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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 4904  
Subject: Re: Buying first rental property Date: 11/14/2012 2:22 PM
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Hi EsM30,

Any thoughts?
Definitely...

I've just refinanced my house into a 10 year loan and took out $40,000 of equity. At < 3% interest (and tax deductible) it felt like a no brainer.
Bad move, unfortunately. The amortization costs and cashflow risks on that 10 yr FRM put you at a very significant handicap as a first-timer landlord. As KennyO says; "CASHFLOW IS KING!®"

As a first-timer, living in a lower-priced region, you'll likely ignore this advice, but; GO BACK AND REFI AGAIN TO A 30 FRM.
(Unless you are an aggressive saver, in which case take a 5 yr ARM and bank/safe-invest the monthly savings to offset the fairly low risks of any rate increases in the distant future.)

I plan to do all the maintenance myself, which should help my profit picture.
Do you make nothing in your regular profession? Or do you earn less than the local handyman rates?

If you can have your maintenance done for less than you are worth doing what you are paid for, save your money and book better profits by paying the cheaper outsourced maintenance.

I don't want to plan for any price appreciation, so this has to be profitable over time just through increased equity and positive cashflow eventually.
Increased equity is not profits... its merely the gradual accumulation of your net worth in one particular asset bucket versus others. Smart real estate investors keep their equity balances minimized in their real estate (which has a minimal appreciation track in the best of times, and is likely flat for a decade into the future from here... but which has outstanding yield/income growth.)

Also, while "CASHFLOW IS KING®" it is not the same as profitability. Cashflow is the combination of actual profits *AND* equity flowing through your books... its like drinking a latte', where equity is the milk and profits are the espresso.

REAL profitability is actual profitability... the stuff that is not simply shifting money from one of your own pockets to the other, but actually increasing your overall net worth over net time.

The long-term after-tax rents/yield left over after the carrying costs of ownership, minus any depreciation recapture, is your actual profitability. That sounds complex... but take a moment to wrap your head around it, as this is your "True North" compass heading. You definitely want to navigate your short term on cashflow (did I mention "CASHFLOW IS KING®"?) which includes getting your butt back to your lender & getting your amortization burden stretched back out 30 years... *AND* the longterm focus is actual real profits.

Luck!
Dave Donhoff
Leverage Planner
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