Talking stocks, trading, and investing in general

[patrickBOOTH]

My cousin and his wife are just a tad younger than I and this weekend we got into a conversation about investing. I always figured that a basic knowledge of products out there and how the markets in general work was common knowledge. It hit me that some smart people out there are absolutely oblivious to such things. Some of the things they were saying were so absolutely stupid I was baffled.

 

[ThinkDerm]

My cousin and his wife are just a tad younger than I and this weekend we got into a conversation about investing. I always figured that a basic knowledge of products out there and how the markets in general work was common knowledge. It hit me that some smart people out there are absolutely oblivious to such things. Some of the things they were saying were so absolutely stupid I was baffled.

what did they say?

 

[patrickBOOTH]

Just a mishmash of wrong headed stuff.

 

[jbarwick]

So on vacation I was talking about RE investing with a friend. He said he earns a 13% return on his RE holdings but I could not get near that when I was calculating it to him aloud. His argument was he uses leverage and I need to account for that and after a few beers I threw up my hands.

He buys condos specifically in Chicago. He says his investment is $500K avg. and can rent the condos for $42K. $42/$500 = 8.4%. Take out interest, taxes, condo fess, and other small amounts and his return is less. Leverage, even with increased property values, does not seem to make up the difference either...

 

[patrickBOOTH]

His investment is $500k or their value is $500k? Also depreciation and any prior NOLs could affect the rate.

 

[JDMills]

So on vacation I was talking about RE investing with a friend. He said he earns a 13% return on his RE holdings but I could not get near that when I was calculating it to him aloud. His argument was he uses leverage and I need to account for that and after a few beers I threw up my hands.

He buys condos specifically in Chicago. He says his investment is $500K avg. and can rent the condos for $42K. $42/$500 = 8.4%. Take out interest, taxes, condo fess, and other small amounts and his return is less. Leverage, even with increased property values, does not seem to make up the difference either...

So you'd have to look at what his return is based on what he put in (ie his down payment). You need to look at the mortgage payment (P+I) and include principal repayment in your calculation. His return is equal to:

(Rent in excess of mtg payment+Principal portion of mortgage payment)/Amount he invested.

Lets assume the 42k covers his mortgage. If we assume 40% of the mtg payment is principal and he put 100k down we get:

40%x42000=$16,800

$16,800/100,000= 16.8%

Again made up numbers for the sake of example. If we remove taxes, repairs, etc that number drops obviously. This also doesn't take into account any value increase in the property and assumes he would never sell it.

 

[jbarwick]

Value $500K, puts 20% down, 15-year mortgage. Says he is cash flow negative on every property due to 15yr mortgages.

I think he ends up with $18K after taxes, interest, and fees. So $18K/$100K then?

 

[patrickBOOTH]

I just dumped this into a model. With no expenses other than interest @4.4% and amortization of principle he would have to be generating ~$56k per year in rental income to get a 13.4% Cash to Equity IRR ($15.6 cash per year on average).

 

[patrickBOOTH]

Ignore "Millions of dollars". This is a smalltimer analysis.

 

[brokencycle]

I just dumped this into a model. With no expenses other than interest @4.4% and amortization of principle he would have to be generating ~$56k per year in rental income to get a 13.4% Cash to Equity IRR ($15.6 cash per year on average).

View attachment 1339286

Did you really take a cellphone pic of your screen?

 

[patrickBOOTH]

...maybe...

 

[venividivicibj]

Goddamnit, let the man make his 13% in peace

 

[patrickBOOTH]

I made more than that this year and didn't have to bother with tenants.

 

[jbarwick]

Interesting PB. Add in a dash of exaggeration and he makes market returns. Maybe his hobby is fixing **** for tenants.

 

[otc]

Does a 500k condo in Chicago really rent for 3500 a month?

Seems high to me, but I guess it isn't something I have looked at too closely. Maybe these are high amenity high-rise buildings...but that adds sizable HOA fees (easily 700-800 a month)