Why Investing for Cash Flow is Important
Cash flowing real estate is an incredibly powerful investment tool. However, many investors buy property for the appreciation alone and choose not to concentrate on cash flow. I’ve seen some investors buy a property that only nets a very small amount per month or even is cash flow negative! The reason they do this is because they are betting on future appreciation. There are some potential problems with this strategy and here are a few. Many times a given market will take a downturn and prices start to fall and all of that appreciation you were betting on may not be there. There can also be the issue of ongoing maintenance and property upkeep issues. If a property barely breaks even or is cash flow negative, then a seemingly small repair can be a big deal when that investor has to come out of pocket for the expense.
Appreciation is a nice benefit, but concentrating on cash flow really can strengthen your portfolio and your overall returns. If you are investing in rental property using a Self-Directed IRA for instance, then monthly cash flow may be exactly what you are after so that you have income during retirement. Investing for cash flow isn’t always easy, especially in some of the most competitive markets. What if you are having a hard time finding cash flowing properties in your market? You may want to consider purchasing in other markets or using a turn-key provider that already has the property purchased, renovated, and rented.
I’ll give you an example of a property I am renovating right now. I purchased the property for $99,000 and at the price I paid it didn’t fit the “buy, fix, & flip” model, but the numbers made sense as a rental. I know that I’ll have about $120,000 into it and can easily refinance and get my money back out given the property’s worth once fixed. I also know my total payment for principal, interest, taxes, & insurance (PITI) for a 30 year fixed loan should only be about $900 per month. Even though this property is in the renovation period I decided to put up a coming soon sign in the front yard. That was placed on the lawn on a Friday evening and by Monday morning, we had over 10 people interested in renting the property at a listing price of $1,850 per month. My target profit was $800 per month. Now there will be some ongoing maintenance and vacancy costs, but I’ll still easily net around $800-$900 per month on that single property! Why does this property cash flow so well? Because I specifically targeted this area as a place people want to live. It’s a great community with an amazing school system. There is great demand for the product I am providing.
This is just an example of how someone can take control of their wealth accumulation and retirement planning. Typically we are taught to save our money, “Save, save, save and invest it in the stock market.” We are taught to contribute to our 401k and let our nest egg build up. And once you get to a certain age you can start taking that money out living off it. Hopefully, you calculated how long you will live correctly, so you don’t run out of money. This is a dangerous game to play.
One rental property isn’t going to make you rich. But take the example above and multiply it by 10 rental properties or maybe 20. Let’s say you have 20 rental properties that are cash flowing on average $500 per month that is $10,000 per month to retire and live on! Whether you use personal funds or retirement funds, building a cash flowing empire may be one strategy to consider.
Matthew A. Tillack