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New BMW vs. Cashflow Machine

November 17, 2010

2010 BMW M6

A new BMW? Or, a cash flow machine? Take your pick because this is a serious choice in this real estate market. I have been working with a lot of investors lately — All with different investment strategies, price ranges, and net worth. Real estate investments are no longer only for the rich but for the wise. If you have a smidgen of faith in the outlook of the real estate market, it is a GREAT time to begin investing. If you are still not sure we are at the bottom (we’re not), and need more time to get your finances in order and want to wait for the real steals, you still have time. The only problem, depending on your cash status, is that rates are at an incredible low and will not be here for ever! If you have cash and want to wait for prices to bottom out, you will have significantly more leverage come the bottom.

I am a huge fan of the cash flow investment strategies. It is not a get rich quick strategy, but it is conservative, leverageable, and tax-friendly. This is an approach a client of mine is taking. Although they already drive a BMW they have now set their eyes on cash flow. Their purchases have gone something like this:

Purchase Price:     $95,000

  • Closing Costs:    $500
  • Repairs:              $5,000

Total:          $100,500  (Out-the-door)

Being in close proximity to UCF, they have had no problems renting. For a 3 bedroom, 2 bathroom townhome they are renting for about $1,200/month.

Here is the monthly breakdown:

Rent: $1,200

Less HOA: ($200)

Less Insurance: ($100)

Less Taxes: ($150)

Cash Flow Per Month ………………………………………………………$750

Annually they are going to see a cash-on-cash return of:

(750×12) / 100,500 >> 9,000 / 100,500 = 9% return + appreciation

Now consider the same situation leveraged.

On a property like this, you would be required (most likely) to put 20% down. Here is how the purchase would play out:

Purchase Price:     $95,000

  • Closing Costs:    $3,000
  • Repairs:              $5,000

Total:                        $103,000

Less Financed:      ($76,000)

Cash Investment: $27,000


Here is the monthly breakdown:

Rent: $1,200

Less HOA: ($200)

Less Insurance: ($100)

Less Taxes: ($150)

Less Mtg Payment: ($365*)

Cash Flow Per Month ………………………………………………………$385


Annually they are going to see a cash-on-cash return of:

(385×12) / 27,000 >> 4,620 / 27,000 = 17% return + appreciation


As far as I know most portfolios aren’t performing this well. Oh yeah, the return on a BMW!! Here are the asking prices I found on a BMW M6 from 2008 and 2009:

2009:  $84,988 >>  -$17,362 / $102,350 = Negative 17% in the first year.

2008:  $68,900 >>  -$33,450 / $102,350 = Negative 33% over 2 years.


But you really did enjoy the beemer for 2 years didn’t you?

The moral of this story is buy USED cars and CASHFLOW properties!


Call me if you’d like to discuss it further.


These are just to examples of how a purchase like this can be handled. All numbers are estimates based on my most recent figures. 
*Mtg payment is based on 30 years at a 4% interest rate.
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