Quote: (12-22-2014 09:27 AM)TheFinalEpic Wrote:
If you understand the time value of money, then 270000 in 25 years will probably be less than 170000 today. Your dollar is never worth as much as it is today, I have a friend who insists upon buying month to month memberships because of this phenomena.
Well the time value of money is a thing yes, but like everything, the devil is in the details, the key detail here being the rate you pay vs. the rate you make.
If he's paying 9% interest, (after tax money mind you, unless you're in the US, or incorporated if I'm not mistaken), he needs to be able to generate like 13% off this debt, just to break even. 9% interest on 80% the value of a property is a huge bite into cashflow.
The US the last few years have had sort of a perfect storm of opportunity for people wanting to become landlords, low rates, low prices, and more or less stable rents. There is the ideal place to leverage.
If you're looking at very high rates (undeveloped world), or very high prices compared to rents (Canada) its a lot more difficult to make a go of leverage.
It can be done, but at least in Canada now the vast majority of cases it makes more financial sense to be the renter, not the owner. I'm renting a condo, and since prices of identical units, condo fees, mortgage rates are all knowns, and insurance and taxes can be pretty well estimated, best I can figure, before any big maintenance issues or special condo assessments (surprise!) they're subsidizing my rent roughly $100-$150 a month.
Why would they do that? Because everyone "knows" (at least seems the conventional thinking still here in Canada) real estate only goes up.
Leverage (from base lever) means a force multiplier. It can be a great tool to make 5x more on your money, but If you're leveraged to the hilt and things go south, they can go very south because it's happening 5x faster.