Joe 401k?

[surveyor]

Estimates

Remember that the appreciation is a low estimate. We anticipate 4% but who knows it could be more. In those situations, the ROE would return more than 24%. So a 24% CAGR is very sustainable because of the low estimate of appreciation (which we carry out over a period of ten years). In the ROE calculation, cash flow should generally improve over time and appreciation should be higher than what you anticipate (not a huge amount, but decent).

By refinancing and getting that equity out to invest in more properties, making it work even harder, the ROE keeps getting better and better. It does get hard to calculate later and later though but so far it looks good.

Thanks SDR for the good words, the investments you make should make your family life better, not worse and we all have different situations that make certain investments unpractical. I know a few who want to get into real estate but they are unable to convince their spouse (which is pretty critical). For me, I am lucky that I am able to put money into both real estate and the stock market. My stock market account has been going gangbusters, too! Still, I have run the numbers and based on effort, return, and making all your money work for you (including your home’s equity), real estate was the only way to go.

I will say that because I am able to invest both in real estate and the stock market, I can tell you in 10 years which performs better. Stick around for that. Hahahaha.

[surveyor]

Estimates

Remember that the appreciation is a low estimate. We anticipate 4% but who knows it could be more. In those situations, the ROE would return more than 24%. So a 24% CAGR is very sustainable because of the low estimate of appreciation (which we carry out over a period of ten years). In the ROE calculation, cash flow should generally improve over time and appreciation should be higher than what you anticipate (not a huge amount, but decent).

By refinancing and getting that equity out to invest in more properties, making it work even harder, the ROE keeps getting better and better. It does get hard to calculate later and later though but so far it looks good.

Thanks SDR for the good words, the investments you make should make your family life better, not worse and we all have different situations that make certain investments unpractical. I know a few who want to get into real estate but they are unable to convince their spouse (which is pretty critical). For me, I am lucky that I am able to put money into both real estate and the stock market. My stock market account has been going gangbusters, too! Still, I have run the numbers and based on effort, return, and making all your money work for you (including your home’s equity), real estate was the only way to go.

I will say that because I am able to invest both in real estate and the stock market, I can tell you in 10 years which performs better. Stick around for that. Hahahaha.

[Anonymous]

First post, though I have been lurking here for quite some time.

First of all let me thank Rich for this site and all of you for wonderful insights.

Recent discussions on ROE and rentals as investment have triggered some thoughts, hence this comment.

One thing I have noticed is that we dont seem to be accounting for “accumulation” of cash flow over the years from the property.

Do we just “consume” it and ignore for next year’s calculation ?

I think this becomes a significant chunk over the years, as we can also consider the interest this earns.

Am I missing something ?

Also why are we thinking that ROE drops over the years.
If we define equity as “cash invested”, it actually reduces as the cash flow builds up (and we recover initial investment), may become zero and then negative.
In this case ROE goes up to infinity and then becomes negative.
Or is the equity defined as original investment ?
Or is it “paper” equity ? (current value – loan)

I hope the questions make sense!
Would like to learn some more.

Thanks.

[Anonymous]

First post, though I have been lurking here for quite some time.

First of all let me thank Rich for this site and all of you for wonderful insights.

Recent discussions on ROE and rentals as investment have triggered some thoughts, hence this comment.

One thing I have noticed is that we dont seem to be accounting for “accumulation” of cash flow over the years from the property.

Do we just “consume” it and ignore for next year’s calculation ?

I think this becomes a significant chunk over the years, as we can also consider the interest this earns.

Am I missing something ?

Also why are we thinking that ROE drops over the years.
If we define equity as “cash invested”, it actually reduces as the cash flow builds up (and we recover initial investment), may become zero and then negative.
In this case ROE goes up to infinity and then becomes negative.
Or is the equity defined as original investment ?
Or is it “paper” equity ? (current value – loan)

I hope the questions make sense!
Would like to learn some more.

Thanks.

[surveyor]

Geez, someone’s up early reading this thread…

If a property produces good cash flow, it will certainly improve the ROE, but it becomes difficult to really account how to best use the money up to a certain point. You can start paying back some of the loan early (increasing your loan reduction portion of the ROE) or just accumulate it until you get enough to buy another property, or just keep it in your rainy day fund. It’s akin to tracking your dividends for stocks, where after awhile you just lose track of them. While I try to keep up with my paperwork, it is best to just keep the number as simple as you can.

The ROE number itself has so many components and there are so many ways to approach your real estate investing. You can concentrate on certain parts, like the cash flow and the tax basis in order to get a true calculation. At the beginning, the ROE is a useful “generic” number that can help you choose properties based on their potential. Later on, when you purchase the property and start working through it, you can re-calculate the ROE and see how it actually performed.

And each part of the ROE can change over time or have specific calculations unique to certain properties. For example, properties in the Hurricane Katrina hit zone can be depreciated faster, so their tax basis is different than any other property around the country.

As far as equity going up to infinity and all, the downpayment portion of the ROE will always stay generally the same, because that is what you put into the property at the beginning. Everything else after that becomes part of the return. Even if you pay off the donwpayment, the results of that will show up on the cash flow portion (because the loan interest you’ve been paying on the downpayment part would be part of the cash flow). There are programs where you can put 10% or 5% down, and that can increase your ROE to a huge degree.

Anyways from dictionary.com:

equity – the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc.

Paper equity or not, it is still a real value but it does and will fluctuate or time.

[surveyor]

Geez, someone’s up early reading this thread…

If a property produces good cash flow, it will certainly improve the ROE, but it becomes difficult to really account how to best use the money up to a certain point. You can start paying back some of the loan early (increasing your loan reduction portion of the ROE) or just accumulate it until you get enough to buy another property, or just keep it in your rainy day fund. It’s akin to tracking your dividends for stocks, where after awhile you just lose track of them. While I try to keep up with my paperwork, it is best to just keep the number as simple as you can.

The ROE number itself has so many components and there are so many ways to approach your real estate investing. You can concentrate on certain parts, like the cash flow and the tax basis in order to get a true calculation. At the beginning, the ROE is a useful “generic” number that can help you choose properties based on their potential. Later on, when you purchase the property and start working through it, you can re-calculate the ROE and see how it actually performed.

And each part of the ROE can change over time or have specific calculations unique to certain properties. For example, properties in the Hurricane Katrina hit zone can be depreciated faster, so their tax basis is different than any other property around the country.

As far as equity going up to infinity and all, the downpayment portion of the ROE will always stay generally the same, because that is what you put into the property at the beginning. Everything else after that becomes part of the return. Even if you pay off the donwpayment, the results of that will show up on the cash flow portion (because the loan interest you’ve been paying on the downpayment part would be part of the cash flow). There are programs where you can put 10% or 5% down, and that can increase your ROE to a huge degree.

Anyways from dictionary.com:

equity – the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc.

Paper equity or not, it is still a real value but it does and will fluctuate or time.

[Bloat]

Bang,

With 20% down the cashflow is likely zero. Rents cover debt service, maintenance, vacancy, management, travel, reserves, etc. It can take many years to get positive.

ROE drops because equity grows. The 1st year 4% appreciation on a $200k example is $8k against the $40k down making a 20% return. In the 2nd year the equity base becomes $48k and the 4% appreciation becomes $8320 giving 17% ROE. Year 3 would show about 15% ROE. The cagr (compound annual growth rate) is negative.

You can easily get derailed by a large expense, like a new roof or hvac, or it can go in your favor, like if appreciation jumps to 8%.

You could isolate your down payment and look at the return against it: ROI, Return On Investment. This does not represent your true asset (equity) return over time (but it looks good).

[Bloat]

Bang,

With 20% down the cashflow is likely zero. Rents cover debt service, maintenance, vacancy, management, travel, reserves, etc. It can take many years to get positive.

ROE drops because equity grows. The 1st year 4% appreciation on a $200k example is $8k against the $40k down making a 20% return. In the 2nd year the equity base becomes $48k and the 4% appreciation becomes $8320 giving 17% ROE. Year 3 would show about 15% ROE. The cagr (compound annual growth rate) is negative.

You can easily get derailed by a large expense, like a new roof or hvac, or it can go in your favor, like if appreciation jumps to 8%.

You could isolate your down payment and look at the return against it: ROI, Return On Investment. This does not represent your true asset (equity) return over time (but it looks good).

[pertinazzio]

Babbleon wrote: “Being that the stock market is potentially a bubble and it’s important to diversify where should Joe 401k put his money over the next few years?”

I would bet on equities (stocks and stock funds). For several years I have been “maxing-out” on my 403b (like 401Ks I think) at my firm; and now that I have some proceeds from a real-estate sale I am going to start maxing on our underfunded IRAs. In the 403b I have steadily becoming more aggressive even though I am in my mid fifties. Right now (in the 403B) I am 80% Oppenheimer emerging markets (ODMAX) and 20 percent in American Funds Europacific (AEPGX). The returns have been thrilling – if I said how much it would seem like shameless bragging. And you never have to make a “home depot” run with investments like these or mow them either or get them rented out! I fell into them because they were offerred by my employers plan – otherwise there are big front loads plus large initial investment requirements. For someone looking for something a little similar without the loads Janus Overseas which I have owned since June 95. The markets have seen some ups and downs since then and heir have been periods when the fund was down – but overall its been really sweet to me.

I have a prejudice against real estate investments. I got really burned once. In 90 I bought a 4 plex at 601 Silver Spring Avenue, Silver Spring MD 20901. We were really good landlords and there was never a complaint against us. To make a very convoluted story briefer, the county (Montgomery) “stole” the property from us after 10 years just when we were finally getting positive on our cash flow. They forced us to sell at our slightly less than our original purchase price to a favored “non-profit” purchaser as part of an “affordable housing” scheme. It was like something out of Kafka .. worse. People still don’t believe me. 10 years of paint jobs, leasing, floor sanding, and other arduous physical labor was wiped out .. that and much more for it took a part of my cursed soul.

So stocks, my friend, go with stocks! They never call you when things go wrong; if things go south, you just forget about them until things get better.

As for individual stocks, I own very few. GE is one with limited downside(supposedly). I also like it because being concerned with the environment, GE is doing its part on the Global Warming front. Did you know that GE is the world’s leading manufacturer of Wind Turbines?

Beatus ille qui procul negotiis … paterna rura bobus exercet suis, solutus omni fenore….. Horace

[pertinazzio]

Babbleon wrote: “Being that the stock market is potentially a bubble and it’s important to diversify where should Joe 401k put his money over the next few years?”

I would bet on equities (stocks and stock funds). For several years I have been “maxing-out” on my 403b (like 401Ks I think) at my firm; and now that I have some proceeds from a real-estate sale I am going to start maxing on our underfunded IRAs. In the 403b I have steadily becoming more aggressive even though I am in my mid fifties. Right now (in the 403B) I am 80% Oppenheimer emerging markets (ODMAX) and 20 percent in American Funds Europacific (AEPGX). The returns have been thrilling – if I said how much it would seem like shameless bragging. And you never have to make a “home depot” run with investments like these or mow them either or get them rented out! I fell into them because they were offerred by my employers plan – otherwise there are big front loads plus large initial investment requirements. For someone looking for something a little similar without the loads Janus Overseas which I have owned since June 95. The markets have seen some ups and downs since then and heir have been periods when the fund was down – but overall its been really sweet to me.

I have a prejudice against real estate investments. I got really burned once. In 90 I bought a 4 plex at 601 Silver Spring Avenue, Silver Spring MD 20901. We were really good landlords and there was never a complaint against us. To make a very convoluted story briefer, the county (Montgomery) “stole” the property from us after 10 years just when we were finally getting positive on our cash flow. They forced us to sell at our slightly less than our original purchase price to a favored “non-profit” purchaser as part of an “affordable housing” scheme. It was like something out of Kafka .. worse. People still don’t believe me. 10 years of paint jobs, leasing, floor sanding, and other arduous physical labor was wiped out .. that and much more for it took a part of my cursed soul.

So stocks, my friend, go with stocks! They never call you when things go wrong; if things go south, you just forget about them until things get better.

As for individual stocks, I own very few. GE is one with limited downside(supposedly). I also like it because being concerned with the environment, GE is doing its part on the Global Warming front. Did you know that GE is the world’s leading manufacturer of Wind Turbines?

Beatus ille qui procul negotiis … paterna rura bobus exercet suis, solutus omni fenore….. Horace

[Bloat]

Wow, No 5th amendment in MO !? No “just compensation”?

You can’t do much better than your ODMAX fund. I’ve got some money in high-flying funds, maybe 20%. I’ve become conservative in my mid-40’s. Now I’m happy to achieve a 10% average annual return.

[Bloat]

Wow, No 5th amendment in MO !? No “just compensation”?

You can’t do much better than your ODMAX fund. I’ve got some money in high-flying funds, maybe 20%. I’ve become conservative in my mid-40’s. Now I’m happy to achieve a 10% average annual return.

[Coronita]

I'm too lazy to do much. So I just diversify across different indexes, domestic/international, fixed income/stock indexes. Don't think most people can consistently predict where things are going every single time. Also, your tailor your mix based on your age. I also have a short term trading account mainly for speculation, but it's just play money.

I'm in the early thirties. I recently changed the mix from about 95% stock+indexes to 85%, and will continue to do so as I get older and as the market conditions persist. Also, I went from about 75%/25% between domestic and international to about 65%/35% split. One of my most favorite funds has been VGPMX, but unfortunately is closed to most new investors

[Coronita]

I'm too lazy to do much. So I just diversify across different indexes, domestic/international, fixed income/stock indexes. Don't think most people can consistently predict where things are going every single time. Also, your tailor your mix based on your age. I also have a short term trading account mainly for speculation, but it's just play money.

I'm in the early thirties. I recently changed the mix from about 95% stock+indexes to 85%, and will continue to do so as I get older and as the market conditions persist. Also, I went from about 75%/25% between domestic and international to about 65%/35% split. One of my most favorite funds has been VGPMX, but unfortunately is closed to most new investors

[seattle-relo]

What is the minimum one needs to purchase an out of state investment property? With stricter lending standards, what type of down payment, income, etc is required?

[Author]

Posts