How To Become A Millionaire In 10 Years (or less)

In the latest issue of The Entrepreneur's Hotsheet we linked to a post which contained a story about a woman who became a millionaire in 7 years. See the story here: http://www.creonline.com/wwwboard/messages/49935.html

While the story revealed what she did - in general - it doesn't tell HOW she did it. It does not reveal the Investment Math behind it.

This is my take on what she did...

She bought one property (home, apartment, condo, townhouse, etc.) per year using

Interest Only Loans!

Bought correctly, the rent should be enough to cover interest, insurance, taxes and repairs.

Assuming it covers these things exactly, what then happens is

the properties go up in value.

The difference between what she owes and the current value of the property is its Equity. And that Equity is hers.

After ten years (or seven in her case), her first property should have doubled in value. If she paid $100,000 for it, it should now be worth $200,000. But she only owes $100,000 on it. So $100,000 would belong to her.

Her second property (the one she bought in year two) would nearly be doubled and would certainly be doubled the following year.

Adding up the value of all her properties, you will come up with over one million dollars of worth. Possibly even two million. Of that, her share would be quite substantial - $700,000 or more, depending on how fast the property is increasing in value. (At 10% increase per year, the value will double in about seven years. At 7% per year increase, the property will double in about ten years. At 5% increase, the property will double in about fifteen years.)

For example: Here is the value and equity of a property bought for $100,000 with $10,000 deposit, over a fifteen year period.

Year 1: $105,000 with $15,000 equity
Year 2: $110,250 with $20,250 equity
Year 3: $115,762 with $25,762 equity
Year 4: $121,550 with $31,550 equity
Year 5: $127,628 with $37,628 equity
Year 6: $134,009 with $44,009 equity
Year 7: $140,710 with $50,710 equity
Year 8: $147,745 with $57,745 equity
Year 9: $155,132 with $65,132 equity
Year 10: $162,889 with $72,889 equity
Year 11: $171,033 with $81,003 equity
Year 12: $179,585 with $89,585 equity
Year 13: $188,564 with $98,564 equity
Year 14: $197,993 with $107,993 equity
Year 15: $207,892 with $117,892 equity

Note that the proprty is worth $207,000. It has $117,892 in equity and the borrowed $90,000 is still owed because it was an interest only loan.

Note also that during this time period, while the repayments would have stayed relatively the same the rent has been increased. So if the property was in a slight negative cash flow in the beginning, it probably became a positive cash flow property after two years because of rent increases.

Note also that if the porperty was turned into a Share Accomodation type of property, the overall rent collected will be higher. For example: a 2 bed apartment might rent out for $480 per month ($120 per week), but you could justify $400 per month ($100 per week) per person when renting it individually in a "share" situation.

Back to the example property...

After 15 years, the property value has more than doubled and it is producing positive cash flow.

IF one such property had been bought per year, then each property would be at a different stage of the growth table. The property bought in year 2 would have the value matching the year 14 example.

Anyway. After 15 years, you have a whole bunch of property. Some will be in such a state of positive cash flow - the properties near double their value - that in theory you can now RETIRE.

To retire, you Borrow the equity back out of the oldest property on an interest only loan. The property's existing rent should more than cover that "loan."

You use this money to live on.

The following year, you borrow the money out of house number two - as it has now doubled in value and its rent will also more than cover the borrowing.

The following year, it's house number three's turn.

Each time, the loan is interest only. And the property's rent should more than cover it.

By the time you have gone through your collection of properties, the first property should have doubled in value again.

In our example, that means it should be worth about $432,379. Of that, you have the original $90,000 loan and the $117,892 equity you took out - if you could only get 80% of that equity you would have gotten $94,313 and may have elected for $90,000 because it's even. Assuming you only took $90,000 out, your total borrowing is now $180,000 with $252,379 equity! That's over one quarter of a million dollars in equity. Waiting for you to borrow out again, if you want to.

Note that while you do have the option of borrowing the equity back out of each of your properties after they have doubled in price, many will be throwing off substantial positive cashflow because of the increase in rent over the years.

Note also that while this sounds simple - and does not require any "creative" financing - that properties increase in value at different rates in different part of the country and in different parts of a city. And you will need to pick your properties wisely. You are only buying one property per year so there is No Rush. Also, finding your property will require research on your part. And cash flow analysis. You need to be able to figure the income the property will make you (after all expenses - interest, taxes, insurance, repairs).

Well, that's how I believe the woman in the story became a millionaire and how you can use the same method to also become a millionaire and to retire, if you want.

Final note: If debt scares you, this method is not for you. On the other hand, if you can handle the debt from an emotional point of view, then this method might be right up your alley.

Michael Ross

P.S. Hopefuly Robert Campbell will jump in here and share some of his "timing the real estate market" knowledge.


Use these ideas to get the money you might need to start the above "plan"

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.

So, if I have 20 houses that are older, but I bought right and have used as rentals and let them "grow' in equity, when all is said and done I want to have them pay off 10-15 newer houses.

This will be after I 1031 then into the newer houses to defer the taxes. I am not real clear on the whole 1031 thing, but I am sure Robert is.

Then if I rent them and they are free and clear...

With todays interest rates if you can put a 15 year note on a house and pay 7% int. you can rent them out for right at or a little more than the underlying payment.

My overall goal is to have 20 houses free and clear, pretty houses, that bring in at least $1,000 a month.

Just some thoughts...

Terry (Houston)

> In the latest issue of The Entrepreneur's
> Hotsheet we linked to a post which
> contained a story about a woman who became a
> millionaire in 7 years. See the story here:
> http://www.creonline.com/wwwboard/messages/49935.html
> While the story revealed what she did - in
> general - it doesn't tell HOW she did it. It
> does not reveal the Investment Math behind
> it.

> This is my take on what she did...

> She bought one property (home, apartment,
> condo, townhouse, etc.) per year using

> Interest Only Loans! Bought correctly,
> the rent should be enough to cover interest,
> insurance, taxes and repairs.

> Assuming it covers these things exactly,
> what then happens is

> the properties go up in value. The
> difference between what she owes and the
> current value of the property is its Equity
> . And that Equity is hers.

> After ten years (or seven in her case), her
> first property should have doubled in value.
> If she paid $100,000 for it, it should now
> be worth $200,000. But she only owes
> $100,000 on it. So $100,000 would belong to
> her.

> Her second property (the one she bought in
> year two) would nearly be doubled and would
> certainly be doubled the following year.

> Adding up the value of all her properties,
> you will come up with over one million
> dollars of worth. Possibly even two million.
> Of that, her share would be quite
> substantial - $700,000 or more, depending on
> how fast the property is increasing in
> value. (At 10% increase per year, the value
> will double in about seven years. At 7% per
> year increase, the property will double in
> about ten years. At 5% increase, the
> property will double in about fifteen
> years.)

> For example: Here is the value and equity of
> a property bought for $100,000 with $10,000
> deposit, over a fifteen year period.

> Year 1: $105,000 with $15,000 equity
> Year 2: $110,250 with $20,250 equity
> Year 3: $115,762 with $25,762 equity
> Year 4: $121,550 with $31,550 equity
> Year 5: $127,628 with $37,628 equity
> Year 6: $134,009 with $44,009 equity
> Year 7: $140,710 with $50,710 equity
> Year 8: $147,745 with $57,745 equity
> Year 9: $155,132 with $65,132 equity
> Year 10: $162,889 with $72,889 equity
> Year 11: $171,033 with $81,003 equity
> Year 12: $179,585 with $89,585 equity
> Year 13: $188,564 with $98,564 equity
> Year 14: $197,993 with $107,993 equity
> Year 15: $207,892 with $117,892 equity

> Note that the proprty is worth $207,000.
> It has $117,892 in equity and the borrowed
> $90,000 is still owed because it was an
> interest only loan.

> Note also that during this time period,
> while the repayments would have stayed
> relatively the same the rent has been
> increased. So if the property was in a
> slight negative cash flow in the beginning,
> it probably became a positive cash flow
> property after two years because of rent
> increases.

> Note also that if the porperty was turned
> into a Share Accomodation type of property,
> the overall rent collected will be higher.
> For example: a 2 bed apartment might rent
> out for $480 per month ($120 per week), but
> you could justify $400 per month ($100 per
> week) per person when renting it
> individually in a "share"
> situation.

> Back to the example property...

> After 15 years, the property value has more
> than doubled and it is producing positive
> cash flow.

> IF one such property had been bought per
> year, then each property would be at a
> different stage of the growth table. The
> property bought in year 2 would have the
> value matching the year 14 example.

> Anyway. After 15 years, you have a whole
> bunch of property. Some will be in such a
> state of positive cash flow - the properties
> near double their value - that in theory you
> can now RETIRE.

> To retire, you Borrow the equity back out of
> the oldest property on an interest only
> loan. The property's existing rent should
> more than cover that "loan."

> You use this money to live on.

> The following year, you borrow the money out
> of house number two - as it has now doubled
> in value and its rent will also more than
> cover the borrowing.

> The following year, it's house number
> three's turn.

> Each time, the loan is interest only. And
> the property's rent should more than cover
> it.

> By the time you have gone through your
> collection of properties, the first property
> should have doubled in value again.

> In our example, that means it should be
> worth about $432,379. Of that, you have the
> original $90,000 loan and the $117,892
> equity you took out - if you could only get
> 80% of that equity you would have gotten
> $94,313 and may have elected for $90,000
> because it's even. Assuming you only took
> $90,000 out, your total borrowing is now
> $180,000 with $252,379 equity! That's over
> one quarter of a million dollars in equity.
> Waiting for you to borrow out again, if you
> want to.

> Note that while you do have the option of
> borrowing the equity back out of each of
> your properties after they have doubled in
> price, many will be throwing off substantial
> positive cashflow because of the increase in
> rent over the years.

> Note also that while this sounds simple -
> and does not require any
> "creative" financing - that
> properties increase in value at different
> rates in different part of the country and
> in different parts of a city. And you will
> need to pick your properties wisely. You are
> only buying one property per year so there
> is No Rush. Also, finding your property will
> require research on your part. And cash flow
> analysis. You need to be able to figure the
> income the property will make you (after all
> expenses - interest, taxes, insurance,
> repairs).

> Well, that's how I believe the woman in the
> story became a millionaire and how you can
> use the same method to also become a
> millionaire and to retire, if you want.

> Final note: If debt scares you, this method
> is not for you. On the other hand, if you
> can handle the debt from an emotional point
> of view, then this method might be right up
> your alley.

> Michael Ross

> P.S. Hopefuly Robert Campbell will jump in
> here and share some of his "timing the
> real estate market" knowledge.

> 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).

Either way will have rents coming in so they will have a taxable event. And if a home is paid off then you can still get a loan off of it. That you will not pay taxes on that.

I should have cleared up that I am not the one doing this, a great corporation I know is doing it. It is super and I seem to be able to negotiate a great employees benefits package out of them that takes away a lot of their profits.

To the Roth IRA, you can do better that that by using a Self Directed IRA and buy an Option on a property. There is then no real limit to how much Profit can be made in your IRA or your Kids Educational Ira. Even if you started when they are in their later years, they can get it built up quick.

You have given me pause to reevaluate some of my thinking though and I appreciate that.

Terry

I am not using my own credit to buy these houses. I only buy when the people are facing foreclosure or relocation or something along those lines.

I use THEIR Credit and Existing Loans. I just step in and take over. Now, with todays interest rates it does make sense to lower the existing rates by refinancing, but I am not usually in a house that long to make it worth while.

So my option of paying just interest is not usually an option :-)

Terry

This is an interesting thread. I am getting increasingly interested in RE - however I do belive in trends,and the fact the RE (specially in CA - where I live is in a bubble....
so bubbles pop....right?
> In the latest issue of The Entrepreneur's
> Hotsheet we linked to a post which
> contained a story about a woman who became a
> millionaire in 7 years. See the story here:
> http://www.creonline.com/wwwboard/messages/49935.html
> While the story revealed what she did - in
> general - it doesn't tell HOW she did it. It
> does not reveal the Investment Math behind
> it.

> This is my take on what she did...

> She bought one property (home, apartment,
> condo, townhouse, etc.) per year using

> Interest Only Loans! Bought correctly,
> the rent should be enough to cover interest,
> insurance, taxes and repairs.

> Assuming it covers these things exactly,
> what then happens is

> the properties go up in value. The
> difference between what she owes and the
> current value of the property is its Equity
> . And that Equity is hers.

> After ten years (or seven in her case), her
> first property should have doubled in value.
> If she paid $100,000 for it, it should now
> be worth $200,000. But she only owes
> $100,000 on it. So $100,000 would belong to
> her.

> Her second property (the one she bought in
> year two) would nearly be doubled and would
> certainly be doubled the following year.

> Adding up the value of all her properties,
> you will come up with over one million
> dollars of worth. Possibly even two million.
> Of that, her share would be quite
> substantial - $700,000 or more, depending on
> how fast the property is increasing in
> value. (At 10% increase per year, the value
> will double in about seven years. At 7% per
> year increase, the property will double in
> about ten years. At 5% increase, the
> property will double in about fifteen
> years.)

> For example: Here is the value and equity of
> a property bought for $100,000 with $10,000
> deposit, over a fifteen year period.

> Year 1: $105,000 with $15,000 equity
> Year 2: $110,250 with $20,250 equity
> Year 3: $115,762 with $25,762 equity
> Year 4: $121,550 with $31,550 equity
> Year 5: $127,628 with $37,628 equity
> Year 6: $134,009 with $44,009 equity
> Year 7: $140,710 with $50,710 equity
> Year 8: $147,745 with $57,745 equity
> Year 9: $155,132 with $65,132 equity
> Year 10: $162,889 with $72,889 equity
> Year 11: $171,033 with $81,003 equity
> Year 12: $179,585 with $89,585 equity
> Year 13: $188,564 with $98,564 equity
> Year 14: $197,993 with $107,993 equity
> Year 15: $207,892 with $117,892 equity

> Note that the proprty is worth $207,000.
> It has $117,892 in equity and the borrowed
> $90,000 is still owed because it was an
> interest only loan.

> Note also that during this time period,
> while the repayments would have stayed
> relatively the same the rent has been
> increased. So if the property was in a
> slight negative cash flow in the beginning,
> it probably became a positive cash flow
> property after two years because of rent
> increases.

> Note also that if the porperty was turned
> into a Share Accomodation type of property,
> the overall rent collected will be higher.
> For example: a 2 bed apartment might rent
> out for $480 per month ($120 per week), but
> you could justify $400 per month ($100 per
> week) per person when renting it
> individually in a "share"
> situation.

> Back to the example property...

> After 15 years, the property value has more
> than doubled and it is producing positive
> cash flow.

> IF one such property had been bought per
> year, then each property would be at a
> different stage of the growth table. The
> property bought in year 2 would have the
> value matching the year 14 example.

> Anyway. After 15 years, you have a whole
> bunch of property. Some will be in such a
> state of positive cash flow - the properties
> near double their value - that in theory you
> can now RETIRE.

> To retire, you Borrow the equity back out of
> the oldest property on an interest only
> loan. The property's existing rent should
> more than cover that "loan."

> You use this money to live on.

> The following year, you borrow the money out
> of house number two - as it has now doubled
> in value and its rent will also more than
> cover the borrowing.

> The following year, it's house number
> three's turn.

> Each time, the loan is interest only. And
> the property's rent should more than cover
> it.

> By the time you have gone through your
> collection of properties, the first property
> should have doubled in value again.

> In our example, that means it should be
> worth about $432,379. Of that, you have the
> original $90,000 loan and the $117,892
> equity you took out - if you could only get
> 80% of that equity you would have gotten
> $94,313 and may have elected for $90,000
> because it's even. Assuming you only took
> $90,000 out, your total borrowing is now
> $180,000 with $252,379 equity! That's over
> one quarter of a million dollars in equity.
> Waiting for you to borrow out again, if you
> want to.

> Note that while you do have the option of
> borrowing the equity back out of each of
> your properties after they have doubled in
> price, many will be throwing off substantial
> positive cashflow because of the increase in
> rent over the years.

> Note also that while this sounds simple -
> and does not require any
> "creative" financing - that
> properties increase in value at different
> rates in different part of the country and
> in different parts of a city. And you will
> need to pick your properties wisely. You are
> only buying one property per year so there
> is No Rush. Also, finding your property will
> require research on your part. And cash flow
> analysis. You need to be able to figure the
> income the property will make you (after all
> expenses - interest, taxes, insurance,
> repairs).

> Well, that's how I believe the woman in the
> story became a millionaire and how you can
> use the same method to also become a
> millionaire and to retire, if you want.

> Final note: If debt scares you, this method
> is not for you. On the other hand, if you
> can handle the debt from an emotional point
> of view, then this method might be right up
> your alley.

> Michael Ross

> P.S. Hopefuly Robert Campbell will jump in
> here and share some of his "timing the
> real estate market" knowledge.




learn about trends

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


The business idea you have been looking for could be here.

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

Brain... hurts! Must... stop reading... or head will... POP!!

Seriously, though. I've always been pretty good with numbers (left-brained and all that). But, for some reason, this RE investing stuff always makes my eyes glaze over after awhile.

Anyone else getting a brainache from trying to keep up with this thread, or is it just me? 8^]

(I'm not saying it should stop. It's a great topic and I'm sure a lot of people will benefit from it. Michael and Terry are providing some very useful, sensible information.)

Regards,
Chris

Interest Only loans are a standard loan. Often, these kinds of loans are used in the construction industry - interest is paid on the money borrowed to build and the principle paid back upon sale of the building.

You will not find an Interest Only loan offered on a thirty year deal like normal home loans. They are usually shorter term with fixed periods - 1, 2, 3, 4, 5, 7 or 10 years.

Speak to your financial institution about them. They don't advertise them.

And realize: financial instititions do NOT want you to pay back the money and be debt free. They want you to remain in debt forever, because they make their money on the interest you pay and any "account keeping fees" they charge.

A $100,000 loan at 7% over thirty years will see a total of $239,508.70 paid back with $139,508.70 of that being interest.

If you actually paid it all back, the bank would not have an income source any more. To keep you as their income source - and thus in debt - they offer to refinance and consolidate all your loans, to re-draw your loan and access your equity while you pay it, home equity loans, etc. You are encouraged to go into more personal debt on your house by getting tax breaks to do so - to get bigger and bigger houses with bigger and bigger mortgages.

And while You might not lend someone money under those conditions (interest only secured with property), the banks do. They have to... it's how they make money - by lending it. And besides... it's not their money they are lending... it's someone else's - all the people who have savings accounts and all the money they get back as loan repayments.

And this second part... all the money they get back as repayments... means that for every dollar the bank has, they can lend it back out at least ten times. So $100,000 deposited is worth at least $1,000,000 in loans to them! Sometimes they can lend the same money out up to twenty times!

Banks and other lending bodies want you to stay in debt because you are their income source. They just want tell you, though.

Michael Ross