Financing a car, advice please...

[moondogg]

You're right. If you can borrow money at a rate better than your expected return on investment rate, you make money.

But that's not really what he was talking about. Yes, "you don't get rich borrowing money" was a pretty sweeping statement, but he specifically said "consumer goods", and it's a discussion of borrowing money to purchase of an depreciating asset. They is a money-losing proposition, period.

Let's rephrase: "You don't get rich borrowing money for depreciating assets, consumer goods, or any investment whose return does not outpace your interest rate". Personally, I like the original version better. It has more zip.

[MMMMMM]

Thanks for the chart.

It generally goes up long term.

It might be turning down soon, though, and if you are highly leveraged that could be a place you really don't want to be. A down-turn pocket with leverage can really hurt in any investment, and renting out houses isn't like using one yourself for a roof over your head.

[miamikid]

Hi MMMMMM,

This is more the point. If you have a 100K to invest in rental properties, you do better to buy lets say 5 properties 100K properties putting down 20K on each and borrowing 400K than buying just 1 property cash.

The two scenarios:
1. You buy a rental property 100K ... you pay all cash. You rent this property for 1000/mo. Since you have no loan, you have a 1000/mo positive cash flow.

2. You buy 5 rental properties 100K each. You put down 20% and borrow 80%. Lets say in this scenario, you also have a 1000/mo positive cash flow... Each property is rented for 1000/mo, you have 5 loans which are 800/mo each. 200/mo positive cash flow on each property.

So now, Fact is... Real Estate averages 10% return a year in appreciation.

Assuming rents stay same, but 10% appreciation a year per property.

After 5 years, scenario 1, property is worth ~160K
After 5 years, scenario 2, properties worth ~800K -400Kloans= 400K + the principle that your renters have paid back.

Here is the thing too, as time goes on rental values also go up.

So in ten years, lets say your rents have increased just $200 per property... The more properties you have, the more positive cash flow. Before, both scenarios yielded the same cashflow, but now.... In scenario 1 buying just 1 property, your cash flow is now 1200/mo, but on 5 properties it is now 2,000/mo. As time goes on it becomes more magnified.

So not only do you gain alot more wealth in appreciation, but you cash flow is greater too.

This is all possible because you borrowed money and you are having someone else pay back the loan.

So which 100K investment was better?
Scenario 1 or 2?

Clearly 2.

2 is more work, but the rewards are sooo much greater.

[MMMMMM]

Yes but if you catch a downtrend and are highly leveraged you can get killed.

Prices going up an average of X% a year doesn't mean they are necessarily going up over the next 5 years; they might go down.

Haven't you heard of people getting busted out in real estate when the market turned down? This has happened to guys like you are talking about, and to big real estate developers too.

I agree it can work much of the time, and that real estate is generally one of the best investments, but you can't say with confidence that the method you describe works without qualification. Again, if you are leveraged to the hilt and the market turns down for a while you can go bankrupt.

There is a good chance home prices will be turning down soon for a fair length of time. Ask the people on the Stock Market Forum if you want more info.; some (or most) of them know the business much better than I.

[Ray Zee]

yes that works better and i am not advocating not getting mortgages. but even in your scenario it is highly speculative. not just from a down turn in prices but from a downturn in the rental market. in the first case if you are empty you only have to cover taxes and such. in the second you get broke and lose the works.
if things go good you do better. much better with the leverage. anyone that thinks things always go in any direction are doomed for disaster.