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  #19  
Old July 16, 2007, 01:31 PM
Duane Adolph
 
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Default More like Bright and Exciting....

Michael,

THANKS for sharing the DETAILS of your mindset with the an example.

I particularly got a lot from the Contrast that you see in your method vs what you see other real estate investors doing.

It also cleared up that question in regard to the "Foreigners Secret to Wealth" I had alluded to in my previous post. Thank you.

I actually found your method "Bright and Exciting," because it demonstrates what can be done in real estate or any investing while minimizing your financial risk.

Lessons Learned

1. Be Conscious of your numbers (KEEP SCORE)
2. Buy smarter
3. Use debt wisely ie. borrow less than you need

Thanks Michael I will add this one to my BRILLIANT POSTS file folder :->



Quote:
Originally Posted by MichaelRoss View Post
Duane,

Thanks for your sharing your discoveries.



I don't think it's counter to that discussion. That discussion is still as valid as it ever was. As is the discussion about Socializing being Bad for your Wealth. You are far more likely to Get Ahead if you are Debt Free and don't spend your money on Living It Up and Being Seen or General Unproductive Socializing.

My Debt is an Investment Debt. A Debt that makes me more money (rent and value increase) than it costs me (interest and maintenance). A Going Forward debt. As opposed to a Going Backwards debt as would be the case with loans for a Big Screen TV, Flashy Car, HiFi, Furniture and so on. And as would be the case with putting things onto the Plastic.

But even with an Investment Debt you MUST Know Your Numbers.

Too many people get the Real Estate Bug and invest like this...

1. Buy where property has Just gone up to top dollar.
2. Borrow the Maximum they are allowed to borrow.
3. Use All their deposit in doing so.

As such, they are a few years away from any Value Growth and the rent gets them nowhere near close to even just interest payments. And any slight interest rate increase sees them in Massive Financial Trouble. (They'll struggle for a few years then kiss off the property and RE as a bad joke, not realizing it was just their approach that was wrong.)

E.g. Guy buys a place for $350k at 7% interest with 10% deposit. Borrows $315k. Interest alone is $22,050. Rents it for $240 per week or $12,480 for the year - a shortfall of $9,570 per year ($184 per week).

If interest goes to 8% it will cost him an Additional $60 per week $3,150 a year. A total weekly outgoing of $244 which Must come out of his pocket. Anything that needs fixing is gonna really put the squeeze on him if the extra $60 hasn't already.

His basic return on Sales price is rent/price x 100... $12,480/$350,000 x 100 = 3.56% and he's hurting bad.

My Approach is different...

1: Buy in a Future Growth Area (rents will be higher compared to prices)
2: Do not borrow to your maximum capabilities - borrow less than you can afford.
3: Do not use All your deposit - keep some in reserve in case of little emergencies and have that Reserve fund invested, even in a term deposit, so you are making some money on it too.

With the same $35k deposit at the ready and the same borrowing power, a Future Growth area might have a place for $180,000 which rents for $180 per week ($9,360 per year) a return of 5.2% (Any weekly rent which matches the asking prices in thousands - 180 thou, 180 week - gives 5.2%. Weekly rent Above the asking price in thousands gives greater than 5.2%, less gives less than 5.2%. It's handy to know this.)

With a 10% deposit the borrowing is $162,000. At 7% interest the interest is $11,340. Rent brings $9,360 for a shortfall of only $38 per week. An amount my $17,000 in left over deposit can easily handle for 447 weeks (8+ years).

If I'd used $25k deposit I borrow $155k and have interest of $10,850 a shortfall of $1,490 ($28 per week). My left over $10k can pay that for 357 weeks (6+ years). (If I used all my deposit my shortfall is only $15 per week.)

If, with the first number, I put my $17k in a term deposit at 4%, I'll get $680 a year. I can use that to offset my shortfall by $13 a week. Meaning I just need to find $25 a week.

The thing is, I was probably Saving more than $38 a week anyway to acquire my $35k deposit. So even without my Reserve and any interest I get from it I am capable of holding onto the property no matter what. And can acquire two such properties.

(BTW, on this property, interest would have to go to 19% before I faced the same $184 a week shortfall as the first property. If I could afford it before, I'd still be able to afford it now. With 19% interest on the first property I'd be short by $47,370 a year and would most likely have declared bankruptcy by then as there would be few people around capable of affording to buy my problem from me.)

Also, I have a better chance of the rent increasing and covering any shortfall in the next couple of years when I buy this way. (The above does not include any Tax Refund I get from Interest paid or Depreciation of internal items. They are nice but I need to financially survive until that refund comes in.)

I haven't done anything Creative in the examples. All I did was Buy Smarter.

And the foreigner who is unable to get into debt, will likely think this way too if/when they are able to borrow to invest (or acquire their own home). If for no other reason than that's how they've been forced to live up until that moment - making sure they always had money left over.

By going out to the max borrowing power and using all their deposit, they are skating on thin ice and just one interest rate rise away from disaster. (Most people do it this way. No wonder it doesn't work.)

Borrowing less than they can afford and buying cheaper places with higher rent ratios and not using all their deposit, enables them to weather any financial hiccups. (This keeps you financially stable all the time.)

Michael Ross
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