Hey Jon....I've read many of your posts and I agree with some of what you say. Here's what I disagree with:
I think numbers/rules ONLY work some of the time. Focusing on a 50% rule or a 2% rule is NOT neccesarily bad, but it can miss a potentially vast and underlying long-term benefit.
I've been buying houses in the Raleigh area for the past 3-4 years. They range from $150,000-$200,000 in very good neighborhoods with good schools. I bought them for around 5%-25% below market. I put 20% down and got 30 year loans for about 4.5-5%. They each cash-flow around $300-$350/month NOT including maintenance, vacancies, legal fees, evictions. etc. So, basically they are breaking even.
Based on your thinking these will be terrible investments. And, I agree, for the first 10 years it might be a terrible investment. But, if you factor in the tax benefits, the increase in the amount of principal being paid down, and potential rent increases then the terrible investment to begin with can turn into a really good investment down the road.
For example, let's look at 1 of my properties. Paid $143,000 for it (Probably worth $155,000-160,000 now). Put down $28,600 plus $7k in closing costs/inspections and some small fix ups. So, I'm in for around $35,600. Since I have a full-time job have extra money in case I need it for an emergency.
Currently, around 3-4 years in, I'm probably making a small amount on cash flow. But, for these numbers, let's just say i'm breaking even on cash-flow. Not counting anything for appreciation, in "YEAR 1" I paid down the mortgage by $1,800. So, my cash on cash return is $1,800/$35,600 = 5%. Again, not including any appreciation, any increase in rents, or any tax savings, that is a 5% return on my money.
If we jump to "YEAR 10" then I'm paying down the mortgage by $2,900. That gives me a cash on cash return of $2,900/$35,600 = 8%. Again, NOT including tax benefits, possible rent increases or possible small price appreciation.
Obviously, that rate of return will increase in "YEAR 20" and "YEAR 30". Then, once the mortgage is paid off then the rate of return will skyrocket.
Of course, there are RISKS. Every investment has RISKS. Here are a few
1)The local area changes for the worse and the property loses value and rents go down. Nobody knows what will be in 5,10,20 years from now
2)The property gets out-dated and people don't want to rent there.
3)The economy crashes again (BUT, people still need a place to live.....so, I'm not too concerned by this as long as I didn't buy in a speculative bubble (like 2003-2007)
But, too offset these risks you have to have a solid plan. Here's my plan and why I think this plan is better than just looking at the cash on cash returns of the first few years:
1)looking big picture at Raleigh
a)Capital of State (means jobs)
b)3 main universities....UNC, NC ST, DUKE (means always an influx of young people. Many young people will stay in the area of their college if there are good jobs and a good place to start a family)
c)RTP (Research Triangle Park is a thriving technology hub in Raleigh offering good paying jobs in the technology industry.....as I think technology will play a bigger role in the future of our economy)
d)Population Growth. Raleigh is only among the 10 cities in population growth.
2)Keeping property updated and properly maintained.
So, I think, as long as rental properties aren't one's main source of income, then you can build solid wealth over long term even if the properties break-even on cash flow today.
I remember when GOOG bought YOUTUBE for $1.65 billion. All the analysts said that was a ridiculous price to pay based on how much money YOUTUBE was making (which, at the time, they were losing money). But, GOOG saw past those early numbers and looked at what the future of YOUTUBE might be in 5, 10, 20 years. So far, 8 years into that purchase, it is looking like a brilliant idea even though the numbers at the time of purchase didn't appear to be that way.
