I realize that there are quite a few exit strategies in the world. Most things you can enter you can usually also exit (except for, perhaps, North Korea). But in the business world and investing I have come to realize the importance of the exit strategy. I have failed miserably in stocks because of this. I'll write another post about my famous stock tragedy of my young teen years but just trust me when I say that you shouldn't be emotional or sentimental with stocks. If they are plumetting, it's usually for a reason. I'd be about 6K richer if I knew this. Maybe more.
Since I also now have investment real estate, I realized that it is also meet (I like King James English) (and I careth not if I use it incorrectly) to plan a real estate exit strategy. When I first got involved, I was just happy to get the initial decision process and gut wrenching fear of taking action behind me that I never sat down to consider when I'll actually sell this investment for a profit! Go figure. So today I started doing so and I came up with a cool new revelation. Let's use 100K in all my examples because I got 51% in Math 12... or was it Math 11? Whatever. I suck at Math is my point.
100,000 - here's your house
10,000 -here's your deposit
5,000 - here's your closing costs (don't forget these are all random numbers guessing my way)
90,000 - here's your mortgage amount
6000 - rent for the year at $500/month
enough detail already! Details are for weirdos anyways. Systems are for cool people...moving on.
Point is this. Let's say at the end of the year you've put out 15,000 + lose some on interest of course. Your renter is paying down your principal so let's say there was 30% interest and 70% principal (who knows how random I'm being now). That'd be 4,200 paid off the outstanding 90K. Say... $86K left. Here's the point. Your amount owing went down. And here's the beauty part as we all know - The market generally goes up. Let's say it goes up conservatively by 3%. Now your 100k is worth 103k market value and the amount owing has dropped from 90k to 86k.
I know. You're thinking 'duh. Who doesn't know this stuff?" And Taylor #2 might say "You're wasting blog space. Go away." But it's just cool to me. If the market shoots up, so up goes those numbers on the value side. Probably also bumps up the rent potential too.
Meanwhile, buddy over at Mind-ur-Life Financial is trying to get you to dump your 10K in a volatile foreign market fund that you have no control over. I dunno. Maybe I've just got a bad taste in my mouth about those thangs but real estate sure seems more tangible and acheivable for someone with limited time.
You boyz have anything intelligent to say about real estate exit strategies or are you readin' this goin', "Dude...he's right. I have to sell this thing one day, don't I?!"
Be well. Stay out of hell.
B.L.I.P. Heros
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6 comments:
I'm just thinking "who pays $5000 to close a 100k house"?
What, is your lawyer wearing solid gold panties? The other fictitious number I'd like to confront is the amount you pay on your principle the first year, 4200???? I'll tell you from experience because the first place I bought was exactly 100 000 that after 2 years i will have paid off almost 2000 bucks. MLS has some great calculators that will show you month to month how much you will pay to interest and principle.
So, my main question now is "why does it have to be your house"?
I was thinking because I do it so well, and (wheres joe?) why don't you rent close to where you work and then you can spend your money on a rental place anywhere in the world!! Another reason I'm so hot on renting is because if I was paying a $3000 mortgage each month, then I never would have been approved to buy investment property. Almost all my income is written off, and banks think I'm poor, so I need things to keep my expenses down if I'm ever going to be a rich tyrannical revolutionary leader.
your wasting blog space...go away.
I know my numbers suck. I was hoping the ever-silent Disposable Joseph the Third would pipe in and rebuke and fix the errors of my ways. Instead, I have to listen to childlike piping from Taylor 2. Did I not preface that my numbers sucked?
Anyways, thanks for pointing out those items. I think there are a few reasons why we bought. First, the non-monetary reasons that DJ wrote about (calling it your own, pleasing the wife, etc). The bonus was that we actually did quite well and got in before the prices shot up another 30K 1 month later. So, do the math on that plus taxes. Not to mention, it would have thrown us over the limit for qualifying for all those tax rebates on new homes if it was even 10K more. But all that aside, I just wanted access to the leveraging power and, as it were, get that one scratched off the list. At least now we can ride the market wherever it might go and learn through the process.
I think you, being the rent-master-MC are a great resource to have here. I make a lousy renter because I always sit there and say "man! If I were the landlord, I'd do things so differently!" So I quit renting. Also...our rent fee was really only about $700 more per month than our mortgage because we had a good deposit.
But good points. They're true.
question: do you plan on talking about my main point? Exit strategy? Or do you plan on taking us down a bunny trail? EXIT STRATEGY FOLKS! I WANT YOUR IDEAS!!!
EXIT STRATEGY.
If you think the market is levelling, and possibly dropping - exit.
If you are losing more than you're making - exit.
Best thing is probably to hold onto good property because it will increase in value. If you sell in the first five years, then your payments haven't even touched the principle (if you calculate land tax and insurance)
So either flip it and get out, or go long.
That's your exit strategy.
That's like a stock strategy.
What I was thinking about was something else that I can't explain well. Maybe it's just that we need an accountants perspective. Here are some thoughts I was having:
1. Are there any tax advantages to holding? For example, the thought came to me today that I would be far better to put any extra savings I have into a payment in an investment property rather than selling and have to find a new investment...like a sheltered savings? But I guess I'll still have to pay capital gains when I sell? I wish I knew more about that part.
2. Can you use the equity of that place to get another place? haha. Like borrowing from your Visa to pay for your Mastercard?
etc? Perhaps what I was more looking to discuss here were all the surrounding things that we might not think about. The items you mentioned are kind of industry-standard, if you will...maybe I'm making it too big of a deal.
Counsel me. Enlighten me.
First of all, I'd like to know how you guys manage to post so quickly.
I don't have anything intelligent or nerdy to add about the numbers, as I think you have beaten each other up over it already. But, maybe I can say something weird.
When you post something on this web log, you probably have an idea of what you are going to say already, even if it changes a bit as you are writing.
Similarly with property, it is a good idea to choose your exit strategy before you purchase. Sometimes the property itself will determine the way to go. On the flip side, your exit strategy may determine the type of property that you should buy.
Again, if you take out your pocket calculator and consider your personal finances etcetera, you might decide that you can afford to hold on to a place longterm while collecting rent.
In other cases, you might look for a rundown shack in nicer hood for quickie fixie flippie, which in theory will help you to build up some cash for other types of investment.
To make it even more personal, find out what you are good at, and what you enjoy doing. Maybe you have a knack for renovations, and so those types of investments might do you better.
Investing is like the Force; all things are intertwined and affect each other. Use the Force, and do your best to decide on your exit strategy before going in to far. That should give a clear goal for the proceeding steps.
So... I did say something nerdy.
When you pull your calculator out of your pocket, Mr. Liau, do you find that it gets caught on your pocket protector? I've heard you're quite the nerd from people around town. Are you one of those guys who collects pez dispensers and wacky cards? hahahah!
...Actually. I do that. But moving right along.
Nice notes. I like your exit strategy comments. That's what I was thinking - have the plan beforehand. Also, your point about 'what you're good at' is key. What I'm thinking about is that we ought to invest as an alliance. We've got Taylor 2, the Reno-Flipper White Gangsta, Liau, the geeky numbers guy who can use a calculator like a shotgun and myself, a loud-mouthed guy who isn't afraid to sign a contract without reading it and likes to invest just for the rush.
Oh oh. I think I just set myself up for removal! Wait! I can defend my case. Keep me for the negotiation process. I'll be the front man and you guys can be the brains. Like George Bush or something. Just put batteries in me and tell me where to invest.
I'm also good at negotiating and persuading.
Come on, coach! Let me play!
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