Invest for cash flow and financial independence

Financial planners will always tell you to diversify. That’s a good idea, except that most people generally diversify solely through buying many different mutual funds. You are still investing in mutual funds or stocks. There are ways to gain wealth (and financial security) that you may not be currently exploring, ways that go beyond buying mutual funds.

Instead of planning for retirement, plan to achieve financial independence. True financial independence is an easily measurable known goal and it is a goal that can actually be achieved in a short period of time. How? Through passive income. Generate positive cash flow from hard assets like real estate income property. Rental income is passive income for the most part, especially if you have a solid property manager who takes care of the details.

The principles of creating long-term continuous cash flow can be applied to most types of real estate investments. Mobile home lots, apartments, garage / storage units, and houses are great income-generating assets. Homes, particularly low-end homes, are an excellent vehicle for creating long-term cash flow for a multitude of reasons.

While appreciation is often the most important form of profit for real estate investors, investing for cash flow is easier to determine and with less risk. So how do you achieve positive cash flow ethically in the real world? You need to buy in the rare market where high capitalization rates (15% +) are the norm. Such markets are often depressed like Rochester or Memphis and have a large number of tenants. The reason tenants are willing to pay more for rent than they would have to pay for owning in such markets is that they believe the property value is going down or leveling out, in which case not owning is a good idea. despite the high rent. Positive cash flow is so rare and so desirable that it eventually attracts investors from out of town. Your arrival in Rochester or Memphis or wherever causes property values ​​to go up, so that high capitalization rates are no longer available.

There are three main ways that an investor makes money in real estate: 1. from cash flow, 2. property appreciation, and 3. mortgage amortization, thus increasing their cash flow and equity. Only if you buy on a bargain basis can you get a positive cash flow from a rental property.

Why Low-End Homes Are the Ideal Cash Flow Vehicle

First, houses abound. Every city, town and neighborhood has houses. Houses are probably the easiest to buy because they are the most common. Homes are also probably the easiest to buy at a discount, as there are many sellers who own them in some kind of crisis ownership position – vacant, impaired, judgments / bonds, back taxes, etc.

Homes are the easiest to manage, with the possible exception of garage / storage unit rentals, as they are occupied with things and not people, making evictions easy. Well-maintained homes often keep tenants for a 3-5 year cycle, sometimes longer. Most other vehicles have a short-term occupancy.

Homes are by far the easiest to sell due to the high natural demand for places for people to live. In most cases, the property will be sold paperless, but many savvy investors will sell their homes with some type of payment contract and will be able to charge a 10-15% price premium to the buyer without using an estate agent. estate.

The so-called low-end home can be very desirable from an investor’s point of view. First of all, low-end housing doesn’t mean becoming a slum lord. It means basic beginner houses that are located in good, but not necessarily great locations. Typically, these fringe areas are more of a buyer’s market, tipping the bargain in favor of a cash buyer or a buyer seeking owner financing. Actually, homeowner financing is easier, much easier in these slightly marginal areas.

These lower-tier homes can then be frequently purchased at various auction auctions (taxes, foreclosure, probate). In many areas of the US, these houses are bought at prices from $ 5,000 to $ 25,000, without much difficulty (after learning the many strategies and insider secrets).

Typically, these homes can generate rents of $ 600 to $ 900 per month, which, based on the low purchase price, generates an excellent return on investment. Yields of 25% to 35% per year are common. It is not uncommon for smart investors to receive income from their homes for 20 years or more. After this period of ownership, many homeowners will find a stable buyer and sell the home with a vendor who will get the mortgage back (payment contract) and receive another 10-15 years of “mortgage” payments.

Here is an example:

Purchase Price: $ 20,000

Rehabilitation: $ 15,000

Cash investment: $ 35,000

Annual gross income: $ 9,600 $ 800 month

Ordinary Expenses: $ 4,320 45%

Positive cash flow: $ 5,280 year $ 440 month

Market value after repair: $ 50,000

Capital created: $ 15,000 30%

Gross return in cash on cash: 26%

Cash on cash Net return: 15%

To put things in a little more perspective, if you were a risk-averse investor, how much money would you need to invest to earn $ 5,280 per year in interest income, excluding taxes. Assuming the current 5-year GIC rate of 3.5%, you would have to invest $ 150,857. Using the example above, you could buy 4 houses with that money and have an income of $ 21,120 per year. Plus, you wouldn’t have to worry about stock market fluctuations or running out of equity if you were withdrawing income from your portfolio.

Finally, when investing in rental properties, you need to keep an eye on long-term goals rather than shortsighted goals. Property rental is a marathon rather than a sprint with the biggest gains in the end. You will want to liquidate the property as quickly as possible to get the maximum profit potential and acquire new properties. The real money when renting properties as a real estate investment is not renting one or two units, but twenty or thirty. The more rental properties you own, the more money you can make from your property.

In short, investing in real estate is always a good idea, no matter what the economic environment is. Investing in income-generating properties is even better, as positive cash flow properties provide real inflation-protected cash for your retirement.