Thanks for the very informative post.
These interest only loans, (I never heard of them b4) are available in the US????
I know if I were to lend anyone money (even secured) I would want interest and principal repaid)....
> Andras:

> Real estate cycles. There are cycles of
> slow growth and periods of fast growth .
> Interest rates are sometimes low and
> sometimes high.

> And everytime the cycle re-cycles, people
> are surprised for some reason. Go figure.

> To protect yourself from these cycles,
> consider these points:

> Do not buy if rent does not cover
> expenses (interest, principle, taxes,
> insurance, repairs).

> While you can feed an alligator (negative
> geared house which costs more than the
> income it generates), the moment You have a
> loss of income - or just a drop of income -
> you will be in financial trouble. The loan
> doesn't care about you or your
> circumstances. It just wants - demands - to
> be paid.

> The real estate investing highway is
> littered with the dreams of many investors
> who went the negative cash flow negative
> gearing route.

> Never sell . In the example of using
> interest only loans, the idea is to NEVER
> SELL. By holding onto your properties you
> will have them through a cycle.

> If you had bought in a slow growth year, you
> will hold them for ten years or so, right
> through the fast growth period until the
> growth slows again.

> The downturn will not be a concern for you
> because your expenses are covered because
> you only bought positive cash flow
> properties.

> Ten years ago, the real estate market peaked
> down here where I live. For the last ten or
> so years, prices have not grown much.
> Recently, they began to pick up again and
> many "investors" quickly
> off-loaded their properties.

> They held onto them while growth was slow
> and got rid of them before growth got fast.
> As soon as they saw a little growth, they
> were out. Of course, these people also
> bought at the peak prices all those years
> ago.

> If your property is in positve cash flow you
> won't care too much how the growth is. It
> will matter, but not as much as it matters
> to someone who has negative cash flow.

> Buy in growth areas where demand exceeds
> supply .

> I know of places in Australia where you can
> buy a nice three bed house built in 1890 on
> five acres for around $40,000A (about
> $23,000US).

> A five bed house just around the corner from
> where I live, which was built in the '70s,
> is for sale for $429,000A (about
> $250,000US). The block is smaller than one
> quarter acre. And the house is nothing
> special.

> Some people in this area pay $290 a week
> rent for a single bed apartment. Others pay
> $170 a week for the same thing. That's
> $730-$1,250 a month (about $430-$730 US) for
> a single bed apartment.

> And rents just keep going up. Sometimes by
> as much as 25% - There are instances where
> people paying $200 a week ($860 a month)
> have had their rents increased to $250 a
> week ($1080 a month). Considering the
> average Australian income is about $500A a
> week - despite the "official"
> averages which no-one seems to earn - this
> rent is about half of what a normal person
> earns. But they pay it, because they WANT to
> live here. And if they don't, there is
> always someone immediately available to move
> in.

> Many investors report HUGE numbers of people
> wanting to rent their properties. It is not
> uncommon for 50+ people to respond to a
> single "for rent" ad.

> This is the residential market where I live.

> The commercial market is vastly different. I
> know of modern buildings in prime positions
> which have 64% vacancy! And while this goes
> on, more office complexes rise up. It's
> investing madness.

> Know your area . Where I live (The Gold
> Coast, Australia), many properties are sold
> to "investors" who travel up here
> from Sydney. Compared to Sydney, the prices
> here are cheap. But those investors don't
> really know if they are buying in a good
> area, or in a bad area.

> Recently, our local authorities changed the
> name of one street because it had a bad
> "rep." The locals know the area
> and still refer to the street by its old
> name. So it made no difference to them.
> Those who travel up here don't know if the
> street is a good one or a bad one as they
> are only here for a short time. So why the
> street name was really changed is a mystery.

> There are places here where you can buy a 2
> bed apartment for about $70,000A (about
> $41,000US). The area where these cheap
> places are is known locally as "The
> Ghetto." That's not its real name...
> that's its nick name.

> Investors from out of the area are the usual
> buyers of these places because they don't
> know the area. Though they very quickly
> learn once the repair bills start arriving
> ;o)

> Don't buy in "bad" areas . A bad
> area is not necessarily a slum area. It's an
> area where vacancy rates are high. Even in a
> growth city where general demand exceeds
> supply you will find areas of high vacancy.
> These areas are often privately owned
> housing which borders government owned
> housing estates - no-one wants to live next
> door to the habitually unemployed, single
> mothers popping out kid after kid, and the
> other welfare society crowd no matter how
> cheap the rent.

> What you end up with is borderline welfare
> people renting these places out for similar
> prices to what they would pay for government
> housing. Vacancy rates are high.

> I know of one place about half an hour drive
> away where you can buy 2 bed apartments for
> about $45,000A (about $26,000US) and which
> rent is around $65 a week (about $280A,
> $165US a month). Even at such cheap rent,
> vacancy can be as high as 50% - 50% of the
> time the property will be without a tenant.
> And landlords try all kinds of incentives to
> attract tenants - one month free rent, for
> example.

> You can only know this kind of information
> if you know your area, or study the area.

> Be patient when buying . If you are buying
> one property a year there is no rush to
> acquire. You have ample time to do your
> research. To run the numbers. To make sure
> you are buying a property for positive cash
> flow and that that property is in a good
> growth area where demand exceeds supply.

> If the numbers do not make sense do not buy.

> Know your investment strategy BEFORE you
> buy . Will you be buying and holding - thus
> giving you great positive cash flow in the
> future as well as the option of borrowing
> back the equity while the rents cover the
> loan? Will you be trying to buy and sell
> repeatedly and profit that way? What do you
> intend to do with the money the investment
> makes you?

> Will the investment income be used solely to
> live on? To buy more investments? Toys?
> Vacations? Other?

> Terry outlined his basic strategy - buy and
> hold over a number of years. Then at some
> point in the future, sell the older houses
> and use the cashed out equity to pay off the
> loans of the newer houses. Thus being free
> of debt the rent is all yours to keep (bar
> insurance, taxes and repairs). I am certain
> he has a strategy for how that money, once
> free of its debt obligations, will be used
> by him.

> The property acquisition method I outlined
> is different. And use of the borrowed equity
> is something I also have plans for - I know
> what it will be spent on.

> Do you want your real estate income to
> replace your job income? How soon do you
> want this to happen?

> Many people are taken in with "no money
> needed" type strategies. Some of the
> techniques are valid. Others aren't. And
> many people are interested in immediate and
> high returns - the lure of flipping a
> property within 30 days for a $15,000 profit
> and no money needed to do the deal.

> Some people have the wherewithal to do these
> "deals." Others attracted to them
> are desperate and are looking for a magic
> bean to fix all their problems.

> No-one wants to be told, "Here's how to
> do it but it will take ten years."
> Sure, they'll read it, but it doesn't appear
> to be quick enough for them. And yet, the
> slow and steady method is also the least
> "risky" and causes the least
> "stress".

> Keep it simple . The more complex
> something is, the greater the chance you
> will not do it.

> Doing a "Subject To" deal with
> "Lease Options" and tenant buyers
> thrown in (which will then be taken through
> a refinancing process later), all covered
> within a Land Trust with a Company as a
> Trustee, and using "hard money" to
> finance any "rehab" work you need
> done, is about as complex as you can get.

> Ten percent deposit with an interest only
> loan and renters is about as simple as they
> come.

> Start small . Before you get hold of a
> six-plex make sure you have first hand
> experience. Get hold of one property first.
> Not a large expensive one. Just a middle of
> the road property the average Joe would live
> in.

> It ain't flash. It ain't pretty. It ain't
> gonna impress anyone. But it sure does work.

> After your first "small" deal, do
> another one. A little bigger if you want to,
> but not necessary.

> You are not in competition with anyone. And
> you do not have to impress anyone. You will
> most likely never reach the level Donald
> Trump has reached. Or the levels of all the
> full-time investors you read about who do
> 100 deals a year. You might. But you most
> probably will not.

> But this comes down to your strategy - slow,
> steady and plain with little risk, or
> high-flying high-risk fast and complex
> deals.

> Do not invest in sole industry towns . A
> town which survives and exists because of
> one industry or big business fits this.
> These towns are dangerous to the real estate
> investor. What happens if the company folds
> or moves, or if the market for the company's
> products declines?

> You end up with over-supply and
> under-demand.

> The logging town where the greenies have
> made the authorities cease all logging. The
> mining town where the resource has all been
> mined. The town which supports the purple
> bippy dippy factory is doomed once people
> learn that purple bippy dippies cause cancer
> and stop buying. The town that only survives
> due to tourism.

> Be free of personal debt before you
> start investing . Have clear credit cards
> and no personal loans for cars, boats,
> furniture, or other items that go down in
> value.

> Being free of personal debt first might seem
> like a hassle. But the process you go
> through to achieve the "debt free"
> status teaches you skills in money
> management. It also shows lenders that you
> can handle debt and money.

> Looking to real estate as a financial savior
> is a mistake many people make. You can see
> them at the court house every day filing for
> bankruptcy.

> Get control of your personal finances FIRST.
> BEFORE investing. It will save a lot of
> grief later on when you have a financial
> hiccup - yes, that's "when" you
> have a financial hiccup and not
> "if", because you will have some
> kind of financial hiccup for a plethora of
> reasons.

> For instance: If you have one property which
> was covering costs and your tenant has to
> move and you cannot find a new tenant for
> one month, where will you find the money to
> pay the loan, run the "for lease"
> ads, do any repairs needed, and still pay
> your car loan, credit card bill, boat loan,
> and your furniture loan?

> Take out insurance . There are insurance
> products available for all kinds of things,
> including loss of rent income in investment
> properties. If they are reasonably priced,
> consider getting them on your property. If
> the premium is equal to one month's rent,
> then put the money aside yourself without
> taking out a policy.
> These are some of the things to consider
> and make sure you have answers to before
> investing in real estate. Cover these, and
> it virtually won't matter what the market
> does. You won't be adversely effected.

> Hope this helps.

> Michael Ross