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Stages of wealth

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      • TexasHusker
        TexasHusker commented
        Today, 12:23 PM
        Actually I am a fan of REITs for dependable income that is usually a multiple of CDs. But there is added risk with that income. Do your homework.

        With REITs however, you miss out on most of the magic of real estate - leverage.

        Here is an example: 18 months ago, I bought my dad a vacation rental for $182K, for income to pay for his care (he has Alzheimers). He paid cash for the house, but for a moment let's presume that he financed 70% of it.

        That would be a $54,600 initial investment, and let's toss in $5600 for closing costs and prepaids to make it an even $60K.

        Assuming 5.5% @ 30 years, the monthly debt/principal repayment is $728.

        His yearly expenses would be as follows:

        $8736 P&I
        $900 Property taxes
        $1200 insurance
        $4500 utilities
        $2500 repairs and maintenance

        Total rental income is around $32,000.

        Net yearly income is $14,164.

        That is a 24% return on investment per year. Remember, the amount invested is $60,000. And I am not factoring in the added income from depreciation if I chose to take it, OR the principal that the renters are steadily paying back. The real rate of return might well approach 30% a year.

        Just as a nice bonus, due to a tremendous price appreciation, it appears that my dad's cabin is now worth around $227,000. So toss in another $45,000 in profit potentially, after just 18 months.

        Hopefully this helps delineate the difference between REITs and a direct real estate investment.
        Last edited by TexasHusker; Today, 12:28 PM.
    The real magic happens when you multiply this x5. $60k x 5 = $300k invested generating $70,820 of annual income. You would need $1.77M in a portfolio to generate that kind of income @ 4% withdrawal rate.


    • TexasHusker
      TexasHusker commented
      Editing a comment
      That's true. What I have done is this: As my equity in each property grows - due in part from renters paying down principal, and due in part to price appreciation, I have done "cash out refinances" to fund additional Great Clips franchise locations. In fact I am in the process of doing that right now with a fourth location.

      So I will have four locations, but no business debt per se - all of my debt is collateralized with income producing real estate.

      There are many ways to save and invest - I've just discovered this particular way as I my niche.

    Here is my dad's cabin that I bought for illustration purposes. You can see the $182,000 that I paid for it last year, and what it is presumed to be worth today.
    Never underestimate the power of stupid people in large groups.

    -George Carlin



      Originally posted by TexasHusker View Post
      Here is my dad's cabin that I bought for illustration purposes. You can see the $182,000 that I paid for it last year, and what it is presumed to be worth today.
      Oh - its really nice. Totally worth $182,000.

      For what its worth, when I was living in DC, I had a good 3 apartment units out there - every couple of years I was able to take out $30,000-$40,000 from the portfolio because the appreciation was so strong in that market.

      Owing lots of cash producing real estate isn't a bad way to go at all.

      I guess the only thing I'd add here is to follow up on the point about real estate being able to deliver better long term returns. I *think* the returns to the asset classes are comparable.

      Here is a conclusion from a NBER's study looking at the aggregate returns of various asset classes for the last 145 years. It basically says that equities and real estate both give you about 7%.

      "Arguably the most surprising result of our study is that long run returns on housing and equity look remarkably similar."

      Source: NBERs,


      • TexasHusker
        TexasHusker commented
        Editing a comment
        If are you paying cash for real estate, I agree that the returns would be comparable. The study doesn't take into account leverage, which is the attractiveness of real estate.

        A friend of mine ("John") builds nice, but affordable housing. For each house, he goes to the bank and puts down around $30K to start the project and the bank finances everything else until finish. John sells his houses for $175-200K, depending on amenities and finishes. It takes him about 60-90 days to complete a house. He pockets around $20K per house, and has to pay some interim interest over that 75 days. So his total investment might be $32K, but he makes $20K profit in 75 days. He can do that 4 times per year per house, which means he's using around $36-37K as leverage to produce $80K a year in income.

        Stocks can't do that.

      The key to examining real estate is really the cash flow. I can artificially inflate a RE rental investment by getting a VA loan with 0% down on a duplex and rent out half as owner occupied. If I generate $1 of profit, my return is infinite. Not sure why RE investors try to compare RE rental income to stock investment returns. Doesn't make sense. The income is what matters and RE can generate a lot of income on a lot less investment, and that is what is powerful. I would not want a portfolio of RE that generated 30% annual returns but that 30% only equalled a few thousand dollars of income.


        Well technically you can leverage your money with stocks by buying on margin but it's an incredibly risky way to go about things. Buying RE with borrowed money is a far more common and accepted practice (and much lower risk generally).

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.


        • TexasHusker
          TexasHusker commented
          Editing a comment
          That is correct and it is very risky. That's because there is no hard asset as collateral, besides the share value. With real estate, you have a hard asset that presumably will never be worth $0, though I suppose anything is possible. I have had stocks that I thought were quite worthwhile investments quite literally drop all the way to zero (bankruptcy). I hope that never happens with my RE but it could!