts out the same, and increases at the same rate, whether you ny all cash or no cash.
YOu have math and then you have reality and personal preference.. We all know we can run math and what the math tells us.. but tenants dont follow our math projections. And banks dont care about our math projections and how hard do you want to work to prove your math projections.. Honestly my wealthiest clients and friends with 8 figure plus net worth have little to no debt.. I get it starting out but there comes a time if you can afford it and it works free and clear is just a great place to be .. I mean right now with the price of rentals 6% or so is in reality a levered cash on cash return.. equity grows at the same rate.. now granted if you wanted to you can have more props growing equity if you leverage them but your taking on lender loan risk.. At some point free and clear is just fine for many investors. Many props that are bought for cash will return 5 to 6% COC .. So as you age out how many cats do you want to herd . :) 5 or 10 or 30 to 50 to get to the same spendable cash flow.. And is that not what 97% of BP members want spendable cash flow so they can live their life on that cash flow ? No debt makes that far more attainable than massive debt.
Yes, this is 100% true and works IF (and it's a very BIG IF) one has the spendable cash to buy 5 properties free & clear. On average were talking $2,000,000.00 spendable liquid cash.
For the vast majority starting out in REI, and on BP, that's not remotely realistic.
Most can't even conceive how they will ever have just $200,000 sitting around in liquid cash to spend.
For a great many, getting to just $50k saved up liquid cash was an achievement that takes years. So to wait another decade+ to save up enough to get 1, just 1, is not viable investing strategy.
So to use LEVERAGE, to grow a portfolio, to snowball appreciation, to Pyramid up portfolio size to get too 20, 35, 50 on leverage so they can shift strategy too Consolidation, selling down to achieve 5 Free & Clear....
That is the most realistic and viable path for the vast majority. Investing there way UP, via leverage, to a place in life where they have compiled millions in equity position so they can consolidate down to the "Dividend" phase of life.
To the "Hiltons" of life who have $250k+ a year they can throw at investing.... Well it's a totally different thing isn't it. It's not investing anymore in the earning sense, it's more so a high interest savings account. They already "made it" via what there doing for active income.
Again, a million kudo to them, double high-5.
But they are the ever so rare few. The vast majority are not there and don't have any prospects of ever having such.
And for that majority, there is hope. It will take more work, more time, more intention of actions and yes more leverage. Leverage is how they can "hack" the math into there favor. So they can achieve WEALTH.
Those who already start with wealth, it's not about creating any more it's about preservation and that is a totally different picture of things, right.
There is no 1 universal path for all. It's about path's custom tailored to the persons.
Most are in the rat-race, grinding it out in there 9-5 with no light at end of the tunnel and that is why they look to REI, for hope, for light at end of the tunnel, for there way out of the rat-race, for wealth creation not preservation.
The preservation comes after you have it to preserve. And 6% wont create wealth unless one lives a Vampires life of millennia in time scale. Most got maybe 30/40 years if not less to get from next to $0 too "retirement".
