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every side of this issue. Some investors believe you should never put your own money into an investment, while others only buy properties with cash.
"Debt tolerance" may be a more accurate description of this question than "risk tolerance."
Why? Some investors think that using their own cash is riskier than using other people's (lenders) money. But other investors, who are exclusively cash buyers, disagree. The rest of us lay somewhere in the middle.
So if you're deciding whether to pay down your properties or accumulate more, the first question you should ask yourself is: What's my debt tolerance? How close am I to "maxing out" my comfort level?
Goal Setting
The second issue is a question of your life goals. What are your goals for your real estate business? How well do your investments align with these goals?
We don't create profit in a vacuum. We do it for a higher purpose. What is your purpose? Is your goal to have a lot of money when you're in your 60's, or is it to have decent cash flow when you're in your 30's?
Two Examples:
Joe is 30. He owns four single-family homes as rental properties. Each house collects a gross rental income of $2,000 per month. After paying the mortgage, repairs, management, vacancies, and all other expenses, Joe collects $800 a month in passive cash. His goal is to have his rental properties provide him with a nice fat retirement when he is in his 60's. Based on this goal, he chooses not to pay down his houses. Instead he makes the minimum mortgage payments on his properties, and he focuses on accumulating even more houses. This will allow him to enjoy a heftier cash flow when he's in his 60's.
Jill is also 30 years old. She also owns four single-family homes as rental properties, each of which have a gross rent of $2,000 per month and a current passive cash flow of $200 each ($800 total). In other words, her current situation is identical to Joe's.
However, her goal is to enjoy passive income and financial freedom when she is in her 30′s. This will allow her to spend her youth focusing on other endeavors, such as moving to Europe, launching a different business, joining the Peace Corps or raising a family. Rather than focusing on accumulating more properties, she focuses on paying down the rentals that she owns. When all four houses are paid-in-full, she'll gross $8,000 per month. Assuming that roughly half of her gross income will get spent on non-mortgage related operating expenses, she will collect $4,000 per month in passive income. And if she aggressively pays those houses down, she can enjoy that money in her 30′s.
The Best Option
Which of these two options is correct? The best course of action depends on your personal goals. Joe wants to
have more money in his 60's; Jill wants to have immediate cash flow in her 30's. Both of these are valid options, and they underscore how your decisions need to align with your life goals.
We don't make profits in a vacuum; we make them to support the lifestyle that we want to enjoy.
Should you buy more rental properties or focus on paying down the ones that you own? That's not the question you should be asking yourself. The real questions are: What do I want out of life? And how much debt am I willing to accept in order to reach those goals?
Once you answer those two questions, the "buy-more versus pay-down?" question will be easier to solve.
Senior Housing
With tens of millions of baby boomers set to reach retirement in the coming decade, researchers expect a dramatic spike in demand for all types of seniors housing, including adult living communities, assisted living facilities and nursing homes. Those who’d like to take advantage of the boom better do their due diligence, however—already there are concerns about overbuilding of properties aimed at the younger boomers, while demand for assisted living facilities, which typically serve people in their 80s an older, won’t materialize until further down the road. Plus, it's unclear whether the boomers will be willing to invest in the more upscale properties, especially after they've finished paying for their children's student housing.
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Daily Real Estate News
Thursday, March 07, 2013
Where Are Home Prices Heading Through 2017?
Source: “Home Prices Expected to Rise at Least 3.3 Percent Annually Through 2017” RISMedia (March 6, 2013)
Single Family Homes
It’s a tough world out there for Generation X, many of whom had to forgo buying a house or lost one they owned in the wake of the recession. Instead, a significant number of young families are now renting single family homes from the likes of private equity firm Blackstone and newly formed single family home REITs such as American Residential Properties and American Homes 4 Rent. For the time being at least, these properties can be the perfect investment—just ride the rental market until the housing market picks up and then put the “for sale” sign back on.
Student Housing
Another lucrative property niche that has emerged post-recession is student housing. With state-run schools facing fund cuts for on-site housing, private developers have stepped in to deliver off-campus facilities. These are not the dorms you remember from your college days, however: the Millennial generations expects the very best, with privately-run student housing offering such amenities as resort-style pools, volleyball and basketball courts, 24-hour workout rooms and state-of-the-art washers and dryers that send text message alerts once the laundry load is complete.
Medical Office Buildings
As the Affordable Care Act (ACA) takes effect, another asset class set to explode over the next few years is medical office buildings. With health care systems throughout the country looking to provide more localized, lower cost services outside the hospital setting, many will be looking to utilize smaller, outpatient facilities.