With the recommendation of investment guru wht, I read the series of "Ten Years and Ten Million Financial Plans for Ordinary Families" written by BayFamily, and also read other blog posts of this blogger by the way, which benefited a lot. This ten-year 10 million series of articles started in 2007. Under the condition that the assets are about $1.2M and the annual income of the family is less than $200k, the total assets will be $10M after 10 years. Every year, an article summarizes the investment situation of that year. Ten years have passed since the original plan. Although he failed to achieve the goal of 10 million yuan, he still has assets of $7M. The return on investment during this period is quite good. The most commendable thing is that the span of these 10 years includes the financial crisis of the United States in 2008 and the good times later, so the experience is very valuable. The blogger's main investment direction is real estate, instead of touching stocks. He feels that he has learned how to invest in real estate from his blog, so he takes notes and summarizes it.

Investing in real estate can Time the Market


You may have heard a phrase all the time, called Don't time the market. This sentence is for the stock market. The rapid price fluctuation in the stock market can make the current price fully reflect all the information already available in the market. However, real estate is not like this. Buying a house and selling a house is always a long process, and it involves a series of troubles such as moving, so its price often lags behind the information in the market. For example, two or three years after the financial crisis, even if everyone saw the bottom of the house price and wanted to buy it, many people could not afford it at that time, and it would be several years before these people could afford it, so the price at that time did not fully reflect all potential demands. According to the theory of BayFamily bloggers, don't buy house prices when they don't rise, and they will continue to rise for a long time after they start to rise, so you can buy them decisively after a short period of rise.


Investing in real estate requires leverage


As we all know, at least in the United States, investing in real estate without leverage is not as good as investing in stocks (for example, investing in SPY, see this article for details). Therefore, investment in real estate must be leveraged. Leverage here means not buying a house in full, but paying a down payment even if there is enough money to buy a house with a loan from a bank, so that the down payment ratio of 30% corresponds to about 3 times leverage. According to wht, an investment expert friend, low-interest mortgage is the safest loan that ordinary people can use. (Note: Investing in stocks with leverage is gambling, which is definitely not desirable! At present, the mortgage interest rate in the United States is about 4%. Although it is much higher than the almost zero interest rate in the previous 10 years, I think that even now, the interest rate is low in the whole history.


Find a house with long-term positive cash flow


In addition to their own houses, investment houses should not be empty, but should be rented out. If you don't rent it out, or the rent you get back is much lower than the mortgage+all kinds of expenses, you need to keep posting money in this investment house, which is very risky. Once the capital chain is tight, it will be very troublesome. Therefore, the key to investing in real estate is to find a house with long-term positive cash flow, which means that you can cover all the expenses of repaying the loan+various expenses only by the rent collected by the house, and you don't have to post money in it after you pay the down payment.


Because inflation always exists, rents will go up year by year, and mortgages are fixed, so they tend to be the tightest at the beginning, and the more positive cash flow increases in the future. Maybe this investment house can generate considerable positive cash flow after a long time.


Places with high housing prices (low rent-to-sale ratio), such as Bay Area, Beijing and Shanghai, probably have no houses with positive cash flow, unless your leverage is so low that the final rate of return may not be as good as the stock market.


To maintain leverage


Finally, let's talk about a more advanced skill: maintaining the debt/equity ratio, that is, maintaining the leverage ratio.


Many people invest in real estate just according to the practices mentioned in the previous sections: saving money to make up the down payment, buying rent when the down payment is enough, continuing to save money to make up the next down payment, and so on. However, some people find that their long-term return on investment is still not as good as the stock market. What is the problem?


The problem lies in the fact that after the loan was repaid, the debt of a house gradually decreased and the equity gradually increased, and the debt/equity ratio became smaller and smaller, and finally the leverage was gone! As I said before, the long-term return rate of real estate investment without leverage can't compare with the stock market.

So what can be done to make the return on investment higher? The trick is to maintain the leverage ratio. When the debt/equity ratio of a house drops too low, take the initiative to do rejection. Refinance here is not to pursue lower interest rates for lower monthly mortgage payments, but to operate like this:


For example, a house with a value of $1M now owes only $500k to the bank because it has been repaid for 10 years. Now do repayment, refinance 70%, that is, $700k, of which $500k is used to repay the debt of a bank, and the remaining $200k is cash! This $200k cash is equivalent to taking the house as collateral, and borrowing money from the bank at a very low interest rate (the mortgage interest rate is now about 4%). After getting it, it can be used to make up the down payment of the next house!