Reply to Why are people so obsessed with rental properties yielding positive cash flow?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]Is there a firecalc type app that compares the ROI between a RE investment compared to S&P?  Assume a 20% down payment and a 1% gross rental return vs. a one-time S&P investment of the same 20%?  How would one fare if they did this in 1900 vs 2000 vs 2015, etc. over time? [/quote]

Of course real estate would give you more due to leverage on initial investment. Because with stocks you only get income on those 20% that YOU invested. In real estate, you get return on the whole 100% (your down+ remaining 80% financed by the bank). Of course if real estate prices call you are at a loss more than you would be in stocks. But in reality they don’t fall that drastically at lease in urban areas, and when it works well as a rental covering your mortgage and carry costs you can continue holding it . There is no point in selling real estate unless you want to do 1031 exchange or reinvest [/quote]

I'm the OP and people that keep calling me dumb don't seem to grasp this concept.  (BTW, for all those saying I should take a course in finance, I have a degree in math and understand finance/investments just fine.)  What these people don't get apparently is the value of leverage in generating returns.  And leveraging a property makes it more likely that it will not yield a positive cash flow, hence my initial question.  Of course, any property that you buy with no mortgage will give you positive cash flow.  However, you can boost your returns with leverage, and sometimes that means covering a $500 monthly shortfall between the rental income and PITI/other expenses.

But so what?  [b]Most people put much more than $500/month (i.e. negative cash flow) in their 401(k)s and Roth IRAs.  [/b]And yet you never see the pearl clutching like you do with negative cash flow properties.[/quote]

There's a difference between expenses and investment.  Covering the $500 a month shortfall on your real estate carrying costs doesn't add to the value of the underlying asset.  That's more like paying $500 a month in advisor fees on your 401(k), not adding to principal with a new investment. [/quote]

NP and I'm not tracking on this.  Let's say you hypothetically have a$500K unit 100% financed and no appreciation just to keep the math easy.  That $500 outlay will reduce your principle so in year 1 the net value is 0 but in year 2 its $6K since you'd get that back when you sell.  Seems different than paying financial advisory fees which are gone forever.[/quote]

From real estate developer perspective - the property requiring your own cash outlay is just not a good investment. You call find better options that don’t need that. No commercial bank would ever finance an asset that’s not generating cash income (not counting for depreciation and write offs). It’s called “not stabilized” properties [/quote]

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