Bawldguy Talking

No matter what spin one puts on it, every part of life has its own set of ‘physics’. There are certain truths, which when violated, will exact predictable consequences. Jump of a three foot high doghouse onto the lawn, and you’ll be fine. Take a fall from 100 feet up? Not so fine. Gravity works every time it’s tried. Engineers make it our friend whenever possible. Get water hot enough and it turns into steam. Pretty soon it’s gone. Works every time.

Negative leverage — Thou shalt not

If the cost of money borrowed in the process of acquisition cost more, in terms of interest rate than the subject property ‘returns’? You’ve entered the land of negative leverage. It’s akin to the guy whose intention was to fill the hole up, only to discover he’s been diggin’ it deeper and deeper. In the end, it never works.

Law: An investment property shall generate a yield greater than the cost of money it took to acquire it.

Appreciation in value [Read more...]

Have you ever found yourself talking with a financial planner about real estate? I have on many occasions both in private sessions and at seminars. In most cases planners have many reasons why real estate is an under-performing investment. Usually the topic of diversification is brought up and sometimes the word speculation is mentioned.

Don’t get me wrong, I believe many financial planners can be quite helpful in building a financial plan and in presenting the investment choices that they know and understand. The wrinkle seems to be that there are so many ways to really invest and planners tend to focus on investments that they are most familiar with and perhaps where they can make the most money. In my opinion real estate can be a great investment, especially if you understand the fundamentals of what makes for a good real estate investment.

A common fallacy that I hear is that cash flow and appreciation are the only elements in a real estate return. It is then further stated that appreciation is unlikely and should not be considered which only leaves cash flow. Reality is that cash flow and appreciation are just two out of the four elements that make up a real estate return. [Read more...]