> One other thing she could do, which is a
> track that I am on, is to buy the houses as
> you talked about. Then, using the equity
> that has built up through market
> appreciation and paying down the principle,
> sell the older homes to buy newer homes free
> and clear. Of course the older houses are
> being paid for by my tenants.

Pay down the principle or operate via interest only loans, is a question the individual needs to answer for themselves.

Certainly, paying down the principle will increase the speed of equity build up. But, paying interest only should give you cheaper repayments which should make it easier to get a positive cash flow from the property.

Also to consider is, the increase in equity from princple pay down could have gone towards a deposit for another property.

For example: A $90,000 loan at 6% interest only is $5,400 per year.

A $90,000 loan with principle and interest at 6% over 30 years is $6,475.08 - $1,075 more than an interest only loan.

That $1,000 could be the difference between a property with negative cash flow or positive cash flow.

If the rent matched the paydown figure ($6,475) then the interest only route would see you with $1,075 cash in hand. The paydown route would see that amount stored in equity.

With the cash-in-hand route, you could then use that $1,075 to generate more revenue - or add it towards a deposit to buy another property.

Something else to consider is

TAX

I understand what you want to do. Buy a house a year for say 15 years. After that time, you will have a lot of equity built up in the first houses you bought. You would then sell those houses and use the cashed out equity to pay off the loans of your newer houses.

Then ALL the rent from those houses is yours.

As INCOME it is taxable at the applicable rate.

With the interest only loan example... where you borrow the equity back out... you pay no tax because borrowed money is not taxable!

You won't get the benefit of deducting the new interest payments because it's not a loan used to buy the property. But the increased rents you are charging more than make up for it.

So in the first example... the $90,000 you borrow back out is tax free.

That $90,000 works out to be $7,500 per month.

By that stage, I calculate you will have about $9,000 a month coming in from positive cash flow from the rents, after interest and expenses. A total of $16,500 after expenses.

That $9,000 a month is taxable.

If 40% of it was tax, that leaves you with $5,400 a month.

Added to the $7,500 from the equity borrow and you get $12,900 after taxes and expenses.

If the same tax percentage was used based on earning $20,000 a month on properties you own, you get $12,000 after tax (does not include insurance and repairs).

The interest only route gives you money without tax - but you do still have a debt which is payed for by the tenants. It gives you lump sums plus monthly cash flow.

The "cash in the equity in the older houses to pay off the loans of the news houses" route gives you money you have to pay tax on - income tax. But you are out of debt.

Either method will work. One method should be easier to achieve positive cash flow on. Although both methods can have properties with positive cash flow. Because you are in no rush to buy, you can take your time to find the positive cash flow properties.

You really need to decide whether tax free income is better for you, in your situation, than owning properties free and clear but paying tax on the income.

I personally prefer positive cash flow with lump sums of tax free money while operating within interest only loans, than owning free and clear and having positive cash flow only, because it fits (suits) my investment strategy. - The lump sums can be used to buy more investments, to buy toys and vacations, used to live on, or a combination of all the above.

The key being to know WHAT PURPOSE your money will serve.

With regards to negative cash flow properties... many people are putting money into super-annuation, IRAs, 410 (k), etc. And these are either up (or down) depending on which way the stock market is going.

Using the interest only method or the cash out the equity method, would make a better use of such deposited money.

Some people put $100 a week into these "funds." That's $5,200 a year. And the interest earned is pathetic.

They'd be better off feeding an alligator (a negative geared, negative cash flow property) at a couple of hundred a month. At least they will make some money on equity build up. In a "fund" they could lose a large portion of their money if the market falls (how's that 401k looking now? how's your "super" looking now?).

Think about it... the interest only plan or the equity cash out plan... would have you able to "retire" after ten to fifteen years. And even sooner if the money you pay into your govt accredited retirement funds were instead placed into the real estate options.

Let your employer put their share into those funds. Put your money into one of these plans. You'll be better off.

NOTE: I am NOT a financial advisor. I did not learn this stuff at any accredited course. I do not hold any financial advice certification or belong to any financial advising certified body or association.

I did learn this through the school of hard knocks, though. (Boy, those alligators can eat you alive, financially.)

Michael Ross

P.S. Besides funding your retirement, these methods could also be used to fund college! Start them when your child is born and not only will you have enough money for college, you may even have enough to retire as well as fund college!

P.P.S. These methods, and the income they generate, is on top of other income sources (business or job).