Quote from @Sean McMannis:
Quote from @Joe Villeneuve:
Quote from @Matthew Irish-Jones:
@Joe Villeneuve why is the value of
Your cost to buy going down?
$100k property. 20% ($20k) DP = $20k in equity.
Equity represents your money locked up in jail, and represents your cost to buy the property from the equity standpoint. When you initially buy the property, at 20% down, your cost to buy the property is $20k and what you are buying is $20k in equity, but the value of the property is 5 times that = $100k. When the property increases in value to $120k, your equity grows equally to $40k. The property value of $120k, that equity of $40k is now only 3 to 1. $140k to $40k. IF the property is sold, and that equity is recovered as cash, that cash at 20% DP now buys a PV of $200k. The equity went up $20k, but you lost $80k in potential PV.
Hi Joe. I've been running this concept through my head all weekend. In your example, $120K to $40K is a 3 to 1 equity to value ratio, correct? If so, is that a metric that you watch? If your equity to value ration drops below 5 to 1, does that mean it's time to either cash out or sell to trade up?
Obviously it depends on your goals, but is that the general idea?
Thanks!
Yes, more or less. What I look for is the property reaching two specific numbers ($$$). Once both are achieved, it's time to sell because I'm losing money exponentially then.
1 - When my cost (cash in...which should be only the DP) is recovered from the accumulated cash flow. This means I got all my cost back and it's profit from this point forward...from cash flow.
2 - When the appreciated equity gain, equals the paid for equity (DP). When a $100k property has $20k DP, and appreciates to $120k.
At this point, My equity is losing value, and I'm losing cash flow potential at the same time...and the loses are exponential. The value of my equity is what it buys me...which is the PV. When the property in this example hit $120k, and the equity reached $40k, that equity was buying me only $120k of PV. Sold, that same equity (at 20% DP) now buys me a PV of $200k...and since I'm buying two $100k properties, just like the original, the cash flow increases.
From this point forward, if both scenarios appreciate at 5% the next year, the unsold $120k property gains only $6k in PV, while the $200k property gains $10k. Repeat these steps when the criteria is achieved on these two new properties, and when these two properties double the original paid for equity ($20k) with a new PV of $240k..while the original property's appreciated value is now $146k, selling the new two properties totalling $240k, buys 4 of the original $100k properties...and the increased CF follows.
A 5% appreciation on the first property now increases the PV of that one property to ...well you get the idea.
Sitting on equity, loses money exponentially. The equity is your asset, and when it sits on its A$$, doing nothing other than feeding on the appreciation alone, you are losing the money that could be made if that same equity was out making you money by actually working for you.
Goals don't matter. Whatever your goals are, the math is still the math, and moving the equity forward speeds up your move towards that goal.
