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Thomas Stanley - The Millionaire Next Door

They have just read "The Millionaire Next Door" by Thomas Stanley.

http://www.amazon.com/exec/obidos/tg/detail/-/0671015206/104-8360017-8220717

They advocate saving a lot, and being frugal and thrifty - spending as little as possible.

I wonder - what's the point of this?

I can understand having some savings, but why should we live as poor people and save lots of money?

What's the point of saving the money, then?

Jason
Tuesday, October 07, 2003

I think its meaning is to maintain a lifestyle one notch below your financial means.

There are many examples of lost fortune; people that win 100mil in a lottery and blow it all in a year, or sudden stardom ala MC Hammer, just to piss it all away.

Those who you concider rich are either in debt up to thier ears and don't show it or those who live a little below thier means, albeit thier means are a factor of 10 greater than the majority.

Case Point: I went to an estate auction a couple days ago, the "rich guy" of the town was there, picked up some nice stuff....he bid a lot and bought much, but would have paid 10 or 30 times more if paid retail.

apw
Tuesday, October 07, 2003

The payoff is psychological freedom.

<warning type="grand generalizations">
There is a big discrepancy in how we live versus how our parents or grandparents lived. I notice that somewhere starting with the baby boomer generation, there has been a sense of entitlement which has resulted in little or no savings, buying whatever they want and severe debt.
</warning>

This is all a personal thing. Where do you put your values? Do you value what you can buy to occupy your time now, or do you value security in the future? There should be a balance, but finding it is difficult for many people.

To Each His Own
Tuesday, October 07, 2003

Why do you use "they" in your post?  Do you mean "I".

I think the idea is to continually save money so that you can live off the interest.  In order to do this you have to pinch your pennies so to speak and this results in you living a lifestyle without luxuries.  The idea being that after you have a million dollars you would be able to all of a sudden live a better lifestyle because you could retire and live off the interest.

This may have been true around 1987 when the interest rate was 13% but now when interest is 1% and you get 2-3% maybe 4% on a CD you'd have to save at least 5 - 6 million dollars to live on 1% interest. 8^)


Tuesday, October 07, 2003

That's easy. Let's say your income is $10 a year. Let's say you spend $11 a year. In 10 years, you'll be 1 year's salary in debt.

Let's now say you spend $9 a year. In 10 years time you'll be able to lose your job and still live for jus over a year on the money you've saved.

Now let's say you spend $7 a year. In 10 years time you'll be able to live for over 3 years on the money you've saved.

In a $100,000 a year job, assuming 30% tax, you will see a million dollars pass through your hands in 14 years time. Let's say you enter the job market at 20, and start looking towards retirement at 50 or 65. How much of that 2 - 3 million you've earned will you actually have?

Mark T A W .com
Tuesday, October 07, 2003

This is one of my favorite subjects.  By saving money, you're really saving time.  The two are equal and inseparible.

Want to bum around Europe for a year?  Explore your artistic side full time?  Start a business?  Volunteer?  Sit around and do nothing?  You can buy all these things with money.

The point isn't to die with $5M in the bank.  The point is that most (not all) people would increase their happiness more by having varied life experiences than by acquiring items.

In a way, buying time is a little bit like cheating death.  I don't know about you, but when I get home from work, I'm tired.  The better part of my day, gone.  Doing this 240 days out of 365 really takes a toll on who you are and makes you boring.

Different people will see this from wildly different point of view.  For me, buying time and doing fun and rewarding stuff is more valuable than a fancy car, a house with marble countertops, or a closet full of $120 shirts.  I don't consider it "living poor" to buy my latte at 7-11 for $1.60 rather than at Strabucks for $4.  How important is "show" to you?

Bill Carlson
Tuesday, October 07, 2003

Note: I haven't read The Millionaire Next Door, though I did read a condensation of it published in...Fortune, I think.

There are a couple of reasons to save a large chunk of money:

1) Life is unpredictable.  You *will* have major, unexpected expenses.  Would you rather be able to pay for them immediately, or take out a loan and pay a lot to a bank for the privilege?

2) Wealth creates wealth.  Those who have money can invest it, and make even more money.  But you need the money to invest it.

3) Retirement.  Imagine not needing to work.  That takes a large nest egg.

The Pedant, Brent P. Newhall
Tuesday, October 07, 2003

PS - If you think life is all about acquiring Stuff and going on Fancy Vacations, then maybe you're not enjoying your day to day life enough.

How many of us who lived through the blackout on the East Coast learned that you don't need to have all the modern conveniences to enjoy yourself?

Mark T A W .com
Tuesday, October 07, 2003

other books in this vein:

The Only Investment Guide You'll Ever Need (or something like that) by Tobias.

Your Money Or Your Life by Dominguez and Robin

For me, Your Money or Your Life really solidifed the ideas in Millioniare Next Door, even if the math is based on 90's level interest rates.

Chuck Schwab has a retirement calculator on his site that's pretty sobering. Why don't you check it out and see how comfortably you'll be able to retire at your current savings & interest rate in your IRA/401k etc.

Mark T A W .com
Tuesday, October 07, 2003

Stanley's next book, The Millionaire Mind explains things more. Using the example of fixing your toilet, there or two kinds of millionaires he observed.  One fixes it themselves, and saves the money.  The other figures their time is more valuable than the money saved.

It turns out that both ways are good, given certain assumptions.  He explains why.  Read the book, it is better than The Millionaire Next Door!

Scot
Tuesday, October 07, 2003

+1 for the Millionaire Mind.

Its my financial bible.

Canuck
Tuesday, October 07, 2003

NOTE: I haven't read "The Millionaire Next Door", but I have read his other book: "The Mind of the Millionaire". It's a good read, but nothing new if you've got some common-sense about you.

My story:

My wife and I live on roughly 30% of our combined income.

Most americans live on 100% (and a large number spend more, say 104% (or more)) of what they make. This makes no financial sense at all.

We don't live "rich" but then we don't live "poor" either. We live a good, solid "middle class" lifestyle and have no regrets with our lifestyle.

We intentionally make hundreds of small sacrifices in the short-term for the long-term greater good. For example, we don't buy new cars -- we always get something at least 2 years old and let someone else eat the steepest part of the depreciation curve. Most of my peers have a new car every three or four years. We get seven or eight (or more --- the current car's eight and looks to get another two or three before it dies) out of ours. When we buy our cars we pay cash, so as not to eat several thousand in finance charges. We make things last. We spend money wisely.

The entire point, from our perspective, is to retire early.

Based upon our current rate of savings (and other current assumptions (rates of return, interest rates, inflation (CPI -- consumer price index), real-estate values and a whole bunch-o-other-stuff). Anyway, based on current assumptions, we're going to retire early, we'll be making enough from our investments to maintain our current income level *plus* keep up with inflation *plus* increase our current income annually during our retirement -- and when we're both dead and gone we'll have a very large legacy to leave to the surviving members of the family.

By "early", I mean that I'll be 43 and she'll be 40. We'll be *done* then. We won't have to work another day in our lives and we'll be making our current income plus a raise every year. This is important. Most people, when retirement planning, don't take into consideration the effects of inflation eating away the nest egg. We've got inflation covered and then some. NOTE: This is based on assumptions that may change over time, but we've got contingencies in place to mitigate any issues, barring a complete colapse of the economy.

That puts us at rougly 25 years ahead of the "retire at 65" generation. That means we won't have to work (although we probably will out of boredom) for that 25 years, and we can maintain our current income levels (which is waaayyy more than we need -- remember, we're currently living on about 30% of our income)

We won't have to rely on Social Security, which will probably be bankrupt by the time we're old enough to collect (it's not enough to retire on, even if SS does somehow stay solvent through our "golden years") -- and we'll be completely ... (drumroll ...) "Financially Independent"

I'm currently 34. I'm looking forward to completely giving up work within 9 years. To me that's *beautiful*. Think about it. 9 years! Sounds sweet. Most of our peers are looking at more than 30 years before they retire -- if they can retire at all. Imagine being a "slave to the man" until the day you die. That's utterly depressing.

I'm retiring before my parents. They belong to the "spend 104% of your income" set and are just now waking up to the reality of the life they've lived. They're going to both work, full time, until the day they die. They woke up to this fact entirely too late, and are trying to play the "catch up" game, but it's too little too late.

Our house is paid off in less than that -- it'll be completely paid off by the time I'm 40 --  which will give us even more "disposable income" when we retire (no more mortgage obligation). Most of our peers are accumulating debt at an astonishing rate. Most will never retire and will work the daily grind until the day they die.

It's all about the freedom to do what I want, when I want, for the last 20 or 30 (or more) years of my life. If you retire at 65, you'll be lucky to get 10 more years to enjoy the rest of your life-- and even worse, you'll be old with all of the associated issues (failing health, diminished physical stamina (I'm not knocking "old" -- it's all relative, but it's a given that, at least physically, things are much different at 65 or 70 than they are at 40 or 45)

You wouldn't know it if you saw me, but I'm the "Millionaire Next Door" and then some. 

To the original poster:

If you could have 25 (or more) years of *complete* freedom -- no job, no bills: house paid off, cars paid off, no revolving credit, no second-mortgage/home-equity loan, no financial obligations of any kind -- would you do it? It requires quite a bit of discipline, some careful decisions, and a bit of contingency planning. For less than 20 years of this planning, you can get 25 more "for free".

Is it worth it?

My answer: Hell Yes!

FYI -- it's been a long, slow, methodical plan that we're only 12 years into, and have 9 more to fully implement. It takes time. They call it the *Time*ValueOfMoney for a reason! Don't fall for anything along the "Get Rich Quick" line of thinking.

Everybody can do this. Most don't. The absolute key to it all is CompoundInteres(tm), and to realize just how badly it hurts you when you're paying it, and just how beneficial it is when you're collecting it, and that you double your rates of return by collecting it instead of paying it (instead of paying 18% on credit card debt, you're collecting, say, 12% on an investment and netting a difference of 30% (18 % + 12% = 30%) making for *huge* increases in your net worth if allowed to accumulate and compound over time. TimeValue and CompoundInterest are key to making this happen. Franklin had it completely wrong when he said "A  penny saved is a penny earned." It's really, if you understand the TimeValueOfMoney and CompoundInterest, it's really more like "A penny saved is a *dollar* earned". Think about it. Run some numbers. Spreadsheets are our friends when looking at these numbers. I'd go as far as saying that (thanks Joel! <grin>) MS Excel has made me a millionaire, simply because it makes obvious what most people don't think about when you actually "run the numbers".

It's all about living below your means, educating yourself on investments (FYI: equities/stocks/bonds/CDs and the like are *not* your best investments), being disciplined on your spending, coming up with a long-term (20 to 25 years) plan, planning for contingencies, being flexible, keeping your goal in mind and actually (gasp) MAKING IT HAPPEN! Nobody's going to do it for you, you've got to do it yourself.

In a nutshell, that's why I live below my means. It'll give me a good two or three decades without a job, to do whatever the hell it is I feel like doing at the time.

Sgt. Sausage
Tuesday, October 07, 2003

Sausage:

If those are not good investments, what *is*?

Mike Swieton
Tuesday, October 07, 2003

Sgt. Sausage (and those like him) is what the book is about.  The book isn't about how everyone should save everything they have for retirement.

To sum up the book: The vast majority of milionaires are not basketball stars, wall street brokers, CEOs, or dot com millionairs (well maybe not anymore).  Most of them are regular people, who knew how to save.  They give an example in the book of a teacher, who made $35,000 a year, saved up and was worth $2 million at retirement age.  She didn't do anything other than save, and not in a bank savings account.

This was a book I had to read for my personal finance class, and I'm very glad I did.  It (plus finance books like the stuff from Fool.com) have changed my outlook on money, and I'm glad I read it now (at 23) rather than when I was 50.

The book is an interesting read, worth it if you have time to kill, or want to know more about the average millionaire.

Lastly, re: saving. I like the fool.com idea of saving.  Save enough so that you'll be able to live happily when you retire, but not so much that you can't live happily now.

Andrew Hurst
Tuesday, October 07, 2003

"(FYI: equities/stocks/bonds/CDs and the like are *not* your best investments)"

And???  You're leaving us hanging, man!!!

Come on, throw us a bone! :)

Jim Rankin
Tuesday, October 07, 2003

I'll join the chorus.  I'd love to hear what's a better investment than stocks over the long run.  (Real estate?)

Matt Conrad
Tuesday, October 07, 2003

A book that counters Sgt. Sausage is "Die Broke". The Die Broke philosophy says that few people can actually afford to retire any more (even at age 65). Most will work until they die. You don't want to save your money and die rich, because that is wasted money and effort. Make enough and spend (just) enough to live comforably. Then buy investments like annuities and reverse mortgages that leverage equity you have now (and then you die broke and the bank collects).

runtime
Tuesday, October 07, 2003

I'm guessing home ownership.  As a long-term investment, it makes sense -- when the house is paid off, appreciation (around 7% a year) is free.  Not bad compared with the S&P 500 performance of about 10% over the past 80 years, considering you're also saving money by not paying rent.

In the short-term, though (when amount borrowed is approximately equal to the price of the house), your effective rate is (appreciation rate - mortgage rate), which is pretty low, sometimes even negative.  And there's brokerage fees, property taxes, homeowners insurance, and home maintence which will eat into your savings.  Plus, homes are not as liquid an investment as stocks.  If you run the numbers you might as well be better off renting and socking the rest of the your cash into stocks and bonds.

Alyosha`
Tuesday, October 07, 2003

For real state investment and specifically real estate vs stocks, read "Value Investing in Real Estate" by Gary Eldred.

The Millionaire Next Door and The Millionaire Mind are particularly insightful because they are the result of interviewing people who have have real net worth, not just high incomes. The Millionaire Mind in particular gives more insight into how these people think and though much is common sense, most of it is not what people practice. Unfortunately, the role models for sucess that we are bombarded with in the media are often exactly the wrong kind of people to look to for acheiving real wealth.

fool for python
Tuesday, October 07, 2003

sgt. sausage has a good philosophy. i saved up $90,000 by working 2 jobs for 2 years and not spending any money. - I made $70,000 a year at my day job and charged $50 an hour for consulting at my 2nd job and averaged about 30 hours of consulting per week.  this is after losing 30 grand in a dot com stock option debacle. i leave this cash in a savings account that gives me 2.4% per year (it is the max insured by the FDIC). I drive a crappy 1997 ford escort that i paid cash for. i will be putting a down payment on a house (apartment) the middle of next summer. my credit card has a $400 limit. any large purchases  I need to make (computers, etc) I put on a business amex (i am incorporated). i also purchase all my fun stuff (DJ equipment, records) with my corporation because i am technically incorporated as a "software/entertainment consultant) and do make $1000 a week as a nightclub dj. i learned how to save,etc by reading all the books mentioned: "die broke, millionaire next door, your money or your life" and a few others.  my insights on this discussion are: work as much as possible until you have a large cash buffer (90K is excessive, but i am paranoid) then try to find a hobby that you can also make some cash doing (in my case DJ/music). i don't know who said it, but the phrase that sticks in my head is "anything worth doing, is worth doing for money." :)  good luck!

rz
Tuesday, October 07, 2003

The prototype for "The Millionaire Next Door" is "The Richest Man in Babylon" by George S. Clason.

Reginald Braithwaite-Lee
Tuesday, October 07, 2003

I tried The Richest Man in Babalon, I couldn't read it. The author took too long to make his point. Wasn't there also one about a barber? It seemed like it was mostly filler - the author had a good message, but needed to expand it to fit 100 - 200 pages when the author was only competent enough to fill 20 - 30.

In any case, the Millionair Next Door wasn't exactly a parable the way The Richest Man in Babalon was, it was a study of millionaires, so I'm not sure The Richest Man in Babalon served as the template. Either way, read both.

I've heard The Millionaire Mind wasn't as good a read as The Millionaire Next Door, but maybe I'll check it out. I picked it up a while back on discount, but never quite got around to reading it... especially after those bad reviews.

Mark T A W .com
Wednesday, October 08, 2003

I am somewhat like Sausage, having saved about half my salary last year...

BUT I think the bigger picture is that it would be even better to find work where you wouldn't WANT to retire.  Instead of killing yourself starting at 20 to save enough money to retire at 40, you could make those 20 years more enjoyable by taking a pay cut and doing something you like.

That doesn't apply to everyone, and of course if you love your work every day you're one of the lucky few.  But I'm thinking there are a lot of programmers out there in it for the money, and who would be happier doing other things for less pay.  Of course for some people, programming IS the job that they would never want to retire from, which is very convenient, considering that it pays well.

Andy
Wednesday, October 08, 2003

> Instead of killing yourself starting at 20 to save enough money to retire at 40, you could make those 20 years more enjoyable by taking a pay cut and doing something you like. <

You mean you could make those 40 years more enjoyable because you'd be working twice as long.

You could be hit by a bus tomorrow. You could also live until you're 100. You should live as if both of those are going to happen. Enjoy today AND plan for tomorrow.

Mark T A W .com
Wednesday, October 08, 2003

Sgt. Sausage - have you got kids?
In my experience 2 or 3 kids makes the difference between 30% and 104% ;-)

SteveM
Wednesday, October 08, 2003

The focus on personal saving is a massive con, a tool used to keep working people chained to a life of servitude.

Talk to wealthy individuals and examine the long term plans of organisations (businesses).

Do you know any company whose long term strategy is to save money ? no, the long term strategy of every company is to INCREASE REVENUE, and INCREASE PROFIT MARGINS.

If you can learn how to turn that extra hour or two you have at night, or those weekend days into extra income,

If you can learn how to multiply your revenue by employing others and break that link between your income and the man hours you expend then you are on the path to financial freedom.

The idea that if you are smart and save and live within your means for the next 35 years you may have 2 million dollars with which to buy a house and a car is not only downright insulting, it's untrue.

Saving is equivalent to losing weight by dieting, increasing your income is equivalent to excersise.  Yes you need both, but conentrate on the second and the first will magically fall into place.  The first is pain and denial, the second is empowering and life changing.

Australia's richest man was once asked "How can somone earn a lot of money quickly ?"  he replied "Get into a lot of debt. You will HAVE to earn a lot of money quickly".

Braid Ged
Wednesday, October 08, 2003

Braid,

I agree that producing income from means other than simply working is a great goal. Taking your money and buying stocks and bonds is essentially taking your money and investing it in someone else's business. Why not invest it in your own, right? A few things to keep in mind.

1. The corporations are OWNED by someone, so their goal of producing income v. savings is in the context of someone else, who probably already has a massive savings.

2. Not everyone can do this, by definition if you have other people working for you, someone must be working.

3. Living within your means is not a con, the con here is consumerism and the debt machine. That's what really keeps us working. It's not like someone who immediately spends all their money is going to be able to start a business.

You're either operating in the red or in the black, whether you're a business or an individual. Businesses that run in the red are typically either poorly run, or are in the process of expanding. Any business that consistently runs in the red will eventually go out of business.

Mark T A W .com
Wednesday, October 08, 2003

On BBC they are running the "Mind of a Millionaire" series right now. http://www.bbc.co.uk/science/humanbody/tv/millionaire/

From what I can tell the secret to becoming a millionaire is ... high risk taking and pure luck.
These are people that are prepared to take big gambles. The small percentage that get lucky become "Millionaires", but for every Millionaire there are a lott of loosers that followed the same strategy and, well, lost.

Just me (Sir to you)
Wednesday, October 08, 2003

In my experience 2 or 3 kids makes the difference between 30% and 104% ;-)

-- So does the income. Would you rather have 30% of Bill Gates bank balance or 104% of your own?

Robert Moir
Wednesday, October 08, 2003

Just Sir, I haven't read The Mind of a Millionaire, but The Millionaire Next Door seemed to focus on being frugal, not on taking gambles. Sure most of the millionaires were business owners, but nowhere did I get a sense that they were big risk takers.

That series looks interesting, I hope it airs in the US.

Mark T A W .com
Wednesday, October 08, 2003

Read somewhere (wish I had the link still) that a study was done to find out who was more "happy":

- a self-made millionaire or
- a lottery-winner millionaire

The study showed that the lottery winner -- instant wealth -- was happier. I forget why, but it might have something to do with the type of person that you are if you can create your own wealth over a period of many years. That type of person will make many sacrifices -- used cars, smaller homes, cheaper clothing, less vacations -- compared to the other guy who just got a lot of money dumped in his lap.

<sigh>
Wish I still had that link....
</sigh>

Chi Lambda
Wednesday, October 08, 2003


I think the key to having a big pile of cash is that now you work because you want to, not because you need the pay check.

You might have heard the expression "The best way to be truely effective at your job is to act like you don't care about it." -  In other words, to be willing to be fired for doing the "right thing."

In my experience, there are only two or three ways to get to that position:

1) Have a big pile of cash,
2) Have your house paid off and a residual income (say, book royalties),
3) Have a reputation for excellence, so that anyone who fires you is considered a fool, and you are snapped up within days.

In this industry, #2 and #3 are pretty close together.


It could even be a mastercard commercial:  "Not living in fear of losing your job -- Priceless."

regards,

Matt H.
Wednesday, October 08, 2003

There's a handful of big names in software that can make a living with book royalties.  Mike Gunderloy has an interesting series on becoming a book author and how little pay is involved.

http://www.larkware.com/AdviceforWriters.html

somebody correct me if I'm wrong.
Wednesday, October 08, 2003

There's a story in Your Money Or Your Life (or maybe it was another book whose name ecapes me at the moment about the people who did that program).

There's a story about a guy who starts to approach financial freedom - where he can live off of his investments. At work he starts getting more assertive, taking on the more difficult projects, and doing things the right way, rather than always cow towing to his bosses. After all, what does he care if he's laid off, or what his bosses think of him? He wants to get things done the right way because for the first time, he's really there just because he wants to be there, not because he has to be. At this point he can work almost any job and still live.

So who said saving was the Man's way of controlling you? Spending is the Man's way of controlling you.

Mark T A W .com
Wednesday, October 08, 2003

A few tidbits at the end of this thread:

The Canadian equivalent is "The Wealthy Barber" by David Chilton. ( http://www.amazon.ca/exec/obidos/ASIN/0788789503/qid%3D1065617678/702-9022304-5674427 )

One advantage of home ownership often overlooked: you get to live there rent-free.  So, even if appreciation doesn't match your mortgage interest rate, you still come out ahead.  To look at it another way, your landlord uses your rent to pay mortgage+property tax+maintenance+profit.  When you own, you keep the profit.

RENT is a four-letter word.  Unless you're a landlord.

Finally, the one big reason to save?  How about the tech shitstorm that we're still going through.  Right now I am working on a product for my own company and living off savings.  I figure bankruptcy will occur in ten years if I don't take any remedial action before then.

David Jones
Wednesday, October 08, 2003

Another good book concerning time and money and the relationship of the two is:

Time Tactics Of Very Successful People.
B. Eugene Greisman

It definately makes you thinkg twice about what you spend your time/money on

moses whitecotton
Wednesday, October 08, 2003

All that saving and building for the future, then you divorce and not only lose most of it but then have to pay 75% of your take-home in alimony and child support.

Bitter Ed
Wednesday, October 08, 2003

Paying off your mortgage isn't quite as good a deal as it may seem.

Say you own 10% of your house (typical for most mortgages).  With today's interest rates, let's say your mortgage rate is 6% (makes the math easy).  Now, let's also assume that the appreciation rate is 3% (will vary WILDLY based on where you live).

That mortage interest is tax deductable, so your effective rate is really only 4% or so.  Then, consider that you are gaining equity in the home at that 3% appreciation.  Since you have only paid for 10% of your home, that works out to 30% return on your investment.

On top of that, you now have all that extra money to invest in more liquid investments.  Real estate is NOT liquid.  If you can make only 8% on your investments, you're more than overcoming the 4% you are paying on your mortgage.

There are always other factors, but basically it actually works out well to have a mortgage, even if you can afford not to.

David
Wednesday, October 08, 2003

Mr Pork Product, I hope your health stays good.
That can change your financial picture in a hury.

somebody
Wednesday, October 08, 2003

"...That mortage interest is tax deductable..."

Not in Canada and perhaps not in other places. As I understand it, there are other taxation differences (capital gains?) that at least supposedly compensate us for that, but it certainly makes the calculations a lot more complex.

We're looking at 2 houses right now, after having blown everything failing at our own business. Both are in small towns. One is $20000, 30-45 commute, and 10 minutes from a nice lake. The other is $10000, 45-60 minute commute, and 60 minutes from that same nice lake. The condition of both houses is comparable (and livable!). Taxes are the same in both cases. Tough call, but we've decided to start with the one closest to the lake as property in this area seems to be increasing in value whereas the other location is not.

Ron Porter
Wednesday, October 08, 2003

Mark T A W,

The "barber" book you are thinking of is probably
"The Wealthy Barber" by David Chilton.

It was the first finance book I read.  Chilton did some work
during the PBS pledge drives in the mid to late 90's -- kind of like Suze Orman does now.  I liked him a lot, though now there are many other places to get similar advice. 

Greg M.
Wednesday, October 08, 2003

In regard to Bill Carlson, and others:

I used to think like Bill, in that time and money were all but indistinguishable--and I still do!  You can almost always trade one to get the other.

The catch, I've learned, is that there's a cap on the amount of time you have, while money has no theoretical limit--making time more valuable.

The thing about living frugally is that the tradeoff is time--you may spend more time at work, do your own home maintenance, spend more time with the car in the shop, spend your weekends cleaning instead of relaxing, and the like.

I'm not saying that frugal is bad, just that you're aware of the tradeoffs.  I'm not sure time gets compounded quite as easily as money does, so it perhap makes more sense to save the money earlier and shift the time savings to later when the financial benefits of compounding kick in.

-Rich

Rich
Wednesday, October 08, 2003

Is that $10,000 and $20,000 correct?

Either sounds pretty close to free to me.

njkayaker
Wednesday, October 08, 2003

$10,000 Canadian? So like $5,000 US? damn.. I live in the San Francisco Bay Area. I'm looking at 1 bedroom/1 bath condos for $400,000 - $500,000. My landlord bought a dumpy duplex for $450,000 in 2000 and is selling it now for about $800,000.

My girlfriend and I joke about moving someplace where we can just buy a house with our saved cash. Then we just have to make enough money to buy food (and pay property taxes) for the rest of our lives. Maybe we should stop joking and really think about it...

PS - I'm still waiting for Sgt. Sausage's response! <:-)

runtime
Wednesday, October 08, 2003

To answer some questions that were directed my way:

(1) No kids. You are correct. This was a conscious decision made by my wife and I when we got married. There were a number of reasons we chose this road (philosophical reasons I don't want to get into here (inappropriate for the current thread)), but it was a choice. If you have children, even "accidentally", you've made a choice to have them and, in the context of this thread, yes -- children are *expensive*.  Most people plan to have rugrats, but aren't fully aware of the associated costs with raising a family. This doesn't mean you can't save. It just means you'll save a little less.

(2) As far as the investments -- yes I do invest in "traditional" investments (equities/stocks/bonds etc.) and generally do all right with those. They make money, beat inflation, and I'm not saying that one shouldn't invest in those. They're good solid investments if you know what you're doing. What I am saying is that the RealMoney(tm) is not to be found in those investments.

My best investments in the last 10 years have been investing in private (small) businesses.

I own my own programming shop. There's 6 of us (2 owners (50/50)(we're both developers), a receptionist, 2 additional developers and 1 hardware/network tech). Almost 7 years ago I invested $1500 to startup. Most of that was spent on the attorney fees in setting up the partnership agreement and getting our legal ducks in a row. For the last 6 years, it's thrown off between 70K and 125K a year profit (!) for an initial investment of 1.5K. Not bad for a $1500 investment.  I spend about half my time on this business as a database developer. The other half of my time is spent on other business ventures described below.

I funded part of, and own a piece of an independent claims adjusting office, currently with 8 employees (two secretaries and 6 adjusters). To date, for the last 8 years, it's returned about 40% annually on the initial investment. FYI : in a previous life, before I got the tech bug, I worked as a claims adjuster for a national chain of adjusting offices. I didn't just randomly pick claims adjusting to invest in -- it's something I'm very intimate with.

When we bought our house, we bought some acreage with it. This land is either (a) straight up rented, or (b) used in a "profit sharing" agreement. We let some local farmers work this land along with their own farms and take a nice profit on the land that not only pays for the land itself, and the property taxes on the land, but throws off a tidy profit in the 15% range, and in a few years when the land is paid off, it will be 100% profit (less taxes (both property and income)) coming in from the rents/profit-sharing.

I turned my hobby (playing guitar) into an additional income source. Because my other businesses are taking more and more of my time as they grow, I'm no longer actively gigging, but when I was, I got an additional 10 to 15K a year by both (a) actively playing a gig or (b) renting my gear (P.A., E.Q., peakers, amps mixers, lights, monitors, mikes, signal processing, cables etc.) to other local musicians for their gigs. This busines (a) cost nothing -- all gear was bought with gig profits, (b) didn't at all appear to me as "work" -- it was my hobby, and it generated good income, (c) was actually DamnedFun(tm), and (d) made me 10K to 12K a year with *no* initial investment of my own money.

I own real estate. To insulate personal assest from potential liability issues, I'm starting a real estate management company. Not only will I have my own real estate assets owned and managed by the management company (that I'll own) , but I'll sell the management services to other real estate investors and have my employees handle the day to day work, while I sit back and collect a percentage of the the fees. This is targetted for 2Q 2004 implementation -- I haven't fully run the numbers, but I expect that this business venture will consistently return 15 to 20% of my initial investment, year over year. Better than the long-term average percentages in any stock market.

By far, your best investments are to own (or own pieces of) small, private, non-publicly traded businesses, that can generate and throw off profit, and where the revenue is generated by your employees and/or partners, without you having to come in and run the business day to day. The absolute ideal is for the businesses to be able to run without your day-to-day input. You can retire, and have your employees generate your income.

That's my plan. I've currently got about 50% of my net worth in the above (and many other) business ventures, about 25% in real estate, and have the remaining 25% in the traditional (equities/stocks/bonds/etc). With the semi-recent "bubble burst" I'm actually pretty darned glad I wasn't "all in" on the "irrational exuberance" of the late 90's. Even with the downturn of the economy, my business are doing well, growing, generating profit, and exceeding the returns of the more "traditional" investment routes.

That's my story and I'm stickin' to it!

Sgt. Sausage
Wednesday, October 08, 2003

there is more than just monthly loan payment vs. monthly rent payment to compare.

house cost = loan payment + down payment + taxes + maintenence + significant transaction fees both on buying and selling
rent cost = rent + deposit + sometimes small movein/out fees.

in an economy where appreciation is likely to be stagnant or even negative on housing prices, medium-term rent may well be a wiser choice. around here, monthly rental costs are far below even typical mortgage payments on equivalent houses. you can invest the down payment somewhere else as the bubble (driven by the previous stock bubble) continues to deflate.

mb
Wednesday, October 08, 2003

> house cost = loan payment + down payment +
> taxes + maintenence + significant transaction fees
> both on buying and selling
> rent cost = rent + deposit + sometimes small
> movein/out fees.

You forgot to subtract what you get back from selling the house.  You count selling transaction fees, so why not count what you might get back from the sale? 

Joe Blandy
Wednesday, October 08, 2003

In other words the Loan payment is not the true cost - only the the loan interest is a cost. You will get back the principal amount when you sell the house.

DJ
Wednesday, October 08, 2003

If ( MonthlyRent < MonthlyMortgage ) and ( EstimatedTimeOfOccupation < 6 years ) then
  Rent()
else
  Buy()

apw
Wednesday, October 08, 2003

also forgot

Home Owner Ins, Prop Tax, PMI if required

apw
Wednesday, October 08, 2003

Thanks for the reply, Rich.  I think you can divide expenditures into three categories:

- Essential.  You've got to eat, have someplace to live, get a haircut, have transportation, etc.

- Major upgrades.  Kids, nice house, expensive car, home remodeling, expensive home furnishings.  Divorce.

- Luxuries.  Eating out, vacations, nice clothes, charitable donations, entertainment.

In my experience, middle class people don't "do themselves in" with #1 or #3.  It's #2 that gets them. 

How many times have you heard "Buy the most house you can; your income will rise over time" or "My kitchen remodel is going to add so much onto the value of my house"?  Or the unexpected "Honey, I think I might be pregnant".  How many people get dry cleaned by a divorce that was caused by fighting over money or because dad is always at work?  The thing about "major upgrades" is that they are generally illiquid.  It's hard to sell a house, get out of a new car loan, dump your kids or wife or sell your $3,000 couch.

We're living in strange times, economically.  It's likely we will see a "reversal of mean" with regard to home prices.  I think the average one can historically expect is inflation + 1%.  That's about 2.5% right now.  Home prices are approaching the theoretical maximum relative to household incomes.  Don't run your calculations expecting a 7% increase year over year.  More expensive homes also fluxuate in price quite a bit more than average homes.

Luxuries don't have to add much.  For example:

$200/mo - Eating a nice take-out dinner every day (cost is over what you would normally spend to eat in)
$200/mo - Vacation
$125/mo - Entertainment.  Movies, seeing a play once in a while, buying sporting goods, etc.
$75/mo - Nice clothes (over regular clothes)

That's $600/mo to live a pretty good life.  People easily spend this on one car payment + insurance.  A $40K kitchen remodel (that you get $25,000 back in value), leaves you $15K poorer.  That's 6 months of not having to work.

Anyway, the point is that as a middle class person you can live "the good life" and still come out far ahead.

Bill Carlson
Wednesday, October 08, 2003

>> "When we bought our house, we bought some acreage with it. This land is either (a) straight up rented, or (b) used in a "profit sharing" agreement. We let some local farmers work this land along with their own farms and take a nice profit on the land that not only pays for the land itself, and the property taxes on the land, but throws off a tidy profit in the 15% range, and in a few years when the land is paid off, it will be 100% profit (less taxes (both property and income)) coming in from the rents/profit-sharing."

Around my neck of the woods farm land rents for $50 - $90+ per acre per year depending on it's quality and location and no farmer that I know would ever even think of entering into any sort of "profit sharing" agreement with the renter...  Farmland also sells for $1800 - $2200 per acre... How many acres did you buy again?

Let's say you bought 50 acres @ $2000 per acre. (Not including the land the house was on.)

$100,000 - one time investment

You rent those 50 acres to a farmer for $70 per acre.

$3500/yr

Property tax on 50 acres of farmland... I'm going to guestimate $2000-$3000.

$3500-$2000

So you have $1500 dollars left which goes toward the $100,000 you invested to buy the land...

Doesn't add up.  What the heck am I missing here?  Are you feeding people full of shit?  My guess would be probably.

Explain please thx
Wednesday, October 08, 2003

Retire with money- good.

Retire young with money- better.

Love your work, have plenty of time off throughout your life for other things you love, and plenty of money to enjoy that time- best.

I am shooting for best, and doing pretty well. If you are so eager to retire, you must not like your work. That's bad, because the bulk of your prime years will be spent doing it.

And I think people who feel they have to wait until they retire to enjoy themselves are crazy. I know of plenty of people who, not long after retirement, either got sick, or died. I have 35 years before the traditional retirement age- am I seriously going to wait it out before doing the things I want to do?

You owe it to yourself to find (or create) work that doesn't feel like work, and to find the time to do all the other things you enjoy outside of that now, before you are too old to get to it.

I know people will come back with a million excuses as to why they can't do this, or why they can't do it right now but they'll get to it, or why my case is some special abberation.

Well- whatever. I was at one point a Denny's waiter, once a parking valet- I didn't inherit my (any) money and I'm not well connected, lucky, or even particularly hard working.

I believe if you really want to do it, then you can. And if you think you can't, or it's too much work, then don't bitch about being unhappy with your lot in life- you gave in to it and accepted.

-A Millionaire Next Door

Matt
Wednesday, October 08, 2003

1) As for my little equation about buy vs. rent, the 'money you get back' is reflected in the appreication comment: if housing prices are falling or stagnant (as they are right now in many places), the amount you get back at the end is less than or equal to the amount you put in. Especially once you subtract all the expenses (taxes, etc.). If housing prices are going up, then of course it's a wise investment. The 6 year number is good in some scenarios; right now around here it's probably more like 20 years, and about 5 years ago it was more like 1 year. Bubble.

2) Sgt. Sausage--looks like you're a bit of an entrepreneur. Many diversified investments. I also question some of the returns, but the idea sounds good. But when you 'retire', you'll have to either sell the businesses or not really retire, just promote yourself to 'chairman' or something. If you invest in, say, the S&P500, your workload is approximately zero, though your return (and risk) are lower than what you're doing now.

mb
Wednesday, October 08, 2003

i don't think it is so weird to want to retire at 45, even if you love what you are doing. especially in this industry. what do 45 year old guys even do? I don't know any 45 year old programmers OR managers. After 35 or so, everyone seems to disappear.  I would like to do some programming in my 50s, but I certainly don't want to try to make a living doing so at that age.

rz
Wednesday, October 08, 2003

Sgt. Sausage:

you got a fascinating story!

Just curious, what does your name imply?

o' my
Wednesday, October 08, 2003

To: Explain please thx

==> Doesn't add up.  What the heck am I missing here? 

You're missing a lot. See below.

==>Are you feeding people full of shit?  My guess would be probably.

First, I'm offended. Not only is your guess outright rude, but it's wrong. I don't eat shit. I believe in the GoldenRule (do unto others) and don't expect them to eat shit either, so I don't feed it to them.

--

Second, You've done your calculations wrong. You're assuming a $100,000 one-time up front investment on the acreage.

--

BZZZT. Wrong answer. Do not pass go, do not collect $200.

If you do that, and you're trying to make money on the property,  you're insane and deserve what you get in the bankruptcy courts. We have  a concept  that's commonly known as *leverage*.

Consider this. When you buy a house for 100K -- do you put 100K down at closing. Nope (well most people don't anyway -- you might <grin>). You put a down payment of, say 10%. You put 10K down, and that's you're *entire* initial investment. Now lets say you rent your house out for the entire costs of the mortgage, plus the property tax, plus a $125 a month profit. On an initial investment of 10K, you're getting $125 a month in profit, which is $1500 a year, which is 15% on your initial investment. *AND* if you keep the property rented, it pays for itself (meaning someone else is building equity for you -- when it's paid off you now have a 100K property that someone else ate all of the the interest on, paid all of the taxes on,  paid 90K in equity, and still makes you a profit each month. Now, add to that, the appreciation of the asset over time -- by the time your 100K house is paid off it's worth, say, 200K, and you're talking DamnedGoodReturns -- Of course, you have to subtract from the appreciation the accumulated inflation. The house may have appreciated to 200K, but that may only be worth 150K in today's dollars.

Consider that $125 a month on (as in your example of) 50 acres is a little over 2 bucks an acre a month. Not very much actual profit, but sill 15% on the initial 10K investment! Leverage. It's a beautiful thing.

My actual profit isn't that high (15%), in fact it's slightly negative (that's right, I <gasp> *lose* money on the difference between rents collected and mortgage/taxes paid). Imagine that, I can lose money monthly, but still have a long-term 15% return. How's that happen? WTF?

I add in the equity I'm building. That's money that I get to collect (some day in the future),  and it comes out to a 15% return on the initial down payment, plus my monthly payments on the cash I'm losing monthly (unrealized -- I don't actually get the return until I sell the property and scrape the equity out -- but it's there and it's *real* (barring a total colapse of property values)). I'm not even counting on the asset appreciating, but if it does, it's BonusMoney(tm) when I decide to sell it.

Most people are very afraid of this: intentionally losing money from month to month on a property. It's particularly bad for residential real-estate -- you've always got expenses that you have to cover (water heater busted, new roof, new carpet etc. )  so you want to actually cash flow positive on rental homes. I make sure my rental homes cash-flow on the positive side to cover those incidental expenses. I have none of that with my acreage. What expenses, other than mortgage and taxes can there possibly be on acres and acres of dirt and weeds?

Granted It's risky (losing cash flow from month to month) and not for the people who are easily scared of risky investments. The fact is, I pay monthly to make the difference between rents and expenses, but the rent pays all the taxes and the vast majority of the mortgage payment and builds equity. A question that puts this into perspective. Would you pay,say,  $50 a month out of your own pocket to build, say, $300 a month (averaged over the life of the loan) in equity? I would and I do. Some wouldn't. In fact, most wouldn't. Now, say you're losing $50.00 a month *now*, but you expect rent to rise over the next few years (as they historically have)-- enough to make up for the accumulated loss over the "upside down" period when you're losing money? What if rents increase to the point where you're no longer losing $50 a month, but making a profit (cash-flow) each month? A profit that not only offsets all the loss you took in the initial "upside down" years, but starts making you real cash flow over and above what you laid out while you were losing money.
Now, consider, that after the mortgage is paid off, all you've got to pay is the taxes. The increased rents are now paying off decreased expenses, and the profit margins become much greater at that point. What have you got to say to that. Am I still feeding you full of bullshit.

Maybe. It's all speculation, in one way or another. While the mortgage is a fixed expense -- taxes are not. They generally increase over time. Rents generally increase over time. Will they offset each other? My assumptions say they will. Yours might not. It's speculation. It's a gamble. But it's a risk I'm willing to take.

I eat current cash-flow for returns, over time, manifested in equity (and hopefully appreciation)

Leverage. You spend 10K to control, and earn a good income on, a 100K asset. You make your money work for you, instead of the other way around.

Go back and rework your calculations. For my area, in particular the acreage I purchased,  your land prices are about 40% too high, your tax numbers are about 20% too high, and your rent prices are about 10% too low. You'll see that, yes, I'm losing cash flow from month to month.

Now, head over to your favorite on-line mortgage calculator. Figure the mortgage on your loan, keeping a close eye on the amortization schedule and the equity you're building. Now remember, SpreadsheetsAreOurFriends, so pop open an instance of Excel (or your favorite spreadsheet) and RUN THE GOD DAMNED NUMBERS AND QUIT ACCUSING ME OF FEEDING OTHER PEOPLE FULL OF SHIT!!

Granted, it's not as easy as outlined above. There are associated expenses that we haven't covered, and it does take work and time to manage.

I'm not going to broadcast over the internet the exact particulars, but if you work out the numbers -- using the above explained leverage (I actually only laid less on the down, rather than 10% as in the example above -- it was a sweet deal) , and if you modify your initial assumptions per the above discussion you'll see that I'm most certainly not feeding people full of shit, thank you very much.

What did I do to you that you so easily accuse me of "feeding people full of shit" when you can't reason your way through a simple property investment? 

Apology expected.

Sgt. Sausage
Wednesday, October 08, 2003

==>Just curious, what does your name imply? 

Probably just what you think it implies. It's obscene. That ought to be enough to answer your question.

Sgt. Sausage
Wednesday, October 08, 2003

Sgt. Sausage:

I would like to apologize for other posters who are rude and incredulous. I, for one, greatly appreciate the time and insight you have shared here. I have returned to this discussion a couple times yesterday and today to see what you have to say. Thank you!

runtime
Wednesday, October 08, 2003

Right now I think you're a dumbass(TM) Sgt. Sausage.  You good at spewing shit out of your mouth and that's about all.

Read the two statements below and tell me if you're a liar.

>> "We let some local farmers work this land along with their own farms and take a nice profit on the land that not only pays for the land itself, and the property taxes on the land, but throws off a tidy profit in the 15% range, and in a few years when the land is paid off, it will be 100% profit (less taxes (both property and income)) coming in from the rents/profit-sharing."

>> "My actual profit isn't that high (15%), in fact it's slightly negative (that's right, I <gasp> *lose* money on the difference between rents collected and mortgage/taxes paid). Imagine that, I can lose money monthly, but still have a long-term 15% return. How's that happen? WTF?"

Why should anyone believe all of the shit that you spewed from your mouth in this thread.  You're a coniver.  I'm not gonna apologize to you.  I'd rather put a few bullets in your head.

You're one of these guys that's all talk behind the keyboard and probably even more so in real life.  Just talking to you would make me sick.  Are you a pathological liar or something?

Your friend
Wednesday, October 08, 2003

what?

huh?
Wednesday, October 08, 2003

Don't feed the trolls Sausage. hehe. sry for the pun

Full Name
Wednesday, October 08, 2003

Guys -- sorry, I'm gonna feed the troll:

==>Why should anyone believe all of the shit that you spewed from your mouth in this thread.  You're a coniver.  I'm not gonna apologize to you.  I'd rather put a few bullets in your head.
--

Your prerogative. I didn't expect that you'd admit you don't actually understand something.

--

Did you read and understand what I said in my previous post? I'm accumulating equity. Real *value* that shows on my balance sheet. Did you work the examples? I tried to lay it out for you.

I'll make it simple. You can plug the numbers or you can't. Your choice.

I'm losing cash flow from month to month, hence the "slightly negative" comment, but I'm building equity at the rate of roughly 15% of my initial investment, year over year. If you can't understand that cash-flow can be negative, while at the same time creating real financial value (equity), then you've got bigger issues and I can't help you.

It doesn't matter anyway. I'm doing my thing, and it working for me while you're doing ... what ... ?!?! If you were smart, you'd take this as a learning opportunity and work through an example yourself.

If you don't understand something, it's usually customary to ask for an explanation, and fully understand it -- rather than dismiss it as simple shit-spewage.

--

Feeding of the trolls is done. There will be no more communication in this thread by me. See you in another thread somewhere.

Sgt. Sausage
Wednesday, October 08, 2003

Bravo, Sgt.

meinthecorner
Wednesday, October 08, 2003

Sgt. Sausage: if you are losing cash each month, but building equity, then how will you (in your words) "be making our current income plus a raise every year" when you retire? Do you plan to sell your property to unlock the equity you've built and move somewhere else?

runtime
Wednesday, October 08, 2003

>"[3] - Luxuries.  Eating out, vacations, nice clothes, charitable donations, entertainment.

In my experience, middle class people don't "do themselves in" with #1 or #3.  It's #2 that gets them."

Whereas it's probably not as big as #2, #3 is quite significant and has led to many people's financial demise.  Lots of little things add up very fast, especially when they are put on a credit card. A $700 clothes shopping spree here, a $3000 vacation there, a $200 restaurant outing here, and after a few years they have tens of thousand$ in credit card debt with no idea how they're going to pay it down.

T. Norman
Thursday, October 09, 2003

==>Sgt. Sausage: if you are losing cash each month, but building equity, then how will you (in your words) "be making our current income plus a raise every year" when you retire? Do you plan to sell your property to unlock the equity you've built and move somewhere else?

Here's the part I think you're not seeing. This has nothing to do with the discussion of the acreage, or property investment (forget about the property for a moment) -- but with investments in general.

Let's take a hypothetical example. Say, after years of careful investment, you've got a million dollars (the thread is about the Millionaire Next Door isn't it <grin>) Let's also say, for the sake of making the numbers work out that you can consistently earn 10% on your investments -- meaning you earn 100K on the million dollars. Now, if you only actually live on, say, 50K then you've got an extra 50K from the first year's return and you now have 1,050,000 to invest for the second year (your original million plus the 50K that you earned and didn't spend, but rather reinvested.) Now the second year, you make 10% and you've earned 105,000. I can give myself a "raise", and take 55K to live on, again reinvesting the 50K that I didn't
spend. Now I've got 1,100,000 to invest in the third year at 10% giving me a return in the third year of 110,000. I can give myself a "raise" to 60K and I've still got 50K to reinvest. Repeat ad infinitum. As long as you don't spend everything you make (living *below* your means is absolutely key here) then you can consistently give yourself a raise. Here's how the numbers play out:

Year  Amount      Earned    Spent      Reinvested
1      1,000,000  100,000  50,000    50,000
2      1,050,000  105,000  55,000    50,000
3      1,100,000  110,000  60,000    50,000
4      1,150,000  115,000  65,000    50,000
5      1,200,000  120,000  70,000    50,000
6      1,250,000  125,000  75,000    50,000
7      1,300,000  130,000  85,000    50,000
8      1,350,000  135,000  90,000    50,000
9      1,400,000  140,000  95,000    50,000

Notice that the first year I spent 50,000 -- but it goes up by 5K each year. BTW -- I know the percentage is going down (the first year is a 10% raise but the 10th year is only a 5% raise.). The numbers look better if you've got, say 2,000,00 to start and stick with the initial 50K and give a 5K a year raise.

This example is quite contrived, in order to make the arithmetic easy, but I think you get the idea from the above table. Again -- the key is to *not* spend everything you earn, but to reinvest it. Live below your means and always have something to reinvest.

To answer your question re: selling the property to scrape out the equity: It depends. Once the property is paid off, then I've got a choice to make. I can keep the money locked up in equity and continue to receive rents as income (even after the property is paid off. Remember, it's paid off now, no mortgage payment to service and therefore no monthly loss), or I can pull the equity out and invest it elsewhere. Either way, the above table and calculations apply as long as I contine to reinvest and not spend everything I get. I can't answer the question at the moment as it will have to have analysis done, with the assumptions and conditions that are valid at that time.  I don't know what those assumptions will be as I don't have a crystal ball. I'll look at it like this: When a given property is paid off, can I make more money on the continued rent, or can I make more by selling it and investing the money elsewhere?  That choice will be made many years from now and I can't tell you which way it will go.

Sgt. Sausage
Thursday, October 09, 2003

Another way to cash in the equity of your property without selling it is a "reverse mortgage". I learned about this in the "Die Broke" book. Basically, you sell your property to the bank, but they pay you a monthly mortgage payment. When you die, they own the property. If they pay-off the reverse mortgage before you die, then they kill you. No, just kidding! ;-) Then they own the property, but I think you can still live on it until you die.

runtime
Thursday, October 09, 2003

Sausage isn't full of shit, I think he's just a sucker for those simplistic "get rich with real estate" seminars and is desperately trying to justify a purchase...

Sausage, try this in your "spreadsheet": On the left, sum up all cash you have and will pay OUT for your land over the life of the loan -- all mortgage, all taxes, plus all income taxes you're paying on your lease income. 

Then on the right, sum up your resulting assets: Value of the land at the end (say, assuming appreciation at 3% annualk rate of inflation), plus lease income you plan to take in.

Are those numbers pretty close to equal, if not negative? So you're no better off than sticking all that negative cash you're paying out every month under your mattress for the next 10 years?

That cash you're paying out in taxes and interest (which I bet is around 50% or more of your mortgage, right?) is totally lost income for you. You'd make far more earning 8 percent on a bond with that cash than paying out 10 percent to a bank on a mortgage. Using your math, that's 18% interest you're paying on your loan, Sausage, when you could be making 8 percent or more! A 26 percent difference! 

And continuing with your math, why don't you just put down $1 for your "initial investment," then you can say you've made a billion gazillion percent return on that "initial investment?"

Not a Shill
Thursday, October 09, 2003

>>That cash you're paying out in taxes and interest (which I bet is around 50% or more of your mortgage, right?)

Don't know where the Sgt. is at, but around here (Illinois) farmland is taxed at a _very_ low rate. Add that to the low interest rates available now and I'd bet that he's much lower then that.

RocketJeff
Thursday, October 09, 2003

To follow up my own post...

It is quite possible that, at pressent, he's paying more then 50% if you include interest. That's the nature of an amortizing loan - the initial payments are heavly weighted toward interest but as principle is paid off there is less interest to pay and more of the payment goes toward principle. Over the complete life of the loan (which is what's really important) well less then 50% of the total payments goes toward interest - especially with the current low rates.

RocketJeff
Thursday, October 09, 2003

Nobody will give you low rates for undeveloped land, since it's a sucker's deal (it can take 5+ years to sell it off). You either need equivalent value in collateral, make it a personal loan, or it's going to be well over 10% even with today's rates.

Developed land (home/apt/business) has far better return and is easier and cheaper to get a loan for.

Not a Shill
Friday, October 10, 2003

With regqard to the real estate thing, the devil lies in the details.

Another poster has pointed out that in his neck of the woods the relationship between agricultural rent and agricultural land prioes is unfavoutable. That doesn't preclude the figures being different in Sergeant Sausages area.

The main problem with Real Estate as an investiment (and in particular undeveloped land) is lack of liquidity. Prices don't appreciate evenly, in some cases they never do, and if you need to sell you may have to do so at a minimal profit or a loss. Morevoer, unlike with the Stock Exchange, which has the same problem, you have very hight transaction charges, both real and hidden. If you don't need to sell, or buy, then you can cherry-pick the bargains. Which all is part of the first law of the results of iInvestment - the rich get richer and the poor get poorer.

Stephen Jones
Friday, October 10, 2003

my advice: buy low, but sell high!

runtime
Friday, October 10, 2003

Is it me or is it just me?

o' my
Friday, October 10, 2003

no, it's me.

me
Friday, October 10, 2003

One point of saving money: To not be chained to your job.  A HUGE undocumented downside of saving money:  "The best laid plans..."  eg: Save all you want, and then get raked over the coals in a divorce.  Or work hard and save, but it will ALL GO OUT THE WINDOW if you have kids.  Earn $60k and wife has to work.,  Earn $120k and wife stays home.  Little benefit to you.  Or,  save up $90k, and wife will not work until you are broke, and she has to.  (Disclaimer: I've never married or had kids)  No one with a regular say job, and kids ever retires early.  After 10 years of living frugally, and saving up over $1/2 a million, I now side with "Die Broke"    Do not overwork, and do not defer too much happiness.  Balance today and the future.  And know that if you save money, it will probably be bled from you one way or another.  Savings or not, I will never work more than a 40 hour week again in my life (I used to do 60+). 

Bella
Friday, October 10, 2003

I agree with Bella on the "do not defer happiness too much" thing. Enjoy your life now, or else you'll forget how to enjoy your life in the future.

I recall a thread a while back about "what advice would you give yourself 10 years ago" (this was a common thread around that time, I saw one on Slashdot, and prior to that, had a similar conversation with my friends) and most of the people here said "Have more fun. I stopped having fun in College, and I wish I enjoyed myself more. I haven't had any fun since College either."

On the other hand, don't enjoy yourself today by making sacrifices to your future. Just like drinking too much and having a hangover, you don't want to find yourself financially strapped because you're having too much fun today.

Mark T A W .com
Friday, October 10, 2003

MarkTAW, life always seems to come down to 1 word. 

Balance. 

I always come back to this word...I may tatoo this on my knuckles.  (I'll add an exclamation mark for the 8th character, I guess)

Bella
Saturday, October 11, 2003

==>Sausage isn't full of shit, I think he's just a sucker for those simplistic "get rich with real estate" seminars and is desperately trying to justify a purchase...

Ummm ... no. There's no way to "get rich quick" -- *especially* with real estate. I absolutely abhor Mr. Carlton Sheets and those like him.

==>Sausage, try this in your "spreadsheet": On the left, sum up all cash you have and will pay OUT for your land over the life of the loan -- all mortgage, all taxes, plus all income taxes you're paying on your lease income. 

I don't think you read my previous posts closely enough. I'm not laying out that much. The tenant is paying *all* taxes, and greater than 95% of the mortgage.

Essentially I'm paying less than 10% of the expenses and ending up with 100% of the assests. Within 5 years, I expect that rent's will rise enough that I'm paying *nothing* and the tennant is paying *all* expenses. 

I've already run the spreadsheet you recommend above. It was part of the initial decision to purchase the property. I'll attach results below.

==>Then on the right, sum up your resulting assets: Value of the land at the end (say, assuming appreciation at 3% annualk rate of inflation), plus lease income you plan to take in.

If you assum 3% inflation, and a 3% appreciation, then it's a wash and irrelevant to the calculation at hand.

==>Are those numbers pretty close to equal, if not negative? So you're no better off than sticking all that negative cash you're paying out every month under your mattress for the next 10 years?

No where close to equal and certainly not negative.

==>That cash you're paying out in taxes and interest (which I bet is around 50% or more of your mortgage, right?) is totally lost income for you.

Umm... no it's not. The tenant is paying it. No expense to me (but then on the other hand, no income to me either -- ).

==>You'd make far more earning 8 percent on a bond with that cash than paying out 10 percent to a bank on a mortgage. Using your math, that's 18% interest you're paying on your loan, Sausage, when you could be making 8 percent or more! A 26 percent difference! 

These  numbers make no sense given the examples I've posted earlier.

I'll refer you to the calculation at the bottom of this post. Your assumptions in this post are not correct.

==>And continuing with your math, why don't you just put down $1 for your "initial investment," then you can say you've made a billion gazillion percent return on that "initial investment?"

Well, If (a) All I put down was $1, and (b) the tenant paid all expenses -- including mortgage and taxes, then hell yes I've made a billion gazillion percent. The tenant pays the expenses, my initial investment was a dollar, and at the end of the day, I end up with a huge asset that I only paid a dollar for and the tenant paid all expenses on. If only I could find such a sweet deal! (they don't exist, despite what the "get rich quick" scam artists tell you.)

I seem to have hit some "hard" limit on this forum and it won't let me add all the lines to the post to continue this. I'll continue on the next post.

Sgt. Sausage
Sunday, October 12, 2003

[Continued from my previous post]

Since most people are more familiar with residential real estate, this example will be dealing with a condo I've owned for the last 7 years. The farmland thing seems to be confusing some people, but it's the exact same thing. I lost money each month in the first 2 years of this condo. Now I'm making money each month -- in addition to the equity I'm building.

The condo was originally purchased for 92K, with 5% down, leading to an initial investment of $4600 and there was rougly another $2500 in additional investment (water heater, paint & trim & other minor stuff.) Total outlay at beginning of loan: 4600+2500 = $7100.

The mortgage on the place is: $980.00 (15 years at 7%) The actual mortgage is only $825 with the remainder of the $980 being the tax and insurance escrow. Additionally, as with most condos, there's a monthly condo association fee of $110 bringing the total monthly outlay to $1090 for mortgage, taxes and insurance.

When I first rented the place -- the first 2 years we rented it for $1050 a month. We took a $40 loss each month for the mortgage but that was our only expense. Notice -- The *only* thing out of my pocket is $40.00 -- the tenant paid the remainder of the mortgage + taxes + insurance + condo association fee. It's now seven years into it (about half paid for) and, as the rents have risen, we're now renting for $1200 a month , for a profit of about $100.00 a month. We expect profits to rise as rents rise, but that will largely (but not completely) offset by rises in both taxes and rises in the monthly condo fee -- so it's largely a wash.

Here's your spreadsheet on that one:

        Expenses    Income

1        7580    0
2        480    0
3        0    1200
4        0    1200
5        0    1200
6        0    1200
7        0    1200
8        0    1200
9        0    1200
10        0    1200
11        0    1200
12        0    1200
13        0    1200
14        0    1200
15        0    1200

Total                    8060    15600
Asset Value        92000

    Net        107600

My *total* outlay is 8,060 dollars to date, and at the end of it all -- I've made 15,600 in rents *and* got an asset that's worth 92K. This is assuming no further rent increases (not likely) and no appreciation on the original value of the condo (not likely -- it's already worth more based on comps in the same building). As rents rise, and the property appreciates, I'll be looking even better.

This is a bit simplified. There are expenses. We replaced a a dishwasher for $200.00 in year 4, and I expect the HVAC to go within the next 5 which will cost us on the order of 3K to replace -- as well as other incidentals (paint, carpet cleaning etc.) . I expect that the $100.00 a month we're currently making will be entirely eaten by expense and will be a wash.

Either way, I've got an asset in about 8 years that's worth far more than the 92K we paid for it (appreciation -- currently worth about $110K but that may go up *or* down by the time it's paid off.) The beautiful part is that I've paid, out of my pocket 8 grand for something that's worth far more than 8 grand.

BTW -- since this was my first one, I was silly and ate a loss on the monthly for a few years. With residential property those little expenses (new dishwasher etc. ) will always pop up, so now I don't purchase anything unless they're cash-flow positive from day 1, so the unexpected doesn't have to come out of my pocket directly.. The farmland has no such incidental expenses (who's gonna put a dishwasher in the middle of a cornfield <grin>), so I'm willing to eat month each and every month of ownership, and based on the farmland's numbers I'm damned glad to to it too!

Now, for your argument: First off, good luck finding a bond that pays 8%. Have you seen interest rates latley? The bad news is that they're currently at (near) all-time lows -- not good for you in the bond market, but *very* good for me as it makes real estate cheaper to acquire. Now, assuming you paid at the beginning, the same into a bond at 8%, here's what you'd get:

1     Principle      interest     
2     $8,060.00      $644.80     
3     $8,704.80      $696.38     
4     $9,401.18      $752.09     
5     $10,153.28      $812.26     
6     $10,965.54      $877.24     
7     $11,842.78      $947.42     
8     $12,790.21      $1,023.22     
9     $13,813.42      $1,105.07     
10     $14,918.50      $1,193.48     
11     $16,111.98      $1,288.96     
12     $17,400.94      $1,392.07     
13     $18,793.01      $1,503.44     
14     $20,296.45      $1,623.72     
15     $21,920.17      $1,753.61     

Total: $23,673.78

I ask you, would you rather spend 15 years collecting 23K, or would you rather spend 15 years collecting 92K -- either costs you the same as far as money out of your pocket. Which would you rather have? (plus whatever extra you can get as rents rise, plus whatever appreciation (less inflation) you're lucky enough to get).

Based on the number of posts that claim I can't be making any money, or that the numbers are too high, I'll just have to assume that most of you don't understand money and investment, and in particular, real-estate. I'll also have to assume that most of you won't be becomming "The Millionaire Next Door" any time soon. I hope to. On paper I'm already there, but most are classified as "unrealized gains", so depending on when I actually cash out I may be, or may not be.

The point is, I've gotten here by *understanding* what I'm doing -- not by being taken by any "get rich quick" schemes, and by making it an ongoing, and active part of my life, to educate myself on how money and investments work. It's exactly by doing this that I avoid the scam artists, and I'm making it happen in my life, rather than dismissing it as either (a) impossible, or (b) (as an earlier poster put it) simple shit-spewage.

Sgt. Sausage
Sunday, October 12, 2003

Sgt., 

When I was looking to get out of tech,  I first considered rental investing back in 2000.  All my research indicated that you should be cash-flow positive from day 1.  But even back in 2000, nothing in a decent area was cashflow positive, so I put that idea on hold, thinking maybe it's a better time to sell than to buy.  And after the NAZ bubble burst, I had become somewhat bearish on the overall economy, and thought it may not be the right time to get into the landlord game, b/c I didn't want to deal with unemployed tenants and potentially decreasing property values. 

I understood that some RI investors will go cash flow negative for a few years, in exchange for the capital appreciation payout when they sell the property..  But that wasn't a gamble I wanted to take, b/c prices already seemed high at the time  (Bad move, b/c I'd be sitting on a huge capital gain by now) 

At some point, I still want to invest in the RE market.  But, now seems like an even worse time to get in the game than 2000, b/c prices have racheted up, and I don't think rents have kept pace.  I think you're still significantly cash flow negative around here. 

What are your thoughts on RE investing today?  Again, I would rather wait for the right time toget it, even if it's 10 years from now. 

Bella
Monday, October 13, 2003

Dear Sgt. Sausage,
                              you have been either wise, or liucky or both!

                              In the 1980's in the UK there were plenty of people who lost everything in the buy for rent game. Real estate prices plummetted 30%, they found that the rents didn't pay the second mortgage, and worst of all got sacked from their job, so they couldn't pay thie first mortgage (even though the house was nearly paid for) and as a result they lost both properties.

                            Also, consider losses if your tenant loses his job and can't pay. Eviction normally takes a minimum of three or four months, so you've managed to lose that amount of money. And consider the possibiltiy that you may not have tenants at a later date.

                            Another thing to consider is the very real possibility that you are making money because the bank is running the risk for you. this sounds crazy but as banks are under an obligation to lend out money, as otherwise they go bankrupt, then they have often made very dicey loans - consider Latin American dictatorships, Japanese real estate in the 80's, or dot.com start ups nearer to the present.

                          If you have got a 95% loan without offering other property as collateral, then the bank is actually underwriting the risk that the property will depreciate and you won't find tenants, so that when it reposses it, it loses the money and not you. If, on the other hand, you have backed the loan with your first home or some other form of collateral (and HSBC International  is only offering 75% mortgages on buy to rent in the UK so I suspect this is true) then you are not including the risk in your calculations.

                             

Stephen Jones
Monday, October 13, 2003

==>                        In the 1980's in the UK there were plenty of people who lost everything in the buy for rent game.

Everything's a risk in the investment world. Without risk there's no returns. Everybody has to make a judgement call as to whether they're getting sufficient return to balance the risk. In my case, I'm comfortable with both my risk exposure, and the returns I'm receiving for exposing my investment capital to that risk. Others may not be.

==>  Also, consider losses if your tenant loses his job and can't pay. Eviction normally takes a minimum of three or four months ...

Again, it comes down to the risk one is willing to take. I'm willing to take this risk. BTW -- I've done several evictions and not a one has taken more than 30 days. In all cases that I've dealt personally with, a simple nasty-gram from an attorney (costs about a hundred bucks) threatening the eviction process has been enough to have the tenant vacate the property without actually having to go through the process in the legal system. Maybe I've been lucky, but I've never seen the fabled several months to evict a tenant.

==>  Another thing to consider is the very real possibility that you are making money because the bank is running the risk for you.

Well, duh! <grin>. Anytime "the bank" loans money it's taking a risk that they won't be paid back -- on *every* loan it makes.


==> If you have got a 95% loan without offering other property as collateral, then the bank is actually underwriting the risk that the property will depreciate and you won't find tenants, so that when it reposses it, it loses the money and not you. If, on the other hand, you have backed the loan with your first home or some other form of collateral

This is true -- other assets were used as collateral on this particular property. Again, based on my assumptions and running my numbers, I was perfectly willing to risk the other assets. It's all about your comfort level and I was comfortable with this transaction.

==> (and HSBC International  is only offering 75% mortgages on buy to rent in the UK so I suspect this is true) then you are not including the risk in your calculations.

Correct. I've largely regarded the risk of property values declining (hasn't happened in my lifetime), and the risk of high vacancy rates (hasn't happened in my lifetime), and the risk of deadbeat tennants (hasen't happened in my experience as a property owner) as negligible. I suppose I should have worked some allowance for those into my calculations, but I haven't thus far. Again a risk that I was and am willing to take.

Sgt. Sausage
Tuesday, October 14, 2003

==>I understood that some RI investors will go cash flow negative for a few years, in exchange for the capital appreciation payout when they sell the property..  But that wasn't a gamble I wanted to take, b/c prices already seemed high at the time  (Bad move, b/c I'd be sitting on a huge capital gain by now) 

Woulda, coulda, shoulda! <grin>

That's the biggest part of the problem in accumulating assets/investments. Most people are stuck in the "analysis paralysis" and don't make the commitment. Of course, any commitment involves a risk factor, and most people are afraid of risk.


==>At some point, I still want to invest in the RE market. 

This is not exactly GoodThinking(tm). You should not invest in RE for the sake of owning/investing in RE. The above statement should instead be:

"At some point, I still want to invest in the highest yeilding investment that fits within my risk parameters at the time".

Owning RE, just to own RE is silly. If RE happens to get a good return for the risk you're willing to take, then by all means invest in RE. If, on the other hand, it turns out to be gold futures, or pork-bellies <grin>, then that's where you need to go.

RE is part of my overall investment strategy. It's neither the biggest, nor the smallest part of my investing, but it happens to fit my strategy and my comfort with the associated risk.

==>But, now seems like an even worse time to get in the game than 2000, b/c prices have racheted up, and I don't think rents have kept pace.  I think you're still significantly cash flow negative around here. 

Then why do you want RE? If it doesn't make good financial sense, then there's no reason to want to get into it.


==>What are your thoughts on RE investing today? 

I wouldn't go out and accumulate a bunch-o-properties today just to say I'm in the RE game. On the other hand, there are good deals to be made and financing today is about as easy as it ever has been (*anybody* can get a loan with decent terms). If you can find good deals and after the proper analysis, they get good returns for an acceptable risk level, then there's nothing wrong with RE investing. If you're looking to play in the RE world just for the sake of owning RE, then I think it's a very bad idea.

==> Again, I would rather wait for the right time toget it, even if it's 10 years from now.

Good idea, *but* don't just sit on the sidelines for 10 years. If RE ain't good for you for the next 10 years, then make sure you're putting your money to good use for that 10 years rather than having it sit on the sidelines and not do you any good. Find someplace else to invest that gets the best possible returns for your specific risk parameters. Don't suffer from "analysis paralysis". It's a financial killer.

Sgt. Sausage
Tuesday, October 14, 2003

Sgt.--

Some good stuff you've got here, despite the possibility of flamewar for a bit there. :)

Do you have any recommendations for reading material on this and other methods of investing?

Thanks,

-Rich

Rich
Tuesday, October 14, 2003

Sgt,
      What you're now admitting is that your return on investment is high because you have not factored the risks into your figures.

        Can I just point out the following:

a) "I've largely regarded the risk of property values declining (hasn't happened in my lifetime)" Actually it has, unless you're a pre-pubertal Warren Buffett. Property prices in the UK declined by about 30% in most areas at the end of the eighties, and have taken a long time to catch up. In Japan people are still living with the negative equity. There are certainly parts of the States where prices flat-line at best (the rust belt for example). The guy who posted further up, and is buying property for between ten and tweny thousand dollars is obviously buying property that has probably declined in constant value since it was constructed.

b) "and the risk of high vacancy rates (hasn't happened in my lifetime)" - depends what area you are talking about. It hasn't happened in New York for example, and is unlikely ever to do so, but what can happen if you own property when there is a glut of rental property on the market is that the price goes down drastically. I can think of at least two places, Barcelona and most of Thailand, where  rental income is less than 5% of the value of the property - instead of the 10-12% that property investors in the UK hope to make. Sometimes the market can make a real roller coaster ride. I had a friend in Riyadh who told me he was paying the same rent for a three-bedroomed apartment in 1993 he  paid ten years ago for a different three-bedroomed apartment when he first came - $350 a month - but his rent in those ten years had been as low as $80 a month and as high as $700 a month.

c) "and the risk of deadbeat tennants (hasen't happened in my experience as a property owner)" - the problem aren't dead-beat tenants, they are perfectly respectable tenants who suddenly lose their job, and don't find another one quickly. If you own property in an area with a neglible unemployment rate, then you are probably free from this problem, bar a major meltdown, but will probably have other risks. The tenants you have sent the nastygram too that have moved out quick were probably going to go anyway; it's the guy with nowhere else to go that is your problem.

The point is that you are taking a risk - none of the risks I have mentioned above are "negligible". If you have good liquidity then you have little to lose sleep about - but the long term can be a long time.

And most importantly of all, by talking about real estate in general, and not giving exact details of the area you are talking about and the type of proprerty you are investing in, you are obscuring the point; which is that the devil is in the details, and even if your calculations turn out right, they are not necessarily appropriate for another area - or indeed even for the next street along.

Stephen Jones
Wednesday, October 15, 2003

==> What you're now admitting is that your return on investment is high because you have not factored the risks into your figures.

That sentence, as stated,  make absolutely no sense to me whatsoever.

If I invest in say, a mutual fund (or a bond fund, or a stock or a whatever), and get a return -- then I say that the rate of return is, say 15% because it's returned 15% on my investment. I don't say that "hey, even though I made 15% I'll call it 8% because it was a risky investment." I've made 15% on it and it's 15% whether you factor risk into it or not.

On the other hand, that 15% I made this year could just as easily be a negative 30% next year. Is that what you're trying to say? Are you saying that it *might* go negative?

Well, yes, you're right. It might. When predicting future returns, we've all got to make assumptions don't we? I've made mine and so far my model is holding true.


==> a) "I've largely regarded the risk of property values declining (hasn't happened in my lifetime)" Actually it has, unless you're a pre-pubertal Warren Buffett. Property prices in the UK declined by about 30% in most areas at the end of the eighties, and have taken a long time to catch up. In Japan people are still living with the negative equity. There are certainly parts of the States where prices flat-line at best (the rust belt for example).

Yes, but I don't live in the UK. I don't live in Japan.  And, more importantly, I don't buy investment properties in any of those places.

Let me rephrase my above statement so you get my point:
[it] hasn't happened in my lifetime in any place that I really care about for investment purposes.

Is that better now?

I really couldn't care less what real estate is doing in the UK, or Japan. I just barely care what it's doing in the rust belt -- I'm in the "rust belt", but that defines an awfully large swath of the midwest, and I couldn't care less what's happening in an area I'm not invested in.

==>The guy who posted further up, and is buying property for between ten and tweny thousand dollars is obviously buying property that has probably declined in constant value since it was constructed.

Again, not relevant to my assumptions, and my model for my area.

==>b) "and the risk of high vacancy rates (hasn't happened in my lifetime)" - depends what area you are talking about.

Now you seem to get it! "-depend on what area". It's not relevant to my area. If it is relevant to your area, then you assign that risk a higher likelihood of occurring, and it should weigh into consideration on whether or not to make a particular investment. If it's not relevant, it's assigned a negligible weight and carries no consideration.

==> It hasn't happened in New York for example, and is unlikely ever to do so, but what can happen if you own property when there is a glut of rental property on the market is that the price goes down drastically.

Supply... demand ... We all know this. Nothing to see here. Move along now.

==> I can think of at least two places, Barcelona and most of Thailand, where  rental income is less than 5% of the value of the property - instead of the 10-12% that property investors in the UK hope to make.

Why, why, why (?!!) would I care about New York, Barcelona, and Thailand?

Let me ask you this simple question. Would you buy your house -- your personal residence, not investment property, assuming you lived in, say, Arizona, based on the current price of housing in Brazil?

Didn't think so.

It's irrelevant to your decision making process, as  the vacancy rate in Barcelona, New York, and Thailand is completely irrevelant to my decision on rental property where I live.

Let me (again) rephrase my above statement so you get my point: [it] hasn't happened in my lifetime in ANY PLACE THAT I CARE ABOUT.

(apologies for yelling. I'm frustrated.)


==>Sometimes the market can make a real roller coaster ride. I had a friend in Riyadh who told me he was paying the same rent for a three-bedroomed apartment in 1993 he  paid ten years ago for a different three-bedroomed apartment when he first came - $350 a month - but his rent in those ten years had been as low as $80 a month and as high as $700 a month.

And Riyadh is relevant to me in what way?

==>c) "and the risk of deadbeat tennants (hasen't happened in my experience as a property owner)" - the problem aren't dead-beat tenants, they are perfectly respectable tenants who suddenly lose their job, and don't find another one quickly.

And if they don't find another one quickly -- so what? How is that my problem. If they can't make the rent, then they get a nice letter from my attorney. They vacate and I rent to the next guy. If they don't vacate, then I file and have the local sherriff escort them off and wave bye-bye (haven't had to do this in nearly a decade of property ownership). It's not my job to care whether or not they find a job quickly. It's my job to make sure I get the rent check on time. If it's not there, they're gone. Simple as that.


==>If you own property in an area with a neglible unemployment rate, then you are probably free from this problem, bar a major meltdown, but will probably have other risks.

We have typical unemployment here -- tracks with the national numbers pretty well. In the last decade (I've not been around long enough to go back any further) I've not had a problem with vacant property. People have to live somewhere. If they're temporarily down on their luck with respect to employment, then they certainly won't be buying their own place anytime soon. That leaves a few options (a) Live on the street, (b) shack-up with a friend/relative, or (c) somehow, some way, come up with the rent money, somehow, to keep a roof over your head. Most people choose (c). Most people will delay making their credit card payments, will miss a car payment or two, might even default on a student loan or two before they face the prospect of living on the streets. It's one hell of a motivator for people to actually make the rent payment and <gasp> live up to their word -- the obligation they committed to when signing the lease. It sounds evil of me, but it's not my problem if somebody loses their job and can't find another quickly. Can't make the rent? Bye-bye. Don't let the door hit you on the way out.

==>The tenants you have sent the nastygram too that have moved out quick were probably going to go anyway; it's the guy with nowhere else to go that is your problem.

Not an issue.

Let me rephrase that. Yes, it's an issue -- but I've judged it to have the below mentioned negligible effect in my financial model.

==>The point is that you are taking a risk - none of the risks I have mentioned above are "negligible".

In *your* model. We each construct our own model when speculating. We make assumptions. We explore those assumptions. We assign a weight to them -- the likelihood that a given assumption will hold true, or will be proven false.

When speculating -- as all investment is, there is no "correct" model. There is only "my" model, or "your" model, or "some other guy's" model.

In *My* model, based on *my* experience, and in *my* area, with respect to *my* capital that is at risk -- I have pretty much assigned the above a negligible risk. *Your* model may be different, and I would hope that with *your* capital, you build *your* own model and invest accordingly.

My model is simply different than yours. No better, no worse, just different.

If I lived in Thailand, I would certainly take the current events in Thailand into consideration when building my model. The fact is that I don't live in Thailand and it's therefore irrelivant and has a negligible effect on my model.

I'm comfortable with it. I'm doing it.

You're not comfortable with my model -- so you shouldn't follow it. I've got no problem with that. To each his own.

==>If you have good liquidity then you have little to lose sleep about - but the long term can be a long time.

Amen brother! At least we can agree on that one.

==>And most importantly of all, by talking about real estate in general, and not giving exact details of the area you are talking about and the type of proprerty you are investing in, you are obscuring the point;

Details, schmetails <grin>.

Here's a few. I live and work in the greater Cincinnati area. That's Cincinnati, Ohio, U.S.A. I own condo (townhouse)property, I own residential property, and I own a single commercial office building.

My own home (residence) is located 2 counties outside of downtown Cincinnati (a 45 minute commute) If you know Ohio, you know that 2 counties can take you a long way out into the cornfields. I bought my own homestead there because (a) Property and land is cheap. I got 3 times the house and 10 times the land for what a typical "in town" house would go for, just by migrating a few miles out into the sticks. (b) Property taxes run about 1/3 to 1/2 (depending on area) of what they do if you live within Cincinnati. I picked up some cornfield acreage with my house, hence the discussion earlier in the thread regarding the profitability of undeveloped farm land.

Does that really help the discussion any? I didn't think it was relevant to the discussion so I didn't mention it before.


==>which is that the devil is in the details, and even if your calculations turn out right, they are not necessarily appropriate for another area - or indeed even for the next street along.

It seems you get it again. They are, indeed, not appropriate for another area -- or even for another individual in the same area.

You, your very self, living in my same area, with the same data available to you, may judge the above as having greater risk and they may carry more weight in your decisions "go" or "no-go" on a particular property.

Sgt. Sausage
Wednesday, October 15, 2003

Sgt,

I think people try to cite other RE markets are part of their analysis.  As a way to try to predict all the various outcomes.  ie:  If if can happen there, it can happen here. 

I was not considering RE just for the sake of "getting into RE"  I think it is a killer longer term investment.  Having a mortgage free property that is a cash cow can fund one's retirement.  Hell, it can be a cash cow after 15 years..

..I held off b/c the timing was not right in my life.  I was making a career change, and I wanted to develop some basic home repair skills before buying a property.  I fear Contractors can smell a "new money yuppie" trying to get in on RE a mile away, and will bend you over in overinflated repairs.  I was anticipating a bloodly red few years, at a time when rent rolls were not even covering costs of onwership.    So, yea, RE was a bad investment at the time for me, b/c I didn't believe in the apprecaition upside (then and now). 

When the numbers make sense, and I have the time and inclination, RE is on my radar,,,,be it this year, or 10 years from now. 

Bella
Wednesday, October 15, 2003

Dear Sgt. Sausage,
                            Your original posts did not say that they were based on Cincinnati and your belief that the risks you were taking were negligible. You can't talk about real estate in general and then say that no facts that don't apply to your neck of the woods are relevant.


                              Anyway, any investment that permits you to spend the time you have already spent contributing to this thread must be a good one!

Stephen Jones
Thursday, October 16, 2003

==>You can't talk about real estate in general and then say that no facts that don't apply to your neck of the woods are relevant.

Agreed. My bad. I've gone back and re-read most of the thread and maybe I didn't handle it the right way.  Apologies to all on that.

==>Anyway, any investment that permits you to spend the time you have already spent contributing to this thread must be a good one!

One of the real beautiful parts of being both (a) self-employed, and (b) (relatively) financially independent is that it gives you the freedom to devote time to whatever you want -- a point I was trying to make early on in the thread. I want to retire early, very early, so that I can devote *all* of my time to whatever I feel like at that time, rather than spending all my free time earning a wage.

Sgt. Sausage
Thursday, October 16, 2003

Sgt,

The only reason your plan have had a hope in hell of working is b/c:
1) your wife shares your investment mindset towards making your money work fo you, (not vice versa)
2) you arent having kids

Anyone who doesnt have these 2 working for him should not even bother trying. A total waste of time, and uphill climb you will NEVER surmount.

Bella
Thursday, October 16, 2003

Bella,

==>The only reason your plan have had a hope in hell of working is b/c:
1) your wife shares your investment mindset towards making your money work fo you, (not vice versa)
2) you arent having kids

I disagree.

While these certainly are helpful , and increase my chances of success, (I fully acknowledge that both of them have been a large advantage in my personal situation) they are in no way the *only* reason. I know several successful families where the spouses disagree on money, and have several kids -- and are in a far better position than I am, and started with less than I started with


==>Anyone who doesn't have these 2 working for him should not even bother trying.

With that attitude, you'll certainly not have any success with anything. 

Things are hard. Why should I bother trying?

To acomplish my goals, I've gotta make sacrifices. Why should I bother trying?

I need to have discipline. It's easier to ignore my financial future. Why should I bother trying?


==>A total waste of time, and uphill climb you will NEVER surmount.

A defeatist attitude won't get you anywhere. You might as well just give up now and forget trying to do anything else with your life.

Everything in life is an uphill climb. Everything. Some steeper slopes than others, but uphill nonetheless.

I've set my goals, and started a long-term plan that I'm well into, a plan that is thus far doing better than planned for. You don't even have a plan, you've simply given up.

Yeah. That's a great attitude.

Sgt. Sausage
Friday, October 17, 2003

I'm corrected, yes, it's not the *only* reason.  When I say don't bother, let me be more clear.  It's a poor risk/reward situation.  Odds are, you'll get divorced and lose what you worked 20 years to build,  or your kids or wife will drain every penny you earn.  What I am saying is life is better if you don't focus on impossible misisons.  A typical Cost/benefit analysis.  I used to be like you, dreaming of early retirement.  Now, I see the real world around me, and am taking my retirement up front.  Nn need to defer happiness, when the risk of it never materializing are so high.  I enjoy every single day now.  I earn enough to keep my afloat, and not a penny more.  And life is full and exciting.  That was my point. 

Bella
Friday, October 17, 2003

Bella,

What a crappy execuse for not having a plan! Jeeez,you might as well lie down in bed, cause chances are you may get hit by a bus and be transferred into different matrix!!

o'my
Friday, October 17, 2003

Bella,

I stand corrected. That sounds a lot better than the previous post and makes sense. You've looked at your particular situation, made your own judgement, and you're running your life according to your own risk/rewards analysis. At least you've thought about it and are running your life according to your own plan.

Nothing wrong with that. I can respect that.

Most people simple go on "autopilot" and their plan is effectively "Whatever happens... happens."

Sgt. Sausage
Friday, October 17, 2003

A comment on the "not caring about what other markets are like." The Japanese real estate market is a classic (and recent) example of a bubble that burst. It's good to study this kind of thing, even if it is sleightly academic to your current investment strategy.

What Stephen Jones is saying is "this kind of thing might happen to you." The attitude in Japan was that since there was a limited supply and a large demand, the prices would always go up, so it was a very safe investment. This attitude sounds like yours. Japan had a major burst, like our internet bubble, and many people lost all of their retirement money. He just wants you to be careful, and other people who read this thread to be careful.

www.MarkTAW.com
Friday, October 17, 2003

o'my,

I do have a plan, and I am executing it daily.  My plan is "Do not overwork yourself to death today, for a POSSIBLE shot of wealthy and retirment in the future".  Possible meaning too many things OUTSIDE of your control can derail you, even if you do EVERYTHING right.  (kids, wife, divorce, etc)

Rather, I have simplified my life greatly, downshifted my career greatly, and I am exercising my future quality of life daily TODAY.  And I love it. 

"If you choose not to decide, you still have made a choice"

Bella
Saturday, October 18, 2003

Most of these people who blather on about pinching pennies and saving for retirement are only part right.  They can pinch all they want and then die before they have a chance to enjoy it.  On the other hand, you do need something in case you're too old to work.

Balance, it's all about balance.  And we only live this one life, we want to do the best we can and wring the most we can out of it.  Be that experience or possessions if that's what turns you on.

On the other hand, finances is the tortoise and the hare.  If you get a good job young, squirrel the money away, buy a house and pay it off.  Then you can say you did it right, and will not be pressed for cash.  Then you die.

Or you can take some wild chances, and if you hit it big, you can make a lot of flash money.  Then you can tortoise up a bit.  Then you die.

Or you can live wildly and irresponsibly and experience financial discomfort.  Then you die.

You see, it all ends the same.

upallnight
Saturday, October 18, 2003

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