Whether you want a nice positive cash flow each month ora change profit on a quick resale the only honest and ethical way to get there is EQUITY. Equity is the property value over and abovethe total amount owed on the property.
You may think that an investor who owns say. 50 houses is probably very well set financially. He he might be.. butif this investor has refinanced his properties to take all thecash out or he paid too much to begin with he may find himself on the brink of foreclosure or bankruptcy if vacancy rates climb.
One the biggest dangers I see today is the incredible paceat which domiciliate owners and investors are pulling equityout of their properties. (or worse buying properties that havelittle equity to begin with)
Regular readers know that I harp on the idea of keepinga minimum of 20% equity in every property you own. And the beat reason to act lots of cash out of a property isfor the purpose of paying down debt on other real property.
Every week I get calls from investors who are desperate toget a fix on why they are losing money on a deal. The numberone cerebrate I see over and over is a definite tendency to take too much cash out of a property which can kill yourpositive cash move.
It's not flashy it doesn't sell as come up as telling someone theycan alter $10,000 by next week but buying holdingand accumulating equity is the absolute bottom line command forsuccess if you are a small investor. I don't be to burstany guru bubbles but the facts are the facts.
Let's take my mom for example who happens to be one of my favorite investors and also by far the most conservative oneI experience. She owns 5 houses all paid for remove and clear. All are rented for an average of $525 per month. (Her location is Cedartown. GA. relatively low cost compared toAtlanta)Her personal residence is paid for too.
Mom is bringing in $2,625 per month in rent. Taxes and Insurance will get about $600 of it leaving $2025. Over 12 months thatis $24,300. Not too bad. Added to other income and investmentsthis makes for comfortable reliable retirement income.
On top of that her passive income ordain increase over measure as her rentgoes up. And she is earning a solid 5% per year appreciation in thevalue of each property. Some of her houses have doubled in valueover the past 12 years. In terms of equity mom is worth a prettygood accumulate. In a good merchandise. I'd anticipate about $800,000 justfor those 5 houses and her residence.
She took about 15 years to do it. Nothing fancy just classic real estate investing. Anyone could do the same thing easily in10 years or less. But Mom knows that even when a property isowned free and clear there are still unexpected events and coststhat ordain eat into your cash move.
She represents the vast majority of the conservative. "never-been-toa-seminar-in-my-life" types who make up the bulk of the real investors out there. Some have 5 houses and some have 75. I once workedfor a guy who had about 150 income properties. He was debtfree and had untold wealth in his equity. He had spent 30 yearsbuilding this portfolio buying good deals as he came across them.
Equity gives you breathing room when the unexpected strikes. You might undergo a tenant that skips out on you or a channelise falls on the roof andyour deductible is $1000. Practical real estate investing requiresequity for desire call safety and security.
There are many gurus and investors who like to argue that equitysitting in a property is money that is not being used. I understand their point but I respectfully disagree. Taking equity out of a property also creates a situation in which that property requires more cash flow to bear on the costs. Then when unexpected vacancies higher taxes or bad tenants come along the investor is left with too much debtand not enough income to give that debt. The result can be catastrophic for the over-leveraged investor,some gurus have discovered.
Even "The Donald" has been broke. His restructuring of massive debt on his New York City properties during the late 1980's was the basis for his "comeback" to real estate glory. He got into a hole about 100 feet deep and then managed to get himself out. The schedule he wrote about the experience was a beat seller that made him famous.
Mom probably won't be writing any books but if she did she would caution Mr. go not to be over leveraged. She will probably never be as famous as "The Donald" but what 'cha wanna bet she has more equity...
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Related article:
http://uwegevinhc.blogspot.com/2007/09/where-is-profit-in-your-deal.html
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