Buying Investments

How to do a deal in real estate.

There are all sorts of ways of buying a house. The most stupid is to find something you like and buy it on a mortgage.

There are two basic problems with the above method. First, rich people use other people’s money, which means they get other people to pay their bills. I’ll come back to that.

Second, you use what Einstein called the eighth wonder of the world; compound interest. If you buy using a mortgage you are paying compound interest. You want compound interest to be paid to you. I’ll come back to that as well.

Third, the only really important issue with any transaction is the maths.

Okay, let’s unpack the above points.

Here’s a stupid deal. You find a house that you like. You decide to buy. You get a mortgage.

Let us assume you are starting out and you buy a small place for £90,000. You sign up for a thirty year mortgage, and over the course of the next few decades you pay approximately £300,000 for the place. Pure madness. You also now dont have the use of that money, as it is going to make the mortgage company rich, and make you poor.

Here’s what I used to do. I’d find a flat that was cheap and start to use some maths to my benefit. I need to work out how someone else can buy the place for me. I borrow £80k at 5% over twenty years, and rent out the property for £600 a month. The mortgage is going to cost me about £6,000 a year, the rent brings in just over £7,000 a year. Someone else is buying me a house and giving me an extra £1,000 a year.

I now go out and buy a larger place which I can divide into four apartments. I rent out three of them and move into the fourth. I do the maths on this deal in my book on wealth. [https://www.amazon.com/dp/B0CLS37VX1] That now gives me three rentals that pay for the whole project leaving me with a flat that is being paid for by the tenants. I can now find something I really like and buy that, move in, and get the fourth flat rented out to pay the mortgage on my new home.

To make this work you need to set up the maths properly in the first place, but while the idiot with the mortgage is paying out lots of money to buy his house, you dont have that drag upon your wealth. You could now pay the equivalent sum into a pension, except that you dont need to because your pension will be the rents which will go into your pocket in twenty years time because the other mortgages will be paid off, so your home has been paid for by someone else, and so has your pension. Elementary really.

Of course, you do need to be able to value real estate in the first place, and the last person you ask for that valuation is the estate agent. They don’t know. They merely know the price, not the value. But the value is easy to work out.

There is a simple way of valuing a company. For a boring, run-of-the-mill company, a simple valuation would be ten times earnings. Take a rental property. If the rent is £600 a month, and you allow 10% of that for maintenance, the annual income is £540 x 12 = £6,480. Ten times that is roughly £65,000. That’s the real value of the property. The example given above was clearly too expensive. The golden rule is to buy low, and sell high.

Now do the first set of maths assuming you pay the right price. The maths come out much more in your favour. So the golden rule is: do the maths and ignore estate agents. Hunt around for a properly priced deal. If there isn’t one, dont buy, rent instead.

Now let me do the maths on those properties in Panama I spoke about last week.

You dont need to go and look at them. You dont need to read the ad-speak. There is only one thing you do before anything else. You do the maths. It takes less than a minute. Rent is $2k a month, cost of real estate is $330,000. 2,000 x 12 = 24,000. Multiply that by 10, and you have the ideal price: $240,000. The actual price is $330,000. In other words you smile and walk away. That’s it. The deal is insanely overpriced.

It’s all terribly simple really, which is what I keep telling everybody,