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“When people get greedy, I get nervous. When people get nervous, I get greedy”
Think about this statement from Warren Buffet
FYI, Warren Buffet—Richest man on the planet.
If Warren has anything to teach us it might be that these uncertain economic times are actually a gold age for investors to buy when others are retreating. Sellers are more likely to offer favorable terms, accept lower down payments, and help with closing costs.
To depict this point--I just closed on a triplex yesterday (7 May 08). The seller accepted a $7000 down payment for a $160,000 property. She is carrying the entire $153,000 loan balance for 6% (fixed) amortized over 25 years for $985.78 per month. She was willing to do this because she didn’t need the cash and wanted to realize her interest and capital gains in smaller more financially digestible bites (as far as tax purposes). In addition, she paid all the closing costs. I felt it was a pretty good deal. Here is how I looked at it. FYI, Each unit rents for $500 or $1500 per month total gross rents. So let’s talk about likely return on investment (ROI).
Monthly loan paydown ~ $220 = $2640 annually
Positive Cash Flow will be about = 0 (I am going to assume the $1500 will be consumed by Principal, Interest, Taxes, Insurance, Repairs, Vacancy Factor, Property Mgt, and Repairs/Maintenance). Positive cash flow should increase over time as rents generally adjust upward with inflation while the house payment remains “relatively” static (if it is a fixed rate mortgage…the taxes and insurance will rise with inflation)
Appreciation conservatively estimated at 3% (x 160K) annually for the long haul = $4800 annual figure for first year
Depreciation= $128,000 is 80% of cost ($160,000) is allocated to building costs and forms my depreciable basis x .03636 = $4654 in depreciation annually. The true flow through benefit in real dollars is (tax bracket which is 28% x $4654 = $1303 annually
Hard to quantify things you should also consider: Enhanced credit worthiness over time as you show you can service the debt, paying back the fixed loan with ever inflating dollars of diminished purchasing power. In effect, the debt instrument (mortgage) is going to lose value over successive years while the property will likely appreciate since the cost of building a like kind replacement is ever increasing due to normal inflationary pressures, the income approach to property valuation drives the price upward, and recent comparative sales index upward. In effect, we ride the tides of inflation as investors.
Total likely 1st year return is $8743 using a conservative input for appreciation (3%). ROI of 124.9% for the first year…not bad when interest rates are around 5%, and stocks are spiraling downward….think about it.
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