Get on the Escalator

Dated: July 4 2021

Views: 336

 “BUY NOW, LIVE IN LATER” OR “GET ON THE ESCALATOR”                     07-16-03

I have covered this topic before, but it is worth review.  Last evening, I met a charming couple from Scotland.  They were interested in investing in a condominium in Florida.  Rod, the husband, told me that he would like to buy a condominium or a home, here in southwest Florida, that he could rent out and eventually move into in twenty years.  This is a common request that I have from investors.  They would like to buy an income property that will pay for itself, not need any management, need little maintenance, and be in wonderful shape when they are ready to retire.

 

This is just not practical.  First, it is very difficult to predict what type of home or condominium would best suit you twenty years from now.  It will be difficult to pick the location or the lifestyle.  Secondly, this market is very seasonal and to expect the rental income to carry the mortgage and expenses would require quite a large down payment.  I call this the “BUY NOW, LIVE IN LATER” approach.

 

I suggested an alternative: “GET ON THE ESCALATOR.”

This entails purchasing property that is strategically selected to appreciate and serve as a vehicle to ride the escalator of appreciating prices.  This way, when the investor is ready to buy the home of his choice, he will have a saleable property from which to springboard into his ideal retirement home.

 

I also suggested that the investor decide how much cash investment he is willing to make annually into this property (“cash investment” is my euphemism for negative cash flow).  The way I look at things, the cash investment is comprised of two parts:  cash down payment to acquire the home, and annual cash investment required to optimize appreciation of the home while you own it.  Keep in mind that while you own this investment property, the mortgage is being paid down, your equity is increasing, and the home is appreciating.  Furthermore, there are tax benefits while you own a home as an investment.  These factors combine to make investing in income property beneficial.

 

Since I originally wrote this article (2003) I have gained a great deal of experience in the vacation rental market. Owning a Vacation Rental (VR) is an excellent way to get on the escalator. (Recent article about this here)

 

Let us say that you purchase a home for $300,000.00. The initial cash requirement is $65,000.00. The cost of owning the home is $45,000.00 per year. If the rental income is only $30,000.00 per year, this means that you have an additional annual cash investment of $15,000.00 into this home. The home will appreciate at least ten percent per year ($30,000.00).  While you have a tenant occupying the property the mortgage will be paid down and your equity will increase. You will be able to deduct the annual cash investment as a loss against other passive income. 

 

Very simply, for a ten year program:

 

Cash Invested is $65,000 plus 10 times $15,000 = $215,000

With 10% appreciation, in ten years the home will be worth = $707,000

You still owe a mortgage of $137,000 (approximately).

Ignoring the tax benefits while you own, your investment (over ten years, mind you) of $215,000 is now worth, ten years from now, = $570,000.  ($707,000 -$137,000)

 

This is the “GET ON THE ESCALATOR” approach that I prefer for preparing for retirement.

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Gregg Fous

Real estate has been my passion since I took my first Al Lowery class on real estate investing in the 1970’s. I vowed during that class that I would buy one property a year. Over the next five ....

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