All Forum Posts by: Kenneth Lim

Hi, I'm wondering which is better? Below are 2 examples of leverage asset VS solid asset. Please help me by contributing your most valuable comments. This topic has been running around in my head all day long. Thanks.

LEVERGE ASSET

Cost Of Property: $40,000
Downpayment: $8,000
Monthly Rental Revenues: $750
Monthly Debt Services & Other Expenses: $550
Monthly Cashflow: $200
Cash On Cash Return: 30%

Pros: Use only $8,000 and the monthly debt service will be paid with money collected from tenants. After debt is fully paid, the property cost me only $8,000 instead of $40,000.

Cons: If mortage rate goes up drastically, in the event tenant moves out, etc.. this could become a liability instead of an asset.
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SOLID ASSET

Cost Of Property: $40,000
Monthly Rental Revenues: $750
Other Expenses: $100
Monthly Cashflow: $650
Cash On Cash Return: 19.50%

Pros: No fear of tenants moving out, no foreclosure risk as I do not need the money collected from tenants to pay the bank.

Cons: $40,000 can be put into many leverage properties that are able to generate even more cashflow and owning more properties. Upon all debts fully paid by tenants, I own even more properties.
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If you're a savvy investor, which would you choose? Leverage or Solid?

In my own opinion, which I could be wrong, I'd prefer leverage assets as they generates more cashflow and I'm able to own more properties with just a fraction of the total cost of the property.

Of course there are downsides to consider as well. If cashflow every month from each property is positive but pathetically small, runs the risk of bankruptcy if mortgage rate turns against you when you own alot of pathetically small cashflow generating assets.

Originally posted by Jon Holdman:

Clearly you have the possibility of vacancy, which you're concerned about. If the current tenants move out, will you be able to replace them quickly?

I've collected the deposit from my 2 tenants and their contracts will end in about 8 months time. I told them they're required to tell me 2 months in advance if they're moving out or else their security deposit will be forfeited.

Originally posted by Jon Holdman:

I don't understand your numbers. Are you saying you're paying the landlord $750 a month in rent and then subleasing these shops for $1030 a month? And that you paid $4,300 up front?

What was the $4,300? Prepaid rent? Deposits? Something else? You mention you paid two months rent, but that would appear to be $750 a month or $1400. What's the other $2800?

Are there any other costs associated with these shops? Any maintenance, taxes, insurance, etc? Clearly you have the possibility of vacancy, which you're concerned about. If the current tenants move out, will you be able to replace them quickly? In my area, there are LOTS of empty storefronts in the local malls and strip centers, even in the busy ones. I've watched one building on the outlot of a new, busy WalMart set empty for years now.

The 78% ROI (cash on cash return, most RE investors would call that), assumes you're taking in $280 a month on your $4300 investment. If that's correct, then this is a nice investment. If some of that $4300 is a refundable security deposit or pre-paid rent, the investment will be even nicer when you wind it down.

Absolutely sorry about the confusion as I missed out some of the info. Yes I rented the 2 shops from the landlord and then rented the 2 shops out again.

I invested $4,300 in total on some renovation works, security deposit and all other miscellaneous stuff including paper works.

Every month I collect from my tenants $515 x 2 shops ($1,030)
Every month I pay landlord $375 x 2 shops ($750)
Every month my cashflow is $140 x 2 shops ($280)
Cash On Cash Return is about 78% per year

Part of the $4,300 I invested in consist of the deposit I paid to the landlord (Refundable Deposit) because I rented the 2 shops.

The $375 x 2 shops = $750 I paid to the landlord every month consists of all my operating expenses like maintenence, etc....

My net cashflow is $140 x 2 shops = $280

Please pardon me for causing any confusion. This is my very first investment..... I'm indeed a rookie and hopefully I don't make any stupid mistakes here that cause me my hard earned money....

Originally posted by Andy Jones:

Your question is not clear, what "game"? Are you asking for someone to check your math???

Sorry for the confusion. I meant is this consider a good investment? Any advise? Thanks.

Hi guys, I'd greatly appreciate some advise regarding the 2 investments that I have on hand right now. I'm still a rookie, not much of a experience and I'm still learning along the way. I've read and study alot about investing on my own. I learnt how to live below my salary, put away about 50% of what I make every month on my day job and invested the money I saved.

Here goes, I rented 2 shops in a shopping mall from the landlord and paid the landlord 2 months deposit, settled the paperworks and took the 2 contracts. Due to it's prime location, the 2 shops were rented out the very next day. Till now, both shops have been rented out for 4 months on a 1 year contract.

Amount Invested In 2 Shops: USD4,300
Monthly Revenues From 2 Shops: USD1,030
Monthly Operating Cost For 2 Shops: USD750
Monthly Cashflow From 2 Shops: USD280
R.O.I: 78%

Question: According to my calculations, which I could be wrong, if 2 shops are vacant for a month, it'd take about 4 months of my monthly cashflow (USD280 x 4 months) to pay the landlord (USD1,030). Is this the way how this game is being played?

In my senerio, I treated the landlord as my bank. I meant if I were to take a mortgage from the bank to buy a house for investment, I still got to make payment to the bank every month. I understand that end of the day, I do not own the properties except the cashflow that it generates out from my initial investment USD4,300.

Hi Wheatie, thanks for clearing my confusion. Now I totally understand the difference between Cash On Cash Return & R.O.I. As a matter on fact, I think using Cash On Cash Return is more accurate than just using R.O.I. Like you say, it's all your investment. :D

ok got it. Thanks Wheatie. Cash On Cash Return simply means the net cashflow a year divide by the total amount put down including closing cost.

Another question: I read in Rich Dad, Poor Dad regarding ROI. Please correct me if I am wrong. The calculations of ROI simply means Net Cashflow Per Year Divide By Downpayment Only. It doesn't include the closing cost.... just a little confuse regarding ROI.....please help....

Hi guys, as I am doing my research and studies, I am quite confuse regarding the difference between "Cash Flow" & "Cash On Cash Return". Please correct me if I am wrong. Thank you and below is an example.


Example 1) ROI: I bought a house which cost me $100,000. I loan 90% and down 10%. $10,000 downpayment. Net cash flow is $300 per month. $3,600 net cashflow per year.*** Return On Investment is $3,600/$10,000 = 36%


Example 2) Cash On Cash Return: I bought a house which cost me $100,000. I loan 90% and down 10%. $10,000 downpayment. Net cash flow is $300 per month. $3,600 net cashflow per year. Closing cost is $3,500.*** My Cash On Cash Return = $3,600/$13,500 = 26.67%


Q1) Can I say that ROI means your net cashflow divide by your downpayment only?

Q2) Can I say that cash on cash return is your net cashflow plus the closing cost then divide by downpayment?

What do you think of the real estate and cost of living here in San Jose? Don't you think it's crazy? :crying:

Ok Wheatie, thanks for all the info. :D