Ideas on weekend hotel deals, jewelry cleaning, keeping cool this summer and more.
Thursday, June 8th, 2006Z.
Bonnie
A cash cow is a property that produces positive cash flow money into your pocket each month. An alligator is a property with a high negative cash flow. Negative cash flow means you must take money out of your own pocket each month to cover expenses. (It’s called an alligator because it “bites” you each month.) This usually occurs when the price of the property is out of whack with the rental income. This happens when prices appreciate far
more rapidly than do rental rates, as has occurred in many markets in recent years. Here’s an example. {Note: PITI stands for principal, interest, taxes, and insurance.)
Leverage is what makes real estate so profitable for investors. Consider the contrast with stocks. When you buy stocks you generally pay cash for the full amount. If you buy on margin, you will probably be able to borrow half the amount of the stock. When someone else puts up half the money, one of two things happens. You either can now purchase twice as much stock with the same amount of cash, or you only need to come up with half as much cash for the same amount of stock. Either way, you’re leveraging your purchase. With real estate, lenders are willing to come up with 90, 95, sometimes even 100 percent of the purchase. That’s far more leverage than any other investment I know. And it pays off when you sell. For example, if you buy a stock with 50 percent margin and the stock doubles in price, you’ve quadrupled your investment. If you buy real estate with a 90 percent loan and the price of the property doubles, you made 10 times your investment. If you don’t believe it, an example should make it clear.
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