All Forum Posts by: MATT WARDEN

If you think about it, it really doesn't matter where the money is coming from. You have $1 and you can either invest it in a CD and get 6% with no risk, or use it to pay down your mortgage. The only question is which is more likely to give you better return on that $1. Given the numbers I've run, it doesn't seem like putting that $1 in the mortgage is ever the best idea.

Yes! Well, it's hard to say "never" and be right. But, again, the question is simple: does the 1/2 pt less interest rate and much higher mortgage payment allow you to earn more money over the expected lifetime of the property? My guess is the answer is no, and my guess is that any 15 year mortgage will make it damn near impossible to cash flow any rental property ever. It's hard enough to make it work on a 30 yr or 20 yr term.

Again, I fully realize how counter-intuitive this is to a newbie, because it was to me. The best way to think about it is that you are trying to maximize CASH FLOW and mortgage paydown is just a nice side effect that causes you to cash flow more.

One other point: the more money you pump into the property, the more money you risk losing if you ever default on the loan due to hardship expenses, high vacancy rates, or anything else that could come up to deplete your reserves. There was a recent story about an owner being forced by the city to make $150k in repairs. Can your reserves handle an unexpected $150k expense? Doubt it. If something crazy like that happens, you want to be losing as little money as possible.

Relatedly, it also means you want to minimize your down payment.

All I said was that you were taking advantage of the situation, which is the first part of win-win. Whether that is good for the seller or not wasn't what I was referring to.

So, you are planning on overpaying the mortgage payment, which is what I figured you were getting at. When I was first learning about REI, I thought the same thing... overpay to get the mortgage down so that you cash flow higher.

When you run the numbers, this turns out to be a poor strategy. You would be much better off making the minimum payment with none of your own money, and putting your own money in a low risk investment (like a mutual fund or CD).

I would suggest you do a little more analysis here to make sure you're putting your cash to the best use. The rest of your plan looks great.

Good luck.

Just to be clear, I cannot take credit for the valuation methods. I have a good understanding of statistics and I feel I understand the valuation methods well, but the methods have all come from the very intelligent people here on this forum with much, much more experience than I have in the rental business.

Interesting post. One point:

How do you plan on owning multiple properties outright in 5-10 years?

This is a dangerous path to go down. The answer is absolutely 100% NOT binary! The calculation is a conservative estimate of what you will earn on average per unit given infinite time. Anything less than infinite time will produce a variance (this is not a likelihood or a possibility but a mathematical certainty!).

You are not really calculating how much you will make, or even whether you will make anything, on a given property. What you are calculating is the chance that you will cash flow. If you do this calculation and determine that you will cash flow $100 per month, then that means the actual expenses can vary upwards up to +$100 over estimated expenses without getting you into trouble. You are calculating the amount of wiggle room you have before you will be digging out of your own pockets. Thus, it is an estimation of risk not reward!

This is an extremely important point to understand about statistics.

The closer you are to calculating a break-even amount, the more risk you are taking on. The more liberal calculation method you use (like the one quoted below), the more risk you are taking on.

Using this calculation method is riskier than using the 50% calculation method. In fact, the nice thing about numbers is that we can quantify the difference in risk. In this case, this calculation method is riskier by $1880, meaning it allows for $1880 less variance yearly before the owner starts to dig out of his or her own pocket. That is *a lot* less variance (over 22% of the expenses estimated by the 50% calculation), meaning your calculation is much more risky. Put in perspective, the variance is over $155 less per month.

Mortgage payments are about $100/mo for every $15k in principle. This means you bought a duplex that rents out at $1400/month for $105k.

Maybe!

You just need to make it worth the work and risk. That's all I'm saying. Remember, you could have put your down payment in a CD, earn 6% with (near) zero risk and zero work.

WRONG.

This would be true only if:

1) You never had a vacancy (won't happen)
2) You never have to evict anyone (won't happen)
3) You never have to pay to advertise your unit (unlikely to happen)
4) You never have repair or maintenance costs (won't happen)
5) You never have to defend a lawsuit (I wouldn't chance it)
6) You own all the property personally without a corp entity (I wouldn't do this)

I strongly suggest you shell out the couple dollars to buy MikeOH's book. In addition to an understanding of the numbers of rental properties, you will also be able to read a number of true tenant stories that MikeOH has had to deal with. A number of landlords have shared their own horror stories and odd legal situations that would have knocked them out of the rental property business if they had followed a purchase philosophy like you and other suggest above.

No one is trying to argue here. It's not about being right. These guys do not get anything out of this if they make you believe what they're saying. It's about keeping you from losing thousands and thousands of dollars.

Take a look at a recent thread (can't seem to find it) from someone who was highly skeptical about the 50% gross rents expense figure until he started operating his first property.

??? This is precisely why I said the value of earned income will not increase, which is why I said receiving income from rents would be a mitigation strategy.

Thanks,

It is a pretty natural thing. In fact, it is in large part what motivates people to have children. As people get older, they tend to want to pass on their life to others (this is likely part of our survival instinct being expressed as we begin to deal with our own inevitable mortality). In fact, many psychological models refer to the later stage in life as the generative stage.

So, it is pretty common. Even here on these forums and at your local REI, people exhibit this generativity. I was only commenting on how odd it was to see such an abundance of paid mentoring.

In each case here, you are not making money or generating any income. You are reducing an expense by being able to defer taxes or pay the expense with pre-tax dollars (or, perhaps, some of the above may be direct deduction from tax, but I doubt it). That's why I was confused by you listing this in ways to make money from rental properties. (The items I removed from the list and replaced with "..." I don't know enough about to comment on.)

Yes, but again you are not generating any money here. You are only mitigating a loss due to inflation, because your source of income is inflating at the same rate as everything else. Again, this is why I was confused when you listed this as a way to make money from rental properties.