Blog | Real Estate

Why I Buy Properties That Put Money in My Pocket Every Month

The Power of Cash Flow

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I admit, finding properties that cash flow takes some time. But in the end, it’s well worth the wait.

That’s one big reason I love real estate. I can collect cash flow on a monthly basis, without even thinking about it. You can’t say the same for a lot of other investment strategies out there. And you could argue the same point for the return on investment. I believe that real estate offers a larger cash-on-cash return than any other investment strategy.

I have many people ask me why I chose real estate as my career. It all boils down to leverage, or what I call Other People’s Money (OPM). In real estate, leverage is based on the asset itself. Sometimes you can get a bank to loan you money up to 80%, sometimes even 100%, of the total asset value. Why? Because if you were to default on your loan, the bank can repossess the asset. You can’t say the same for, let’s say, stocks. When you invest in the stock market, you hold all the risk. But when you take out a loan to buy real estate, the bank is the one that assumes the risk.

Looking for Properties

Now when I look for properties, I tend to look for buildings that are underperforming. I look for any chance to increase Net Operating Income (NOI). NOI is simply your income minus expenses. The goal is to have more income than expenses to create a positive cash flow. If I can increase the NOI of a property, I will most likely see a healthy return and lucrative cash flow opportunity.

For instance, I’ve bought buildings that have been 100% vacant. People think I’m crazy for it, but the whole point of buying real estate is to create value. And I will only buy properties that I am certain I can increase the value.

In some of my deals, the fix was simply raising rent because the past landlord had it set well below the current market rates. I’ve also remodeled buildings and retrofitted them with things like washers and dryers, to increase the rent anywhere from $25 to $50 a month. It doesn’t sound like much, but when you multiply that by hundreds of units, you'll start to see income levels spike.

Aiming for Value

Once I’ve achieved that increase in NOI, I know I’ve increased the value of the property. Banks value these types of properties based on the NOI, not on market value. So, if you’re able to increase the income a decent amount, you’ve just increased the value of the property.

When I’ve increased the value and I feel like I’m at a good place, I will usually refinance. When I pull money out (tax-free), I’ll then use that same money to reinvest in another property. After many years of doing this over and over again, I’ve been able to exponentially grow my portfolio and wealth. All by using OPM.

If you want to learn more about how I go through my process of picking properties, make sure to read my book, The Advanced Guide to Real Estate Investing: How to Identify the Hottest Markets and Secure the Best Deals.

Original publish date: October 03, 2018

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