You want to make your money work for you. Smart investors want to make their money continue to work for them, and for this to be possible, you need to be able to generate some cash flow. Let me give you an example as to how stock investors make money outside of the normal long-term investment option.
Dividend-yielding stocks will produce income for the stock investor. These stocks will produce an income every quarter, or three months. But the dividend can be something like 3% or 10%+ annually.
So, a person with $10,000 invested in the stock may make $300 – $1,000 per year on the stock. This doesn’t account for the stock also appreciating in value over time. Ultimately, this money can be pocketed and used for whatever you see fit. But a lot of these investors are smart. What the savvy investor would do is take the dividend payout and use that to invest further in another investment portal.
The money provided is cash flow, or money earned from an investment.
This is the very same principle behind cash-flow in real estate investing – and when done right, this can bolster your investment portfolio dramatically.
Real Estate Cash Flow Investing
When talking about real estate cash flow, this is: regular cash received from your investment. And this cash can be:
* Money made from renting a home
* Money earned from lease agreements
If the piece of real estate provides you with money without you needing to sell, this would be considered cash-flow. In other words, a cash-flow property is one that makes an income. For the real estate sector, rentals and leases are the most common forms of cash flow, but if you grew crops and sold them, this would be cash flow, too.
And cash flow can be a lot, or it can be little.
For the sake of an example, we’re going to provide an example of what a large real estate investor may earn in cash-flow.
* Number of Units: 10
* Monthly Rent Per Unit: $1,200
* Expenses: $6,000
* Net Income: $6,000
* Reserve Ratio: 10%
* Reserves: $1,200
* Distributable Cash Flow: $4,800
And there can be even higher expenses, too. If you purchased a unit and have to pay a mortgage on it, this can make you barely break even, or you may make just $2,000 in distributable income off of the investment.
These figures are just roundabout figures, and your expenses and reserves may be higher, too.
Note on Reserves
Whenever you have a piece of real estate that you’re renting, it’s important to keep reserves every month just in case. And this money should continue to accumulate over time even if you don’t need to make a single repair or upgrade to your unit(s).
If the above example is true, a person would have $12,000 in reserves after 10 months, and this doesn’t mean that $1,200 still shouldn’t be set aside. Real estate will need to have repairs done or upgrades in the future. Do not touch this money unless it’s being put toward the upkeep or betterment of the real estate itself.
Distributable income per month or cash flow would be $4,800, and this money is all yours to keep. A pretty nice income, right? But say you have enough money to live a comfortable life already. If this is true, you can put all or some of this money into more real estate.
This is what’s considered cash flow real estate investing. You use the cash flow to be able to invest more and more until you have even more properties in portfolio. Given the figures above, we can also look at this example:
* $57,600 a year in income
* $200,000 home
With the income above, you could put $50,000 on a new home over the next five years. And you’ll rent these homes out for a small profit – if any – and hold them in your portfolio for 15 years, or half the lifetime of a traditional 30-year mortgage.
Within just 20 years, you’ll have 5 properties that are likely worth $2 million now instead of $1 million when you started buying them up. And you’ll have a 50% equity in all homes, meaning you only need to pay back $375,000 in total to satisfy all loans (or a little less for some) since you put 25% down on each property.
Great! So, you have the potential to earn $2 million (minus $375,000 to satisfy loans), or $1.625 million on your portfolio if the home prices doubled over the 15 – 20 years of ownership. This is a very realistic outlook for many areas, and you could walk away with a ton of money to retire and live a happy life.
This is what the smart investor would aim to do in the long-term: make their money work for them. And you could buy homes every year with the money you earned from your original 10 units. It’s a great way to start investing and really change the pace of your life in the future. The issue is that a lot of people don’t have 10 units to start with. The goal is to think small and keep scaling. You can use any income earned from the property and make it work for you over the long-term.
You don’t need to buy homes either.
Raw land is cheaper, and you could buy a lot every year and hold onto it until it’s time to sell. This is a good strategy to use if you’re building up your portfolio because raw land is multiple times lower in price than, say, a home on a 2-acre lot.
On paper, it sounds easy to do, but you really need to break down all of the details, too. The above example assumed $50,000 in down payments, but we didn’t account for closing costs. So, for the sake of the math being easy, we can say each home cost $60,000 to invest in initially, and this would need to be deducted from the total sum of the sale price of each home.
You need to be able to pencil out your annual return to determine if your investment is a wise choice.