Cashflow is King
In the recession, cashflow is king. During the peak of the housing boom in 2004-2006, many speculators investors were diving into properties that they knew would not generate a positive cashflow. Taking a monthly loss on a property was no big deal when they could sell the property three months later and make $30K. The few ‘flippers’ who timed the market right, made a killing, and the rest got killed.
When you buy a property today, it is less likely to appreciate and more likely to depreciate. You are not building equity through appreciation, and the property values are going down faster than you can pay the mortgage principal balance. The tough lesson learned from the housing bust is that the cashflow analysis should be the determining factor in purchasing real estate. The analysis tells you if the property will generate income for you (asset) or cost you money (liability).
If you want to be a real estate investor, you must focus on acquiring assets that generate a passive income. If you are making money each month, then it does not really matter if the market goes up or down.
In Rich Dad, Poor Dad, Robert Kiyosaki tells the story of when he wanted to buy his first rental property. His ‘rich’ dad refused to invest with him because the property did not generate at least $100 per month of income. Kiyosaki thought that the property was a good buy because he could eventually raise the rent, the property would appreciate, or other factors would work in his favor, but his ‘rich’ dad knew better. He knew that things do not always work out the way you plan them, and that you make your money when you buy a property, not when you sell.
As a beginning real estate investor, I told my realtor that I would not buy anything that did not generate at least $100 in monthly cashflow, but would buy anything that would. We were able to find 3 properties where the numbers worked out, and I was soon generating a passive income. When the properties doubled in value two years later, it was a good bonus, now that they have gone back to the value that I originally bought them for, they are still a good investment and continue to generate income.
It is essential that you do a cashflow analysis of any property you are going to buy. Make sure you talk to a rental manager to determine what the rental rate is for the property and what they think it will be in the future. Factor in EVERY COST of owning the property: mortgage, taxes, insurance, mortgage insurance, flood insurance, homeowners association dues, maintenance, vacancy, for rent advertising, property management fees and unexpected emergencies. If you are still generating at least $100 per month, than go for it.
Wounds in real estate are usually deep and take a long time to heal. But if you learn from your mistakes, it can become valuable experience that will make you a savvy investor.
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