I spent the afternoon and part of the evening in a mall with my family. While we were there we visited the Barnes & Noble store - my wife wanted a book on web design and my daughter wanted 100 books on Dora, Diego, Cinderella, etc… etc… etc… :O) The funny part was when I heard my wife telling my daughter that she could have only one book because “daddy was saving money to buy some houses and couldn’t afford more books…” :O) And my daughter asked “Why?” I almost put my daughter on my lap and opened my 20-year investment plan to show her why we needed to save money… :O)
Anyway, while we were there I decided to check some of the books in the Real Estate section. I got one that talked about how to buy rental properties. I was curious about what advice the author was giving and decided to read some of it. In all the examples the author presented, the estimated operating expenses were much less than 50% of the rents. Actually they were more like 30 or 35% of the rents… And interestingly enough in most cases the estimated operating expenses + mortgage was within 1 or 2 dollars of the rent. And the author went on to say that cash flow is king. At first I couldn’t understand how he was talking about cash flow in properties where the rents were hardly enough to cover only the mortgage + estimated operating expenses that seemed too low. After reading a little bit more I understood the secret…
He added the tax savings to his calculation. All the positive cash flow he was demonstrating in each example was due to the estimated tax savings… :O)
He also said that owning rental properties generates 4 income streams (1) appreciation; (2) tenants pay principal; (3) tax savings; and (4) cash flow. The problem was that according to his own examples, (3) and (4) were the same - he only had cash flow because he was considering the tax savings… :O) I felt that he was double dipping… :O)
And just before I closed the book I decided to take a look on his estimated expenses - I couldn’t find legal costs, administrative costs, mileage, advertising… Adverstising was listed in the page, but he assigned $0 cost… I guess he uses Craiglist… :O)
No wonder why there are so many “investors” having problems now. I am no expert, but thanks to the advice I got here I was able to recognize the flaws in his analysis.
By the way, he also had a very simple plan to build a $10 million equity over a period of 30 years buying only 10 houses in the first 10 years (1 house per year) and not doing anything for the rest of the 20 years. He used an average of 6.3% appreciation per year. What he forgot to mention is how the person can maintain those properties over those 30 years with 0 or negative cash flow… :O)
And another pearl I got from the book - don’t bother trying to find houses at a big discount. Buy them at or slightly lower than market value. If you try to buy houses at a big discount, it will take too much time and it is not worth it… :O)
Anyway, I wanted to share this with you and recognize the help you are providing to new investors. Thank you.
PS: propertymanager - now I see what you mean when you say that most “gurus” sugar-coat their strategies to make them seem easy.