Cash Flow Part 5

The final option is the option that assumes paying the entire house off right away ($200K) and then subsequently looking at investing the monthly payment and what the house would be worth in the end. As in the first two examples, the house would be worth approx. $700K in 30 years. No changes here. I would take the $955 per month that was originally going to the mortgage and invest it at an assumed rate of 10%. This would be worth approx. $1.7M in 30 years. So, combined, the house and stock would be worth about $2.4M in 30 years.

As we can see, these options are in descending/ascending order. The first option, of making no down payment results in the highest future value based on projections (estimates). However, this is also the most risky equation because it brings a high level of risk into the equation (low beginning equity in the house and the highest monthly payments). The second option is less risky but it has a lower future value than the first option. And finally, the third option is the least risky but it also has the lowest potential future value.

 Which option do you think I should do?

Cash Flow Part 4

The second option is also a 30-Year option. This would be a 30-Year Mortgage Option w/ $100K down payment - This 30-year mortgage will cost me approx. $272K in today’s dollars in overall costs over 30 years (the $100K down payment, $100K in additional principal and $72K in interest). Essentially, I am trading $100K now for a $72K decrease in total interest payments over the life of the loan. I will be making monthly payments of $478 which is a more manageable amount than the $955 per month in the first option.

 As in the first option, the house would be worth approx. $700K in 30 years. No changes here. In addition, as this method of investigation is considering whether or not I should pay cash, it’s also important to look at the future value of the $100K (remember, I put $100K down so now I only have $100K to invest). If I was to take $100K and, instead of putting it towards the house, invest it in the stock market using a 10% rate of return, that $100K would end up as $1.6M in 30 years. Also, I would now have approx. $477 per month of additional money to invest ($955-$478).

 With some math this looks like it would be worth approx. $847K in 30 years. In review, I would be paying out $478 per month for 30 years and end up with stock with a value of $1.6M as well as the monthly investment that has grown to $847K and a house worth $700K. In total, this would be $3.14M. This seems to be a nice end result, but we will look at the last option in a later post.

Cash Flow Part 3

First, I want to look at the 30-Year Mortgage Option - The 30-year mortgage will cost me approx. $344K in today’s dollars in overall costs over 30 years ($200K in principal and $144K in interest). I will be making monthly payments of $955. This method assumes that I put zero dollars down and make monthly payments over the life of the mortgage. In all likelihood, I will be moving out of this house within the next 7 years and would likely use the house as a rental property. However, that’s a story for another time.

 It’s important to also look at the future value of the house, assuming that the house increases in value by approx. 3% over 30 years, it would be worth approx. $700K in 30 years. The 3% is roughly in line with inflation and seems to be a conservative estimate. In addition, as this method of investigation is considering whether or not I should pay cash, it’s also important to look at the future value of the $200K. If I was to take $200K and, instead of putting it towards the house, invest it in the stock market using a 10% rate of return, that $200K would end up as $3.2M in 30 years.

 In review, I would be paying out $955 per month for 30 years and end up with stock with a value of $3.2M and a house worth $700K. In total, this would amount to $3.9M. This seems to be a nice end result, but we will investigate a few other options in later posts.

Cash Flow - Part 2

Today, I specifically want to look at the purchase of a new home in terms of some sort of a relevant cash flow model. I believe that interest rates are incredibly low today in comparison to historical averages. As such, it is quite possible that there are potential benefits to borrowing money at today’s historically low rates. However, this must be held in balance with biblical principles such as a full understanding that I am a steward of God’s money, not my own money. In addition, we know that the borrower is slave to the lender from the book of Proverbs. Also, carrying debt brings something called “risk” into the equation. If I don’t have a car payment, the car is totally mine. I don’t have to make any payments on the car. I can take the cash flow from my job and do what I want with it instead of sending it to the bank.

However, if I have purchased the car with debt, a portion of my cash flow each month must go to the car. If I lose my job and am no longer receiving a salary, I may no longer be able to make my car payment and the bank could take my car from me. This is why I believe it is responsible to have a manageable level of debt which is dependent on expense levels, salary level and life situation (i.e., do I have a wife and kids that I am supporting?).

Generally, I want to be safer when I have people that I am supporting. This includes a reasonable amount of cash in the bank such as 3-6 months of expenses. Today, I can get a 30-year mortgage at approx. 4% interest and a 7/1 ARM at approx. 3.25%. The house that I am looking to purchase is approx. $200K in value and I am trying to decide how much money I should put down (if any) towards the house. I will investigate three different scenarios over the next few days.

Cash Flow - Part One

I’ve been learning a lot recently about cash flow, and just how important it is in life. Having positive cash flow, that you can invest into cash generating assets, is the key to building long-term sustainable wealth. Cash generating assets can take many forms and I’m sure there are a variety of cash generating assets that I may not be aware of yet, but I think the basics are as follows: real estate, stocks that pay dividends, bonds and businesses.

 Of those three, I believe they should be ordered as follows in terms of lowest level of involvement to highest level of involvement required. Bonds, stocks, real estate and finally, businesses. Bonds and stocks simply require you to choose the investment and then you make your purchase and walk away while you receive a steady stream of cash payments. The only thing that you have to monitor is the underlying health of the business which may take an hour a quarter at most.

Real estate also requires you to choose your investment and make your purchase, but unless you are going to give 10% net rents to a management company, you’re going to have to likely be more involved in this investment as you will be dealing with tenants and various repairs and maintenance issues that may come up. As a reward for this extra work, you may end up with a higher rate of return than bonds but the return may be similar if not less than a diversified portfolio of stocks. This can be discussed at a later time but that’s how I would view the returns.

Finally, businesses require the most time. If you are going to own a business that produces high levels of cash flow, you are likely going to have to be more involved than if you owned a bond or a stock or a rental property. However, you are likely to make the most money and have the largest growth potential by owning a business. It is important to run a business that requires the least amount of time and involvement by you as the owner. This will make your business more sustainable over the long-run and increase the sale value of the business.

Passion

What are you passionate about?

What's important to you?

Are there things that you have settled for?

I think a lot of us (including myself) try to convince ourselves that where we are at is where we always dreamed we would be.  We try to convince ourselves that we are OK right here.

And to an extent, that is true because we have Christ here and now and He is always enough.

But at the same time, I think a lot of us have settled for our current status quo.  For our current reality.

Whatever happened to pursuing dreams?

Whatever happened to letting go of a lesser thing in order to pursue the best thing?

Get your life so full of "good" things and you will always miss out on the "best" things.

More thoughts on this to come, but for today, what can you change about yourself (what can you change about your habits or your choices or your thinking) to get you one step closer to where you really want to be?

Don't settle for what is good when you can go take what is best.

Just Do Something

I've been incredibly busy the last few months, but that doesn't mean that there hasn't been time when I could have been working on various projects.

Recently, I've been realizing that sometimes I don't start projects that I can't complete (because I feel like I don't have enough time).

Or, I want to do a HUGE project that is totally unrealistic in one day.

Take writing this post for example: Sometimes I want to write a book or a novel or a really long blog post.  All of that can prevent me from writing at all.  Which is a complete waste.

So today, I'm trying something new.

I'm going to just do something.

I'm going to write a little bit. 

After all, the way that you write a 150 page book is to write one word at a time.

The journey of a thousand miles is taken one step at a time.

If we don't start, we will never get there.

Start today. 

Lift a few weights.  Read a couple pages.  Write a few words.  Talk to some people.  Do something for someone else that they don't expect.  Stop looking at yourself.  Look at others.

Think positively. 

I've heard that it takes ten positive thoughts to get rid of one negative thought.

We have to train our minds to think postiviely.