Coach Mitch’s REFLECTIONS
In the real estate investing world we use quite a few acronym’s to help remind ourselves to do things in a proper manner. First and foremost, we must make sure that we understand the “numbers” regarding the property. If renting, this becomes crucial.
One such acronym is IDEAL.
D = Depreciation
E = Equity Build Up
A = Appreciation
L = Leverage
Determining a properties Income is the logical starting point when analyzing a real estate investing transaction. As a back-up strategy, you should know how much rent you will be able to collect in the event you do not sell the property as you hope. You must therefore also know what your total housing expenses will be so that you can determine what your cash flow will be. What is another word for cash flow? Profit.
This is a little understood and rarely looked at benefit of real estate investing. Certainly it is not usually made part of the analysis when seeking to invest in single family homes. Sad. The tax benefits associated with owning investment real estate is a major reason to do this type of investing. You should at least calculate the extra rental income that you will accrue, at your income tax rate. It will often be $100 – $200 per month. That is typically equal to the cash flow. That puts an entirely different complexion on the benefits analysis, doesn’t it.
Equity Build Up
In the first several years of a mortgage, the amount of mortgage pay down is very low, about 1% per year. In later years, the amount of equity build up is significant and you should be taking account of this in your analysis, especially after ten years of ownership. I have rental houses for 27 years. Even with refinancing, I’m doing OK. Especially since the tenants can be counted upon to pay down the loan.
I am not a speculator. I do not buy houses based upon any thought of appreciation. I do ask myself what are the near and mid-term potential for increases. While I do play around, and put in 5% and 10% increases, for a few years, I do not ever put more than 3% per cent in as part of the final analysis.
This is interesting. Leverage is the ability to use a small amount of assets to control a large amount of assets. The smaller the down payment, the larger the potential rate of return. The larger the down payment, the smaller the potential rate of return.
Negotiating a low price matters because it lowers your payments and increases your income. So the size of the price discount that you negotiate is very, very important.
Price matters more than anything else
A core principle behind Coach Mitch’s “Ridiculously Simple System…” is the idea that a highly motivated seller will give a very substantial discount in price if he is paid in total and in cash and is able to move on to the next phase of his life.
Imagine if you paid about 25 – 50% of fair market value –
Your Income will be very high if you do not pay very much.
Your Depreciation will be fairly small, and that is a great trade-off because your price will be so low.
Your Equity Build Up is significant because the mortgage is not very big, if you even have a mortgage.
Your Appreciation will be terrific because you paid very little.
Your Leverage will be determined by the strategy you intend to employ.
Motivation is the key
Coach Mitch’s training focuses on finding the most motivated of sellers. In previous posts I spoke about the realities of why someone will sell their property for so little.
Virtually no one believes that property can be gotten for 10% – 25% of its value. People do not believe what they do not understand. These folks cannot imagine themselves being in a situation where they are desperate enough to sell an asset for a give-a-way price. Well, just think about a garage sale. People are willing to give stuff away for very little, all the time, just to be rid of it. They do not want the headache or the clutter. Peace of mind is the concern, not money.
Today, many are only a few paychecks away from being in a desperate situation. They will act to preserve their sanity and that means to move on, even if they have to leave a lot behind. They just want to end the pain and start over.
See Coach Mitch’s “Ridiculously Simple System…” ™ for details.
Be ready to help them,
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