Re: Using existing equity to buy more real estate - Posted by Rich-CA
Posted by Rich-CA on May 28, 2007 at 13:33:21:
David-PA has some solid advice. The one thing I would add is that the CAP rate is equivalent to the Interest Rate on money market or other bank accounts. So when deciding if a CAP rate is good, remember that leaving the money sitting in an ING Direct account yields over 5% with no risk (FDIC insured under $100k or whatever the current limit is), no headaches (no evictions and the only thing trashed might be when the post office sorting machine manges your statement). So in making your decision about what to buy, be certain that you are doing much better than having your money sitting in an account getting interest because you are taking a much higher risk.
You also need to make sure you take into account all of your expenses as well as income. The HUD side has some numbers on how long things last (27 years for an asphalt shingle roof, 10 for a fridge, and so on) and factor these in because you make have to pay for them.
Also keep in mind that Real Estate can become worth less than zero. I have seen other posts here claim that stock is worse because it can go down to zero. Well, I just realized recently that actually RE has the potential to be worse because it can be worth less than zero - such as if you lose a lawsuit with a tenant and they get a deficiency judgment against you for the excess proceeds after the property has been sold or if toxics are found on the property, which the government expects the current owner to pay for cleaning up.
So NEVER be cheap with the liability insurance. Make sure your net worth is covered so the one bad decision you make doesn’t bankrupt you.
Meanwhile, I have been doing this since 1988, when we unwillingly because landlords because you couldn’t sell a condo (except new built) to save your life in No. Cal. That’s almost 20 years and with care and not cutting corners on making sure an investment is a good one, this is a way to go. BTW, the one condo sold for 4 times what we paid and bought us into Phoenix just before the explosion there so in 5 years we have quadrupled our equity. You can’t count on that but is does happen and nothing in the stock market (except one lone stock pick) has done that for us.
