At the convention right after hearing about the self-sufficiency trap, ta different speaker then presented on rate of return on equity. Now each state has their own prices and their own rents, but these rates of return seem to be rather constant and very dismal. This trap sounds something like this-

We have to get that mortgage paid off and live debt free to have freedom. There is a level of truth to having 10, 20 or 40 places free and clear, but the rate of return on that equity was about 4.2% in the example they presented. Comparing that rate of return to say 100% hands off C/D paying 3.7%, you are agreeing for a whopping 0.5% return, all the headaches of being a landlord and the hope for future appreciation.

I am not a fan of the HOPE method of management or investing. I am in a cash flowing area but we go up only the rate of inflation when the market is good. I don't believe I am alone in investing in a cash flowing market with limited upside. I feel we are close to the top so gambling for a 0.5% rate of return in a declining marketplace might not be that great of an idea.

That presentation went on to show how you can juice your rate of returns by doing cash out refis and growing the business by stacking returns. A conservative 50% LTV loan created upper 5% while increasing the cash flow because of the number of units purchased. A 75% loan yielded mid 6% for returns.

The trap - thinking you will save your way to wealth. As long as you use your coconut along life's path, strategic leverage isn't a bad thing, especially when you are younger. There will be good times and there will rough patches. The race is long and, in the end, it is really only against yourself. Comparing a paid off house to a CD rate - caused a subatomic explosion in my mind

I've noticed that there basically 3 levels of equity verses rents. One is where the average prices are in the mid range and the rents are such that returns are in that range of net 6-10 percent after expenses. ($300K house renting for 1500/month is 18K/yr less 40 percent expenses is $10,800 per year or about 3.6 percent on equity before taxes.) Maybe, just maybe you could get 6 percent if you self managed and most likely only if the house was closer to 180K-200K value.

BUt average home price in the USA is said to be about $420K?

The second is where prices have run way up but rents lag behind that range (coastal Calif, New England, NYC, etc) Here you can have a house that's worth 1-1.5 million but only get $3500 a month rent, less expenses. ($3500x12= 42500 less maybe 40 percent for tax, insurance, maint, management,etc, leaving maybe $25200 per year on a million plus in equity.) 10 percent on a million is 100K, so 25000 is only about 2.5 percent, before taxes. In these areas, for many years it seems like we are betting on appreciation.

The thirdd is where there are houses that are lower priced, maybe under $150K or better yet under $100K, but still renting for $1000-1200 a month. ($1k/month equals $12,000/year less 40 percent expenses gives $7200 per year divided by $100K for a return of 7.2 percent.

None of these numbers make me really happy. Even the lower value places have their problems, especially in the quality of tenants they attract.

Being a former contractor for years, to me, the best deal is to find fixer uppers that can be had at substantial discount, then put the crews on them during slow periods to do all necessary repairs, keeping the built in appreciation in my pocket. When the place is fixed up and producing max profits for what it is, then 1031 it into a larger property that needs repairs and repeat.

I will say though that in areas where there is rapid above normal appreciation, like coastal California, taking the risk of lower returns or even some losses in the rental side has been very profitable because of the appreciation.One thought on that however is how long this above normal appreciation can continue? Normal people can only afford so much. Not every house there can be rented to a celebrity or a rich person. Once the normal people reach their maximum there is no room left to increase the rent. They just do not have the money.

I got some pretty good returns on doing a cash out refi for three duplexes a few years back.

When I compare them to a couple other units that are the same they don't make as much, but they are not that far off CF wise.

Then I look at what I did with that money from the refis and I made out much better.

I would try to do a refi on the other units but I have only rehabbed one side of both of them, so not sure it would be worth it right now.

I have often given a simplified version of this advice to people. That debt is fine and even helpful in the growth stage.

.... and back to bashing the States again.

I just got a led on a MFH 57% LTV 4.8M assumption over in Hamilton, Ontario. So why am I not jumping up and down over this? I NEED to have faith in the Canadian Dollar.

If Canadians are not willing to step into this, why should I assume the risk in baling others out - especially if they don't appreciate what you have done? That said, Robert if you are willing to look up the first female mortgage broker in Canada (sadly it was only 50 years ago), you can learn more.

Yep that is all most landlords actually make. Most juice their returns by creating a job for themselves and doing everything themselves.