This post is useful for everyone but is mainly dedicated to real estate professionals. Many people in the market say that almost all developers are flush with cash (not true, by the way) and can wait 10 or 20 years without selling until they get their price, let's call it $100,000 for an apartment.
So, here's a pop quiz:
Let's say that a developer waits 20 years and finally is able to sell his apartment at $100,000. Did he win? So at an average inflation rate of, say 5%, what is the value of $100,000 in 20 years, in today's dollars?
Drum Roll ......
The answer is: $37,688.
Here's another pop quiz:
If this same genius reduced his price from $100,000 by 1/2 and sold today at $50,000, and then reinvested the $50,000 for 20 years in Lebanese Treasury bonds paying an 8.5% coupon, what would he have in 20 years?
Drum Roll ......
The answer is: $255,602
This is what happens when people with no finance training or simple Math skills decide to become real estate investors. When all they do is rely on the lack of transparency in the market to fool people into overpaying. I guess now they have to go back to school and refresh themselves on Time Value of Money and how to use a financial calculator.
3rd Pop Quiz:
If you have $1 million in cash should you buy an apartment today for $1 million or rent it for 2% of its price and reinvest the money?
Answer: If you reinvest the money at the above 8.5%, subtract 2% a year for the rent, and reinvest the 6.5% left, you would end up with $3.5 million in 20 years, which allows you at the end of that period to buy 3 apartments in Beirut like the one you would have bought today for $1 million (even assuming it doesn't drop), and a huge $500,000 villa in Shtoura, for your mother-in-law, AND, you would have lived for free for the whole 20 years.
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