You probably know at least one person who has been through a divorce and subsequently lost all of their money. In the he said/she said of it all, parties divided wealth and halved their assets. But a loss of wealth following a divorce is actually more complicated than that—the real loss of wealth happens as a result of assets liquidated at inopportune times.

Jason Hartman jokingly advises that you should simply time your divorce so that it falls at the peak of the market to better manage your cash flow.

Realistically though, things are more complicated than that. The key to cash management is in the RV Ratio™, a term Jason Hartman coined to assist real estate investors. Historically, .7 percent has been the RV Ratio™ to aim for.

Commonly, investors believe that ten properties with positive cash flow is good enough—but it isn’t. If these properties are all free and clear, worth $2 million, you must look at opportunity cost. It is probably significant, and you don’t want all of your money tied up in the property. The problem is that you don’t know if the financing is there at all—perhaps it is free and clear, perhaps it’s fixed rate or adjustable rate financing. There are a number of unknowns.

To simplify this process, rely on the RV Ratio™. Focus on what rent is and what value is. Eventually, you’ll want to think about things like extra income, management fee, so on—but initially, rent and value will provide you a simple way to evaluate a property. Remember that you are focusing on current value. If you’ve got a $100,000 property, it should provide a minimum of $700 a month in income. The absolute minimum acceptable RV Ratio™ is .5 percent.

You may notice that local property is getting better, and this doesn’t indicate an increase in rent. Instead, we’re seeing a decline in value. Expensive properties may then be renting for much less (.3 percent), which is an unacceptable ratio. Later, you’ll look at the overall return on an investment and the internal rate of return—but use the RV Ratio™ as a rule of thumb. This will allow you to make the best investment decisions. If someone claims a positive cash flow on all of their investments, you can now ask how much they’re worth and how much they rent for—a true sign of value.

Real estate is certainly imperfect, which is actually great. It leaves room for emotional issues, houses, shortages that allow investors to get an edge. There’s more opportunity to be had, and this works in your favor.

(photo credit: ToniVC via photopin cc)

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Minimize Risk and Increase Returns

Historical Trends in Real Estate

The Jason Hartman Team

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