All Forum Posts by: Henry Clark

Quote from @Henry Clark:

I think we should all be required to write posts while we are drinking.  Helps to clarify things.  Switched for this meal to Sangria.  Goes with the Paella and Caprese salad.

Another item to factor in is inflation.  
OP is approaching this from a retirement mode.  
Let's say 3% inflation, 65% LTV on equity, interest rate of 7%, 5% growth but 3% points of that is inflation. Cashflow of $150 per month after taxes or $1,800 per year on a $200,000 investment. Or $1,800/$200,000= 0.9% return.

So the net growth is 2% and the return is 0.8% on the total $200,000.  Or $5,600 per year.

Let's say you had 45% LTV versus loan required 65%. Then you took a loan of 20% of $40,000. PI using 7% interest, 20 year term, is $3,720 per year.

So I’m showing a return of $5,600 versus a PI of $3,720.  At $1,900 per unit I would need 50 equivalent units to achieve an after tax life style of $100,000?  Assumed no refi costs.  

Someone check my logic and math.  I think the spread is greater favorably since the PI would not adjust with inflation.  Whereas the property value would both adjust with the inflation and compounding.  So instead of 50 equivalent units maybe 30?  For now don’t drink while you’re checking the above.  

Uh-oh Henry, now your going to that place of present $ vs future $ that it seems all of about 7 of us on BP get. 

Gotta simplify the heck out of it, because look at all the people who think a 7% or even 8% interest rate is "too high" and it's better to sit the sidelines and watch there liquid capital instead slow-burn. 

Here is my attempt: 

Let's say inflation rate is 3% and stays that forever. 

And say you borrow $10k today. 

That $10k today, has $10k worth of purchase power. 

Inflation is the rate at which purchase power goes DOWN. I think it best if people picture inflation in that way, the rate at which purchase power declines. 

That means, in 10 years, at 3% annual inflation rate, that $10k today will have a purchase power of just $7,374.24.

Or to say that $10k has lost about 26% of it's purchase power over 10 years. 

Meaning, to get the same purchase power in 10 years, it would need to be $12,600 dollars. Because in 10 years $12,600 will buy what $10k will buy today. 

Make sense everyone? 

The BEAUTY of investments with real estate, is that: 

- Real Estate adjusts WITH inflation. Rents go up, cost of real estate goes up, it moves WITH inflation which is why real estate for generations has been coined "the best hedge against inflation". 

- And Real Estate can be bought with FIXED debt. 

* Why FIXED debt matters so much*

Remember that inflation makes the purchase power of the money LESS over time. 

So if we borrow $10k TODAY, and we buy an asset that adjusts WITH inflation such as real estate, it's a time capsule, we will KEEP that $10k of purchase power year after year after year as inflation does it's thing. So in 10 years, it looks like a "gain" because it's now $12,600 BUT, it's just that $10k in purchase power brought into the future. 

And we borrowed at say 5% interest rate. Fixed. 

Some THINK we are paying 5% but NO, we are not, because we borrowed at FIXED rate, we are paying back a set amount and inflation is eroding the purchase power of what we pay back. 

So sure, yr1 that call it $125 monthly payment, it was $125 worth of stuff we couldn't otherwise buy.     But by year 10, were laughing at $125 monthly payment because it's nothing, it's "cheap". 

And the whole time the real estate, which adjusts WITH inflation, has produced more and more and more revenue. 

This speaks back to the "Law of Buffet"; Time IN the market beat's TIMING the market! 

Quote from @Henry Clark:

Quote from @Marcus Auerbach:

@Henry Clark, happy to see I am not the only person to order red with fish :-)

Let me run with your numbers: $300,000 valuation, 65% LTV, $200/mo cash flow, rent $2,600, 7.5% interest, 5% appreciation.

Your PITI is about $1,800 monthly, 5% appreciation comes out to $15,000 per year, a 3% rent increase comes out to $78 per month.

If you take out $10,000 as a cash-out refi, principal and interest are $69, cash-flow still increases by $9 and your LTV is still slightly improving (You took out 10k and had 15k of appreciation). Compared to $200x12=$2,400 in cash flow, that's peanuts compared.

To take out $100,000 annually, you need 10 of those properties. The cash-out is not a taxable event.

In my mind, this is a retirement strategy for a mature portfolio. Typically, your LTV at that point is below 50%, maybe down to 30% or less. If your LTV is very low, you could even increase leverage 1 or 2% per year - basically like a reverse mortgage.

Traditional retirement advice is to take 4% out of your 401k every year so your stock portfolio should last you indefinitely. This is the same idea, but in real estate: your portfolio leverage does not increase, your cash flow does not degrade, you just maintain them both at a stable level. 

Here is my point to new investors: equity really matters, keep that in mind when you buy property!

OP change my summary as needed.  To use this approach for $100,000 after tax lifestyle:
1.  LTV should be lower than say 55%.   To cover bank loan LTV of 65%.
2.  10 properties or equivalents at $300,000, 5% annual appreciation, PITI using 7.5%. $200 after tax monthly cashflow.  

Somewhere in the above area REI should be able say this will or won’t work generally speaking.  

Nice 2CV on the right! And then a Puch500? 

France or Italy?

@Henry Clark, happy to see I am not the only person to order red with fish :-)

Let me run with your numbers: $300,000 valuation, 65% LTV, $200/mo cash flow, rent $2,600, 7.5% interest, 5% appreciation.

Your PITI is about $1,800 monthly, 5% appreciation comes out to $15,000 per year, a 3% rent increase comes out to $78 per month.

If you take out $10,000 as a cash-out refi, principal and interest are $69, cash-flow still increases by $9 and your LTV is still slightly improving (You took out 10k and had 15k of appreciation). Compared to $200x12=$2,400 in cash flow, that's peanuts compared.

To take out $100,000 annually, you need 10 of those properties. The cash-out is not a taxable event.

In my mind, this is a retirement strategy for a mature portfolio. Typically, your LTV at that point is below 50%, maybe down to 30% or less. If your LTV is very low, you could even increase leverage 1 or 2% per year - basically like a reverse mortgage.

Traditional retirement advice is to take 4% out of your 401k every year so your stock portfolio should last you indefinitely. This is the same idea, but in real estate: your portfolio leverage does not increase, your cash flow does not degrade, you just maintain them both at a stable level. 

Here is my point to new investors: equity really matters, keep that in mind when you buy property!