Welcome my friends to the lovely world of real estate; one of the many investing strategies discussed on this website. Whether you are new to real estate or an experienced investor; real estate is all about mindset and preparation. I refer to real estate as a game because it truly is. Games are meant to be fun and challenging. What boring and easy games have you played in the past that you couldn’t wait to try again? Yea didn’t think so. If you are willing to learn the process and devote the time, quality deals can be found in any market at any time.
Books upon books, podcasts upon podcasts, and lectures upon lectures have been prepared on everything and anything real estate related. Just like any other business/investment, there are fundamental principles in this game. For purposes of this article, let’s discuss the almighty principle: cash flow.
Cash flow on a property is the amount of income left over after expenses, otherwise known as net income. Let’s say you purchase a four family home for $700,000. After a 20% down payment ($140,000), your mortgage is $560,000. Over a 30-year term at today’s average interest rate, your mortgage would be $2,650 a month. Let’s say your other major common expenses, taxes and insurance, is $300 a month. Each apartment building is currently paying a rent of $1500 per month for a total of $6,000 monthly gross income. You decide you will hold 10% of this monthly gross income in an account for possible repairs.
$6,000 monthly gross income
($2,650) mortgage expense
($300) taxes and insurance
($600) repairs and maintenance account
$2,450 net income
The annualized net income on this property totals $29,400. Based on your initial investment of $140,000, this is a 21% ROI (return on investment)!
Imagine buying a property that automatically makes you money the day you buy it. Yes, it is possible. Yes, it does require work. Yes, it’s not rocket science.
Sure, it is possible to buy a property that rises 3-10% a year (depending on where you live), otherwise known as appreciation. But what if this property decreases 3-10% a year. You’ve paid top dollar for a property that you initially broke even on (revenue equals expense). A tenant leaves and now you are loosing money every month out of pocket. You try to sell the property but no one will buy it for the price you paid for it. Now, you are losing on both ends, and “upside down” on this investment. Buying an investment property only for appreciation increases your risk exponentially.
It is crucial to do your research, know your enter and exit strategies, and always look for cash flow. This, my friends, is why cash flow is king!
– Trader Phil