In the first post, a faulty financial model was described that
led me astray from the start. Today,
I’ll walk through financial boondoggling you can try if you’re serious about
finding a money pit of your own.
Opt for a 5-year Adjustable Rate Mortgage (ARM). If the market’s right, you can go all out
with a “no doc” interest only loan which may not be possible in many places,
but look anyway. They’re popular just
before a real estate crash.
Get an ARM with a comfortably low interest rate. After 5 years the rate will float with
LIBOR or another index, but never mind that, the property won’t be held that
long. Plan on using a 1031
transaction before the 5-year period ends to flip the initial money
pit for a larger version with no tax consequences. The road to hell is paved with good intentions
so if you intend well, carry on.
The best bet is to find a lender writing loans from coffee
shops or car trunks. Lenders of that ilk
can help lock in the kind of amazing ROI the spreadsheet said was available from the start.
Ignore Pascal’s Wager entirely. Invest as if risk didn’t exist. Hoarding cash as if there’s a smidge
of risk means missing all the whales.
That’s not good. Go all in and
wager your kids’ college money. They’ll
thank you when they get their first student loan bills.
To summarize, think financial utopia – not armaggedon. Become enamored with models in spreadsheets using
fictitious calculations. Treat assumptions
about vacancy rates and repair expenses as gospel. More on that later. Believe there is no risk associated with the
interest rate of the loan, the term of the loan, or the length of time the loan
will be held. Details.
Failing to build a margin of safety into the plan is a fantastic
way to launch with gusto a money-losing proposition. That’s the easy part. Shopping for the property is the fun part. The paying part? That’s ahead.
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