Early in Your Career, the Less You will Have Later On
Yes, you heard me right. Taking on more debt early in your career, can help you retire your overall debt faster later on.
It’s the only known perpetual motion machine in existence anywhere in the universe.
Say you buy a single $300,000 property with 25% (ie, $75,000) down. It’s a nice one–well located, and it earns decent rent.
You sell it after five years.
After you take into account cashflow, paydown of mortgage and a bit of property inflation on the +ve side, and some realtor and attorney fees on the -ve side, you end up with $159,146 in cash. Cool.
This represents an IRR (internal rate of return) of 18.5% pa. Sure beats your bank savings account, which has been paying you a measly 1.5% pa.
But what if you’d been able to buy five properties with 5% down (instead of just one with 25% down)?
Well, because you have higher mortgage payments, you make less on each property than you did before: only $80,718 after five years.
But remember, you own five of the suckers so your total cash on hand after five years is $403,591! Way better than the $159,146 with just one property.
Now I realize that 5% down is tougher to do in 2016 than it was before the modern economy nearly crumbled in the Great Reset (recession of 2008/09). But even if you can only do 2 and ½ buildings (at 10% down) instead of one at 25%, the same set of facts will apply.
There are some other caveats such as you must: a) buy good performing properties that appreciate in value and are in demand, b) be able to add value by animating them, c) write smart leases and d) manage them properly.
By the way, you can goose your returns even higher if you subscribe to the Warren Buffett method of investing. Instead of selling them after five years, you re-evaluate them, re-appraise them and refinance them. This allows you to avoid transaction fees (realtor, legal and opportunity costs) as well as income taxes on your gains.
Then you repeat the process. Pretty soon (in 12-15 years) you have an amazing real estate investment portfolio of surprising size.
I haven’t found anything else that works reliably like this does. Everything else I’ve tried (mutual funds, pen funds, hockey team (the Ottawa Senators), newspaper (Ottawa Business News now Ottawa Business Journal), taxi sign company, stock market… you name it, I’ve done it) has flopped.
Oh, by the way, the money you take out via refinancing is tax-free.
Worked for Warren.
@ profbruce @ quantum_entity
postscript: here’s a spreadsheet I did for a client of mine who buys industrial property. But if you change “industrial condo” to “residential rental” the principles are identical… https://www.dropbox.com/s/oglyh5ud032bhuu/Sample-IRR-2-commercial-5%25-v-25%25.xls?dl=0
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