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Automatic wealth The 6 steps to financial independence - Masreson M.

Masreson M. Automatic wealth The 6 steps to financial independence - Wiley & sons , 2005. - 291 p.
ISBN 0-471-71027
Download (direct link): automaticwealththesixstepsto2005.pdf
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But the deal is even sweeter. Because, in the meantime, you’ve also been getting net rents. That’s the money you put in your pocket every month after paying all the carrying costs of the property. And those net rents should steadily rise every year, since you can fix the majority of your carrying costs (principal and interest).
The best part is that your mortgage payments are being paid out of the rents you receive on the property. And the rents pay for all other expenses, too—from insurance to taxes to maintenance and management (if you’re not managing it yourself). That’s what I mean by the property “paying for itself.”
Step 5: Get Richer While You Sleep 193
But beware. If you pay too much for a property—way too much— and get bad financing, you could end up on the flip side of each one of these forces (as I was with my Washington, D.C., apartment). Instead of appreciating, the property may depreciate. In that case, your leverage could actually compound the problem. If you get the wrong type of financing, you could even end up with negative amortization (meaning your loan balance goes up, even though you’re making your regular monthly payments). And net rents could turn into negative net rents if you don’t know your rental market.
To see what I mean, let’s lay out some numbers. We’ll examine three scenarios.
• First, we’ll see the kind of wealth you can build up as a very occasional real estate investor, buying just one property a year.
• Next, we’ll suppose you’ve gotten some experience under your belt and are now buying two properties a year.
• Finally, we’ll see the kind of wealth you may achieve as a very active investor—perhaps with the intention of eventually doing it full-time.
The Lazy Real Estate Investor’s Route to a Comfortable Retirement
Let’s suppose you’re going to buy just one property a year. And let’s suppose you’ll average a down payment of 10 percent of the purchase price on each property. Some will be less, some will be more. But overall, you’ll average 10 percent down.
Let’s keep it in line with historical numbers and assume your property will appreciate, on the average, 6.5 percent a year. To keep the math simple, we’ll also say that every property you buy costs $100,000.
We’ll also suppose that after paying all costs (principal, interest, taxes, and insurance—PITI for short—and maintenance) and making an allowance for some rental vacancies, you initially net $100 a month on each property. Finally, we’ll assume that your net rents increase by 5 percent a year.
Let’s see what can happen with one property over the course of 15 years.
194 AUTOMATIC WEALTH
EVEN A SINGLE INVESTMENT PROPERTY CAN MAKE A BIG DIFFERENCE IN YOUR RETIREMENT
YEAR EQUITY AFTER EACH YEAR AT 6.5% APPRECIATION* NET RENTS INCREASING AT 5% A YEAR TOTAL NET RENTS RECEIVED TO DATE
1 $17,542 $1,200 $1,200
2 $25,574 $1,260 $2,460
3 $34,128 $1,323 $3,783
4 $43,239 $1,389 $5,172
5 $52,941 $1,459 $6,631
6 $63,274 $1,532 $8,162
7 $74,279 $1,608 $9,770
8 $85,999 $1,689 $11,459
9 $98,481 $1,773 $13,232
10 $111,775 $1,862 $15,093
11 $125,932 $1,955 $17,048
12 $141,009 $2,052 $19,101
13 $157,067 $2,155 $21,256
14 $174,168 $2,263 $23,518
15 $192,381 $2,376 $25,894
*Equity is built up in two ways: from appreciation and from paying down the loan balance (amortization). For amortization purposes, this table assumes a 30-year fixed-rate mortgage at 6.5 percent.
Just by purchasing one investment property, you’ll end up with an extra $192,000 in equity 15 years down the road. And that’s on top of nearly $26,000 in net rents you’ve collected over the years.
That’s not bad. But what if after doing this for one or two years, you understand the concepts and enjoy the process, so you decide to be just a little more active? Instead of buying just one property, you buy one property every year. How would that affect your retirement?
By picking up just one property a year, you have amassed almost $1.4 million in equity in just 15 years. During that time, you’ve also collected more than $180,000 in net rents. And you get a rent check every month of nearly $2,200.
And that’s just buying one property a year.
If you expect to be more active than this, multiply these numbers by two or three or more to get an idea of what you can achieve.
Step 5: Get Richer While You Sleep 195
BUILDING WEALTH WITH JUST ONE PROPERTY A YEAR
YEAR NEW PROPERTIES BOUGHT TOTAL PROPERTIES OWNED TOTAL NET EQUITY TO DATE TOTAL RENTS TO DATE TOTAL EQUITY + NET RENTS TO DATE NET RENTS MONTHLY RENTAL INCOME
1 1 1 $17,542 $1,200 $18,742 $1,200 $100
2 1 2 $43,116 $3,660 $46,776 $2,460 $205
3 1 3 $77,245 $7,443 $84,688 $3,783 $315
4 1 4 $120,483 $12,615 $133,099 $5,172 $431
5 1 5 $173,425 $19,246 $192,671 $6,631 $553
6 1 6 $236,699 $27,408 $264,107 $8,162 $680
7 1 7 $310,978 $37,179 $348,157 $9,770 $814
8 1 8 $396,978 $48,638 $445,615 $11,459 $955
9 1 9 $495,459 $61,869 $557,328 $13,232 $1,103
10 1 10 $607,233 $76,963 $684,196 $15,093 $1,258
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