Posted by JHyre in Ohio on March 25, 1999 at 12:39:18:
I’ll pick up ALL the money. For most of us, housing = 2nd largest expense after taxes. Can’t ignore it. Plus, this question does not require a phenominal amount of focus or time UNLESS one is VERY risk-averse when it comes to housing, in which case this sort of thing’ll keep you awake at night. I don’t see how the home-flipping idea is an unjustified distraction if it produces proper amount of profit. If you view your home as ultimate sanctuary and retreat, then you might not pursue a strategy like that suggested at the convention (and shot down by Kiyosaki) because of peace of mind. I see your/Kiyosaki’s point, but it is probably not too pedestrian for most of us non-millioniares.
In sum- if renting gives you peace of mind that allows you to kick assets, have at it. From a strictly financial point of view, it does not make sense.
What my CPA tells me, and apparently the other CPA’s represented here disagree, is if the intent of purchasing the home by the corporation is to set a defined asset base for the intention of obtaining lines of credit to be used in the business then the home becomes a qualifible biz expense. If the package creates a reasonable positive return (who know what reasonable means) it makes business sense to buy the property.
Whew… Thats a mouthful huh!!
Mainly the focus is as I stated before:
You simply acknowledge that your home is an expense.
It isn’t worth much time or effort to manage this expense.
Focus on assets, cash flow, minding your business.
It was a contrast to what the other post said. if you don’t want to pay down your debt, it must be a good idea to never pay principal, or better yet or just rent.
I do think having your home as a corp benefit is a good idea. I don’t mean renting from the corp.
Mainly the focus is as I stated before:
You simply acknowledge that your home is an expense.
It isn’t worth much time or effort to manage this expense.
Focus on assets, cash flow, minding your business.
It’s easy to theorize about something, but it’s even better to do a cost-benefit analysis. For the most part I tend to agree that owning your own house (through a land trust, of course) is better than renting from your corporation and far better than renting from someone else.
Landlording is not a hobby it is a business and, as such, people do it with the intent and ability to make profit. Accordingly we can deduce that in the majority of cases it is less expensive to own than to rent. Thanks for a good post.
…what if the homeowner is a wee bit savvy and takes out a credit line on his home (after he’s built up some equity, of course). He then uses the credit line to purchase a few Mobile Homes (or other investments).
The monthly cash flow from these investments is used to pay his credit line payments and is also applied to his home owners’s mortgage (if he so wishes). This will serve to significantly reduce his out of pocket expense toward his homeowner’s mortgage. It might even cover his mortgage payments completely!
Interesting scenario?.you now seem to be attempting to prove that leverage does not create additional risk. Good luck with that one!
Let me refigure this for you. I’ll accept your month one and month 3 numbers. Let’s redo month 2. Can’t figure out why you used “9 units refuse to pay”, leaving Person A with 100% vacancy, and Person B with 28% vacancy. Why don’t we use 100% vacancy? Therefore person A suffers a loss this month of $666.67. Person B pays $3333.33 in maintenance and $28,333.33 in mortgage payments for a total monthly loss of $31,666.66.
Three month totals for Person A are +$12,999.99.
Three month totals for Person B are -$19,999.98
Sean, the point is that we can change our assumptions to make the numbers say what we want. As I mentioned in my post, NO ONE will argue that leveraging your holdings will result in a higher rate of return. We both agree on that. What this example above shows that there ARE certain types of circumstances that will work against anyone who is leveraged. Risk doesn’t mean that it will happen, it just means that it could happen. Ask someone who was in Texas in the 80’s and you get a different perception of it. All kinds of buildings were vacant?.and not just for one month. In any case, I’m not concerned with whether you agree with me. I’m quite comfortable with the idea that higher leverage brings a higher degree of risk. I’m also comfortable with the idea that knowledgeable investors can do much to mitigate against risk. The only thing the investor can’t do is change future economic events. And there may be a time when leverage is not preferable.
Of course that 7% is assuming you had a good market. In a 12 month period sometimes the stock market goes through the roof and sometimes it crashes and sometimes it is about the same in January as it was in December. That stock market generally goes up but it is often very volatile.
Re: Never Prepay a Mortgage - Posted by Charles-DFW
Posted by Charles-DFW on April 01, 1999 at 02:33:21:
If you are single, can’t you buy a house, get 3-4 roommates to help pay the mortgage, and reduce your cashflow. Even with out the deduction after a few years you have some equity.
Posted by JHyre in Ohio on March 25, 1999 at 12:47:08:
Hi Mark,
I disagree with your CPA, but you’ll have that. Interest on the corporate owned-home is expensable. Buying home for purpose of having asset base does not make anything other than depreciation & interest expensable. In any event, occupant with ANY relation to company has income to the extent of value of rent-free-housing. Only exception- required to live there for convenience of employer- VERY rare when it comes to housing (e.g.- hotel manager, property manager, etc).
Is that the same economics 101 that told us that high inflation and high unemployment was completely impossible? Until it happened, of course, and then they coined the word “stagflation.”
Then, of course, all those economists sweat and squirm over our current low unemployment. They swear up and down that the low supply of labor must soon lead to rising labor prices and, therefore, inflation. Nevertheless the CPI is only up 1.7 percent for the past 12 months.
Risk, borrowing, investing and other financial concepts are directly affected by inflation. Now you can show me the Phillips Curve, talk about Keynes and make sophisticated computer models but it all boils down to one truth. If you put garbage in to a computer you’ll just get garbage out.
If you want to understand economics you’ve got to get away from academacian professors and take a look around. Anyone can theorize and work a calculator but have you read the writings of Mr. Eder who stabilized the Bolivian currency, ending inflation there? Have you read how the German trillion-to-one inflation was conquored and the philosophy that brought that about? Have you read the economic writings of Jean-Baptiste Say?
I’ll tell you right now that what passes as “economic science” nowadays is pure 100% bull excrement. I’ve read Samuelson and current economic books and they’re riddled with nonsense and fallacy.
50 units, and ALL of them vacant? I mean, if a person owns a four-plex and they’re all vacant I can understand that. How in the world would 50 units suddenly end up vacant one month? Or what if the guy in question was a confirmed 5 percenter and bought 200 units. Are you going to tell me that 200 units could end up 100% vacant? Short of an outbreak of ebola virus, how is that going to happen?
I’ve been in real estate for awhile and my experience is the more units you have the less risk you incur. Leverage has little, if any, effect on risk in real estate because if your property value declines by 20 percent the bank can’t come to you and demand you put up more money or sell (unlike the stock market where if you pass 50 percent margin they issue a margin call).
Risk, leverage, and stock truisms don’t work in every financial market, and I don’t care what some academacian that has never left his lecture podium says. Vacancy rate, according to the LA City Department of Water & Power, is 8 percent and the Apartment Association of Greater Los Angeles recommends adding an additional 2 percent to that number to account for master-metered complexes and to be on the safe side. We can theorize about 100 percent vacancy all we want, but we might as well theorize about 1000 percent vacancy.
With blue chips making over 20% gains for the third year in a row you claim that a 7 percent gain assumes a good market?!!? Stocks have gone up, on average, about 11 percent over the past 25 years. I think that using 7% in that example gave you the extreme benefit of the doubt!
food for Thought, Rob. Robert still owns his first house he and his wife bought after they came back up.
he said he bought for 117k. They’ve never bought another primary residence, instead he focuses on Cash flow, Assets and minding his own business. His passive cash flow incidentaly is 30k/month, he says he has a friend with a 120k/month passive.
His deal is get your passive income above your expenses, then you can really concentrate on doing deals and minding your own business.
Posted by JHyre in Ohio on March 26, 1999 at 13:17:48:
Nice try. You set up a strawman, hang a “Redline” sign on it and beat the hill out of it. The economists mentioned are idiots-True. That doesn’t address the underlying argument- debt creates more risk. It CAN also create more return. The issue is striking the balance. BTW, even competent economists (Friedman, Hayek) would agree that debt increases risk for the simple reason that it DOES.
Good on the fringes, assault the host - Posted by JHyre in Ohio
Posted by JHyre in Ohio on March 26, 1999 at 14:09:26:
OK, you spend plenty of time attacking the fringe point- 100% vacancy is impossible. But wait, my hometown of Youngstown has LOTS of LARGE VACANT units- dirt cheap if you’re interested. Well, let’s concede the 100% vacant point anyway- you still don’t meet the main argument head-on or otherwise- leverage increases risk. Even if the risk isn’t like a margin call, it can clean you out- or Donald Trump for that matter. While your diversification strategy can reduce risk to some degree, it doesn’t always compensate for risk created by debt- or are you saying that no one who owns 50+ units can get overwhelmed by debt in a falling market?
Bottom line- debt increases risk. Without debt, there are no payments to fail on. With debt there are such payments and hence the risk of not being able to pay. Risk may be managed- which you apparently do with some success- but it is nevertheless present.