<p>The decline in values of assets matter…</p>
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<p>Are you sure?</p>
<p>Would you say the same thing when you’re 90 years old?</p>
<p>My mother has held GE from 20 to the 60s, down to 5 and now to wherever it is today. She just cares about getting her regular dividend checks.</p>
<p>Those with pensions care about their stream of income. They don’t care about what the source of that income is [perhaps they should].</p>
<p>Of course. But you have that risk with real estate as well. Now you might think that as an experience real estate investor, you would be able to make a better estimate of that particular part of the risk profile. But my only point was that you can’t simply assume that investments liquid assets–even high yielding liquid assets–are necessarily more “risky” than investments in rental property; the assessment of risk is complicated and individualized, both with respect to the specific type of investment and the needs of the specific investor.</p>
<p>The mortgage I paid off was at 6%, and paying it off lets me refi another mortgage twice as large from 6% to 3.25%. I’m not sure how you calculate a rate of return on this… if I calculate how much less interest I will pay in the next year for the amount I paid off, it comes out to around 11% for the first year.</p>
<p>I have all the stock market exposure I want in my 401ks and IRAs. I have no particular skill in investing in the market, so there is no guarantee I would do any better than reworking my mortgages.</p>
<p>Yes, I could almost certainly make more by investing in another property. But… I don’t really want any more properties. As I said, most of the properties that generate decent returns need a lot of work. In the past I have done a lot of it myself, which is one reason my returns are so high, and I don’t really have the desire to take on another project. I already have a full-time job.</p>
<p>
About half my properties are currently worth less than I paid for them. But I don’t care, because I have an extreme long-term view - basically until I die. They all had positive cash-flow from day one, and that is my primary interest. The value will come back eventually, but even if my heirs don’t make a big capital return, in the meantime I will have several decades of 25-30% yearly ROI, and that’s assuming the rents never increase.</p>
<p>25-30% ROI? I’d gladly pay you 2 and 20 to manage my money. They should have you in Barron’s instead of Abby Joseph Cohen.</p>
<p>[GE</a> cuts dividend to save money - Business - US business | NBC News](<a href=“GE cuts dividend to save money”>GE cuts dividend to save money)</p>
<p>EMM1, hyg is going to be an awful investment. Write it down. Dstark said this on Jun 15, 2013.</p>
<p>I do not like tlt. I said that earlier this year. </p>
<p>I don’t like dividend stocks that are paying 2 to 3 percent a year. I am talking in generalities. I am not talking every stock that pays dividends of 2 to 3 percent a year. i have said that earlier so I have been wrong on that…but I won’t be. ;)</p>
<p>I don’t like gold. </p>
<p>I don’t think investors know what they are doing. I don’t think they understand how important interest rates are to asset values. They aren’t the only important factor, but they are a big factor. For fixed
income, it is all about interest rates, and duration, and credit quality…with a little psychology thrown into the mix.</p>
<p>Hyg is really going to suck some day.</p>
<p>These interest rates of today are not going to be around forever. I have no idea when they are going to rise and keep rising. When interest rates really rise, that is going to affect asset prices. Some asset prices will still rise with rising rates, but asset prices will still be affected.</p>
<p>Bernanke is going to soothe the markets this coming week. That is more than a 50/50 guess.</p>
<p>I think what is happening in Japan is a big warning sign which is why I talk about Japan. Doesn’t mean the US markets are going to crash tomorrow.</p>
<p>GE. My insurance agent is long GE. He doesn’t have 33 percent of his assets in GE but be isn’t happy. </p>
<p>If I buy something at 20 and it rises to 50 and then drops back to 20, I doubt I would be too happy. That drop in GE (I haven’t looked at the exact drop. I am making the numbers up.) is hurting my agent’s retirement. We have talked about this a couple of times over the last few years. And yeah…he is still getting dividends. The dividends are lower than they were 4 years ago; although, they have been increased off the lows.</p>
<p>Notrichenough, if you pay off the mortgages you will not have a 25 to 30 percent return on investment per year, Right?</p>
<p>If I buy a place for 300,000 with 100,000 down and I generate 30,000 a year in income my return is 30 percent.</p>
<p>If I pay off the mortgage, I now have 300,000 in the property. If I generate 40,000 a year because of lower interest costs, my return drops to 13.333 percent a year going forward.</p>
<p>You may very well be right about HYG and interest rate sensitive securities generally, but again, that would not impact the cash flow. If interest rates return to anything like a normal level in the short to intermediate term, stocks will take a big hit as well. Something like TIAA traditional is the only safe haven I can think of (besides cash).</p>
<p>Japan has been completely crazy.</p>
<p>
That’s idealized, it doesn’t include vacancies or repairs and maintenance or a reserve fund or a vacancy allowance, etc. Or management fees - if we ever turn them over to a property manager instead of managing them ourselves, that’s 10% of income off the top. It’s really a max possible return, which is unlikely to be achieved consistently. So 20-22% is probably more realistically achievable on a regular basis.</p>
<p>And you don’t get these returns until the mortgages are paid off. So for the first 15-30 years you make a lot less. In the early years, almost all of our profit was rolled back in to pay for improvements. And by accelerating paying off the mortgages we are actually reducing our return because we are investing more money in them without increasing the revenue. But it will increase our cash flow, years earlier, which is the goal.</p>
<p>And I have thousands of hours of sweat equity in these properties, I’m not willing to do that for anyone else. ;)</p>
<p>We may have a pretty decent retirement, though. :D</p>
<p>Cash flow is not everything…</p>
<p>There are a lot of investors that are investing for cash flow that are going to get buried. I am not saying anything profound. That is just the way money works.</p>
<p>Inflation can crush the value of cash flow.</p>
<p>What if something happens and you need to sell the asset? The asset declines 50 percent. Then where are you.</p>
<p>You could be in trouble.</p>
<p>I have money invested in bonds. I want some cash flow. I invest in individual bonds because they have maturity dates. Slightly limits the downside. I am not fooling myself. These asset prices can decline 30 percent. (That is a little over 2 percent rise in rates. That would just get interest rates closer to normal). If I had to sell that would wipe out 6 years of interest. If inflation took off, the value of the bonds and the cash flow would decrease.</p>
<p>
True, but if you have multiple properties, and pay off one, and then add the amount of that payment to another mortgage to pay that one off, and then roll 2 payments over, etc., what is your rate of return then?</p>
<p>The way I look at it is that as long as the money to pay down the mortgages is coming from my tenants, it is not money I am “investing” into the property - I am basically taking a smaller return now so I get a bigger return later, sooner.</p>
<p>I’m not an accountant, so this is probably the wrong way to think about things, but it makes sense inside my head. :)</p>
<p>
Well, theoretically, rents should also increase with inflation.</p>
<p>:)</p>
<p>Ok…</p>
<p>Let’s do it like this.</p>
<p>You put in your original investment into an investment property. You never invest any additional money into properties except for money generated by investment properties. You reinvest all cash flow into property or pay down mortgages.</p>
<p>You double your original investment every 3 years. After 12 years, Your investment has increased 16 times. The return on that original investment is 24 percent compounded a year.</p>
<p>Since you are a math guy, let’s use numbers.</p>
<p>Let’s say you invest 100,000 in properties in 2008. In 2020 at 24 percent compounded a year, your 100,000 investment is now worth 1.6 million.</p>
<p>Is that the kind of returns you are talking about, notrichenough?</p>
<p>If so, you are kicking butt…</p>
<p>One possibility for dealing with the likelihood of interest rate increases might be to give up some yield and switch to HYS. Much less volatile, and because you are dealing with short term bonds, should revert to the mean in relatively short order.</p>
<p>Of course, if the economy crashes again, you still face significant default risk.</p>
<p>It doesn’t compound like that. You can’t invest more into the property after the mortgage is paid off.</p>
<p>If I buy a place for $100K, 20% down, 4%, 15 yrs, taxes+insurance+utils = $300/month, rent for $1000/month</p>
<p>This gives a mortgage of around $600, for total expenses of $900/month.</p>
<p>This gives a net of $100/mo, $1200/year, for a return of 1200/20000 = 6%.</p>
<p>When the mortgage is paid off, my net is now $700/mo, $8400/year for a return of 8400/20000 = 42% of my initial investment of $20K. And my equity has increased 400%, giving me a return on equity of 8400/100000 = 8.4%.</p>
<p>If I use the $100/month to prepay the mortgage, it lowers the term to about 12 years.</p>
<p>So for 12 years you make nothing, then you make 42% forever.</p>
<p>Or… you sell, buy five more, and in 12 more years you are making $40K/year on your initial $20K, and have $500,000 in equity.</p>
<p>Hys does have less interest rate risk than hyg.</p>
<p>Hyg and hys also fluctuate compared to other securities. There is risk and reward there too. </p>
<p>There is very little nuance on a bb. If we were having conversations we would be able to flush things out. </p>
<p>I wrote earlier that bonds I own could drop 30 percent in value with an increase in rates.
So why would I buy these bonds? </p>
<p>One reason is the longer it takes for rates to increase the less the bonds are affected.
A 200 basis point move 5 years ago and these bonds would have dropped 40 percent instead of 30 percent today. In 5 more years, the bond prices will only drop 20 percent in a 200 basis point move.
So my risk, because I am long bonds with fixed maturity dates, is declining. My thoughts were rates were not going to go up before I bought these. </p>
<p>My other thought was I could make 5 percent a year for 20 years on my fixed income investments or I could stay in cash and see if rates go up. I would not get the 5 petcent a year while I wait. I would get zero. That was a tradeoff. The longer it took for rates to normalize, the better the 5 percent deal was. </p>
<p>I could also invest in shorter maturies while I wait. That would change the numbers around. So many choices. Lol</p>
<p>“It doesn’t compound like that. You can’t invest more into the property after the mortgage is paid off.”</p>
<p>You can invest more into a property. Fix it up. Might be a bad investment though. </p>
<p>Your returns are better than you wrote. You don’t make nothing for 12 years. You paid off a mortgage using other people’s money. That increases your return.</p>
<p>Your equity is 20,000 year 1 and 100,000 after year 12. </p>
<p>Under your scenario, , If you sold the property after 12 years for what you paid, your returns would be around 14 percent a year compounded. </p>
<p>I know you are just looking at cash on cash returns. You don’t see the cash so you think you didn’t make a cash on cash return. What? The mortgage just paid itself off by itself? You used that cash flow to pay off the mortgage.</p>
<p>Now if you had an interest only mortgage, the numbers would be different.</p>
<p>
I know that, but I can’t spend the equity, so I ignore it. It’s a bonus for my kids. ;)</p>
<p>Well, I suppose I could take out another mortgage and spend it, but then that sort of defeats the purpose.</p>
<p>Well… </p>
<p>You can reinvest that 100,000. You can exchange that property tax free for another property and get a higher return. Can’t you? I know it depends on situations 12 years out but it is possible. </p>
<p>Edit. You may not want to do the above. We are getting old. Younger people can do it.</p>
<p>In theory. 1031’s in practice can be tricky. It can be difficult to identify replacement properties and get the timing done correctly, and you put a lot of faith in the escrow agent. There was a large one that went bankrupt a few years ago, a lot of people lost a lot of money.</p>
<p>Besides, like I said, more properties = more work. I’m looking for less work, although if something really outstanding came up I might go for it. If we’d started when we were younger, maybe I’d have accumulated more.</p>