When it comes to real estate investing I always look at two things first: how much, if any, can I cash flow the property? and 2. Is there any built in equity with the deal?
Let’s explore cash flow. Cash flow is my favorite part about real estate investing.. Actually, cash flow is my favorite part about investing in any asset! The reason is simple, we all need a couple bucks in our pocket. There are two ways to accomplish this. We can either work for money, or have our money work for us. Logic would say that to build a nice retirement or lifestyle, one would want to choose the latter.
Cash flow, or passive income as viewed by the IRS, is also taxed at a lower rate than earned income. The reason for this is also not too complex, the government gives incentives for people to invest in housing. The government needs housing, so by investing in something that they need, you can take advantage of these incentives they offer.
Cash flow is also a solid foundation and can weather the storm of a housing first. We saw in recent years many so-called real estate investors getting slaughtered when the market took a turn as housing loans collapsed. The investors who had built their portfolio on cash flow were fine, in fact they actually thrived as rental rates took off from a growing demand of renters who could not afford the loans on their own property any longer.
When you invest for cash flow, it does not matter whether the value of the property goes up or down or remains constant. You have calculated your return based on how much cash it puts in your pocket on a monthly or yearly basis in comparison to how much you initially put into the asset to acquire it.
Many successful real estate investors have found ways to acquire cash flowing properties without using any of their own money initially. This is what rich dad Robert Kiyosaki refers to as printing your own money. There are many strategies of doing this, some that include having money partners or private lenders or other types of financing, and others that include going out and finding motivated sellers.
Now let’s talk built in equity. Built-in equity is nice as you obviously increase your net worth as soon as you acquire that asset. The thing about equity however is that it does not provide any cash flow directly. You might have increased cash flow with the more equity you have, as a result of lower loan costs each month, but simply acquiring a house that is worth more than you buy it for in and of itself does not put cash in your pocket on a regular basis. However, properties with built in equity are usually much easier to cash flow, and worst-case scenario are always prime opportunities to create some earned income by wholesaling or flipping, which can also be done using other peoples money or financing.
If you are interested in building or expanding your real estate investing portfolio, head over to our investors page. We are happy to assist investors from around the world to invest in real estate in Arizona no matter how little or how much they have to invest!