- 24,036
- 1,926
- Joined
- May 18, 2005
Thank you very much.
How come people don't pay 100% down on "investment homes" ?
- Thread in 'General' Thread starter Started by thunderchunk69,
- Start date
- 9,105
- 95
- Joined
- Aug 31, 2006
- 23
- 10
- Joined
- Sep 6, 2008
your return on capital is higher if you put less money in and have the bank put up the rest for you
For instance
$100,000 property giving you earnings of $10,000 a year
Capitalization 1
you bought the property out right and you are getting a 10% return on your capital
Capitalization 2 (typical structure of large real estate investment trusts)
you put up $30,000 the bank puts up the other $70,000 but you still get all the earnings as long as don't miss an interest payment
well then you would be looking at making $10,000 off of $30,000 which would put you at a 33% return on your capital
Then you can try to put the money you didn't put up in the house into another potential high return investment
-------
Oh and like previously mentioned for whatever reason the government does give you incentive through the tax code to use the banks money
So now there are situations where it makes since not to pay off what you owe ... This is an unintended consequence of trying to encourage people to purchasehomes and it probably helped to create the culture of excessive borrowing that is responsible for the recent credit bubble and related fallout
For instance
$100,000 property giving you earnings of $10,000 a year
Capitalization 1
you bought the property out right and you are getting a 10% return on your capital
Capitalization 2 (typical structure of large real estate investment trusts)
you put up $30,000 the bank puts up the other $70,000 but you still get all the earnings as long as don't miss an interest payment
well then you would be looking at making $10,000 off of $30,000 which would put you at a 33% return on your capital
Then you can try to put the money you didn't put up in the house into another potential high return investment
-------
Oh and like previously mentioned for whatever reason the government does give you incentive through the tax code to use the banks money
So now there are situations where it makes since not to pay off what you owe ... This is an unintended consequence of trying to encourage people to purchasehomes and it probably helped to create the culture of excessive borrowing that is responsible for the recent credit bubble and related fallout
- 6,782
- 18
- Joined
- Dec 29, 2006
Leverage FTW.
You want to get rich? The L word is the tool. More so with securities than real-estate though
You want to get rich? The L word is the tool. More so with securities than real-estate though
- 24,036
- 1,926
- Joined
- May 18, 2005
I do I do
so using $ that's not yours can work to your benefit?
sounds good.
thanks for the insightful replies.
my friend is gonna get his real estate off the ground way before I do so i'll have a better understanding.
- 278
- 11
- Joined
- Jun 24, 2004
Technically ... when used with securities it's called "buying on margin". BE CAREFUL DOING THIS! You can make a killing, but youalso can lose your shirt in hurry.
- 23
- 10
- Joined
- Sep 6, 2008
i'd like to mention your gut feeling on this was correct.. don't mess around with borrowing unless you have to
the pendulum swings both ways .. the losses on a leveraged bet will be worse than those that involve no borrowing .. plus it introduces the very realpossibility of being completely wiped out (missing an interest payment on a loan will cause your position to be forfeited to the bank)
here is Buffett's take
http://www.valuestockplus.net/2008/10/warren-buffett-on-financial-leverage.html
the pendulum swings both ways .. the losses on a leveraged bet will be worse than those that involve no borrowing .. plus it introduces the very realpossibility of being completely wiped out (missing an interest payment on a loan will cause your position to be forfeited to the bank)
here is Buffett's take
http://www.valuestockplus.net/2008/10/warren-buffett-on-financial-leverage.html
- 13,868
- 44
- Joined
- Jan 22, 2008
this is why renting private homes in Florida sucks
- 278
- 11
- Joined
- Jun 24, 2004
No they won't .... it takes several delinquent payments before a property goes into foreclosure. Banks want to avoid foreclosure proceedingsbecause they are expensive and time consuming. They only use this as a last resort if they see now other way to collect their principle.They most certainlywon't take a property if you miss one payment (though you will have to pay it eventually).
- 12,422
- 2,916
- Joined
- Jul 6, 2008
I always thought that too. Why not buy a house 100% then rent it out? Won't the money just go straight to your pockets instead of the bank
- 4,096
- 12
- Joined
- Feb 27, 2004
check11
- 424
- 10
- Joined
- May 18, 2006
among other things, the economic theory of 'opportunity cost.' what other things could you be doing with all that money? the rich never get rich byusing their own money. they always use other folks' money as much as possible.
get a loan/mortgage from a lending institution for the property. rent/lease it to someone, and have them paying off the property for you, and some,hopefully...
get a loan/mortgage from a lending institution for the property. rent/lease it to someone, and have them paying off the property for you, and some,hopefully...
- 10,490
- 229
- Joined
- May 2, 2001
- 34
- 10
- Joined
- Nov 10, 2007
Noone wants to put all their money into one property.
If you have one million dollars, why would you put that all into one property when you can own 10 one million dollar properties with 100,000 down per house.
Not to mention.. POSITIVE CASHFLOW
PC: If you can own a property that is leveraged and be making more monthly than you spend to own the property you are putting out positive cashflow allowingyou to own numerous investments for no money down while simentounsly not losing anything.
If you have one million dollars, why would you put that all into one property when you can own 10 one million dollar properties with 100,000 down per house.
Not to mention.. POSITIVE CASHFLOW
PC: If you can own a property that is leveraged and be making more monthly than you spend to own the property you are putting out positive cashflow allowingyou to own numerous investments for no money down while simentounsly not losing anything.
- 24,036
- 1,926
- Joined
- May 18, 2005
thanks for the more insight.
- 6,279
- 986
- Joined
- Jul 2, 2009
- 24,036
- 1,926
- Joined
- May 18, 2005
Nj, but my $ isn't there yet.
my friend's is, I just am trying to follow closely.
he comes to me for advice sometimes, and vice versa
- 1,740
- 11
- Joined
- Jan 12, 2005
and i'm in NY btw. any useful tidbits on NY housing markets, investing, etc?
- 4,522
- 298
- Joined
- Jun 15, 2004
Exactly
- 24,036
- 1,926
- Joined
- May 18, 2005
you've read nothing
- 5,161
- 490
- Joined
- Oct 19, 2003
Good read.
- 4,522
- 298
- Joined
- Jun 15, 2004
I obviously stopped reading after dirty's postOriginally Posted by ThunderChunk69
you've read nothing
- 793
- 10
- Joined
- Jan 21, 2001
i dont because there could be a good deal on another home a few weeks or months down the road. im 24 years old and i've owned only 4 different homes, allin pennsylvania, and i have lived half an hour away on jersey. homes there are cheaper compared to jersey, and forclosures there go real quick. Real estate isnot my business, but if i can get in and make out with cash, count me in.
- 6,409
- 15,495
- Joined
- Jun 28, 2004
Dirty is exactly right. All of the money lost to interest is far more than the money saved in reduced taxation. It is better to, if you can, buy as much of ahouse, especially an investment property, outright and with the money saved in interest, invest it.
To answer the OP's question, most people who were buying investment properties had far less than the full price of the house on hand. They were willing totake on huge mortgages because home prices were "guaranted to increase" from 2000 through 2007.
To answer the OP's question, most people who were buying investment properties had far less than the full price of the house on hand. They were willing totake on huge mortgages because home prices were "guaranted to increase" from 2000 through 2007.
- 23
- 10
- Joined
- Sep 6, 2008
i think in terms of securities in general... i've never directly invested into real estate, marketable securities fit my temperament ...
in general if you miss a payment on a debt agreement it is because you don't have the money to pay it so now the lender takes your collateral to paythemselves
"This is the stupidest thing I've ever heard.
First of all, how the @$#! will a leveraged bet equal a bigger loss?
It's simple numbers, and common $!$!#%* sense. "
22 it's like you said in your example which (i just glanced at the final figures)...
in the first set-up you lost over 100% of your invested capital
in the second set-up you lost 50% of your invested capital
your flaw is that you are looking at the final number by itself instead of in regards to how much you invested... just like you said earlier "investmentsneed to be calculated by 'rate of return' and not just a bottom line number"
in general if you miss a payment on a debt agreement it is because you don't have the money to pay it so now the lender takes your collateral to paythemselves
"This is the stupidest thing I've ever heard.
First of all, how the @$#! will a leveraged bet equal a bigger loss?
It's simple numbers, and common $!$!#%* sense. "
22 it's like you said in your example which (i just glanced at the final figures)...
in the first set-up you lost over 100% of your invested capital
in the second set-up you lost 50% of your invested capital
your flaw is that you are looking at the final number by itself instead of in regards to how much you invested... just like you said earlier "investmentsneed to be calculated by 'rate of return' and not just a bottom line number"