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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5068  
Subject: Re: Something for me to think about Date: 8/8/2003 4:16 PM
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I second the responses from SoftSimp and SloanT. They represent good common sense. Of course, I would feel that way because their sentiments are aligned so closely with mine.


mazske writes:

If this property, and this is just an example and not a real one I'm considering to buy, could rent immediately for $350/month, I should be cash positive by a little bit.

Maybe. Maybe not. You still need to analyze your expenses. This would include property taxes, insurance, maintenance, repairs, etc.


The only concern is what if the market tanks for the next 20 years, while housing prices keep rising for the next 20 years. That's the unknown factor.

Yes. You have hit on it. I don't like to be concentrated in equities during the accumulation phase because the possible range of outcomes is so large. If you want to make a plan and have some assurance that it will actually succeed, you can't be too concentrated in equities.


Now, let's say I only bought this one rental property and let's say in 15 years I was making $100 gross a month on the rents. That's a little bit more gravy, even though my rough guess is that in 15 years, rents would go up much more than $100/month.

Consider this. If you can rent the property for $400 and assuming your non-mortgage expenses are not too much more than 2.3%, and you apply all excess cash flows to reducing the mortgage, it is possible that you could own the house free-and-clear in just 17 years. At a 3% increase in rents per year, your net operating income (gross rents less expenses) would be about $5,720/year or about $475/month.. Consider how you might have done if you invested (even on a tax-deferred basis) in the stock market: A single $9400 earning a compound annual return of 10% (some think this is unlikely) would grow to about $47.5K. A 4% withdrawal rate on this sum would yield $1900/year (before-tax) or about $158/month. Not only would the house be throwing off 3 times as much income but at only 4% appreciation the value of the house would be in excess of $90K. It's not even close.

Consider what your downside is in the stock market. Historically speaking over a 17 year period, the stock market is quite capable of returning less than 2%, meaning under the worst case, your original 9400 grows to only about $13K, probably not even keeping up with inflation.

Even if your rents and property value decline by 20% immediately after purchase. (This would be totally without precedent for your area) You might have a small negative for a few years but after 17 years you would still have substantial equity of over $40K and a positive cash flow.

Keep in mind that this is a very average property. With work you can do much better.

Regards,
FMO



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