Are You Domino Pizza? III

With the “Power of Leveraging”, Peter is glad that he only used $100 as an up front payment 15 years back and today it appreciates to $5000 ($250*20 toys). He predicts his net worth will be $12,500 for another 15 years when he finishes all the installments. Remember besides $100 up front payment, he needs to touch up $7.51 every month to serve the installment even he receives $5 rental every month. Thus, his total investment would be $100 + $7.51*12 months*30 years, which is $2803.60.
For the sake of easy calculation, we omit several factors such as Peter might lose out his rental for certain period because people who rent Mickey Mouse come and go. When this happens, it generates another costs which eat up his total return because in the process of searching for new people to rent the toy, it involves several costs such as broker fee, admin fee….etc to secure the tenant. The higher turnover rate, the more costs he needs to bear. Furthermore, 30 years is a long period. From time to time, Peter got to pay some maintenance fee to maintain toys usage life. Insurance charge, local council assessment fee and so forth are other hidden costs.

People might argue that the rental could be raised from time to time. True, but its increment would depend on the demand. When the demand is weak, not only Peter cannot raise its rental but he might lower the rental in order to attract the tenant. If not doing so, he needs to find ways to earn more in order to serve the installments. The monthly installments are sure thing while the rental from tenants is depends to the market condition.

While leveraging sometimes is needed in doing business as well as investment, it must be deal with EXTRA CARE. It’s like a knife: if use it wisely, it helps you a lot; if you use it without care, it can hurt or even kill you. It’s true that for majority of us, it’s impossible to purchase real estate for cash and we need to leverage with housing loan. The advice is for those who dreams for becoming rich in the shortest time by OVER LEVERAGING. He may buy 2, 3, 5, 10 or even 20 real estates with the money he has for 1 real estate. This type of “investment” is not a prudent and rational investment. Think of it: along the expressway where the maximum limit is 110km/h, will you drive until 120, 130, 150 or even 200km/h? How about if you are driving during heavy rain night time? People who drive exceed the limit in such conditions know well about the risks but for some reasons, they ignore it. If the journey is short, he might lucky enough to reach his destination. Life is a long journey. It’s never a 100m race but marathon. People who “run out of time” to over leveraging in real estate or any investments will only have 1 outcome: FAIL. When you can choose to drive safely with 90, 100 or 110km/h during sunny day, why choose to drive over 110km/h at night with heavy rain?

Remember the story of camel loaded with full load? When 1 little straw put on it, it collapses. When you over stretching your financial, only 1 small occurrence could fail you entirely. Domino Effect is devastating.

Are You Domino Pizza?