This is the era of cash flow investing. People are buying rental properties and cash flowing them as opposed to buying and gambling on appreciation like we did the last time we lived through a real estate investing craze. I am all here for it as long as it is done responsibly. Cash flow is bae.
Here are a few ideas I have that will help you be a responsible real estate investor.
The best way to make money in real estate is to buy a deal. This means that you buy something below market and then re-position it for a quick profits. This can be done multiple ways. You can buy from a distressed seller, you can buy a distressed property that needs rehab, you can buy a property that is being run inefficiently, you can buy a property that is rented below market rents. All of these are great, sure bet ways to make money.
Where people get in trouble though is betting on raising rents or betting on the market carrying up the prices. Don’t gamble. If you buy a deal you should know that it is is a deal going into the deal. You make your money on the buy.
A lot of people are buying properties with slim cap rates hoping for an increase in value later on. They might get lucky but they also might get slaughtered. Given the state of the market it is wise not to bet on things that are not guaranteed.
Hedge your bets on a multi family pull back
I think that we are going to see a pull back in rents. I was listening to a book this morning where he made a point that “rents always increase in value” and that eerily reminded me of the lines touted by novice real estate agents selling homes during the last bubble. I believe we will see a pull back on rents because right now people are renting by force not by choice. As the economy improves, as wages increase and as people become more secure in their employment they are going to opt to own, when that happens, demand for rentals will go down which will then carry down rent rates, and property valuations which are tied to net operating income based on those rent rates.
Rents might always go up, but they can also go down, when they go down, that ultra leveraged 200 plus unit multi family deal you have is going to get hammered. Small ticks in rents can create millions in multi family. When the market corrects against them the same will be true. These guys will then be upside down millions with negative cash flow they can’t afford to pay out of pocket. All because they gambled on things that didn’t already exist. Don’t be like those guys.
Play chess, not checkers. A lot of people hopping into multi family are getting there as someones exit strategy. They are at the end of the cycle not the beginning. This is shown in the novices creating mutli family syndications and the banks willing to bet on those novices. The worse place to invest is where the crowd is and right now that crowd is in multi family. Hedge your best by looking at single family homes because that is where people will rotate to. Look at the consumer not the investors. Consumers drive where consumption goes next and consumption to a real estate investor shifts with cycles.
Buy for what it can do now not for what it can do in the future
This speaks to what I said above. The deal has to make sense as a rental NOW, not at a later date when you raise the rents. The deal should cash flow NOW, not at a later date when you raise the rents. That cash on cash on the cash flow should be solid NOW, not at a later date when you raise the rents.
Raising the rents, appreciation and decreasing costs should be icing not the cake. This is if you want to invest responsibly. I say this because NONE of those other things are guarantees. You don’t want to get into a deal hoping that something will happen then when that doesn’t happen you get stuck holding the bag. Be smart. You do this by negotiating a better deal up front. You don’t pay for what the property will do at a later date or can do after its re-positioned, you pay for what it is doing now and even at that number it should cash flow.
I see this a lot on multi family properties in southern California. Most of the deals here are priced at break even. So the rent will barely cover the mortgage. That isn’t a deal. I pity the fool who is taking something like that on.
Protect the downside with reserves
Number three should have been number one for me. If you have been following anything that I say or do you will see that I am HIGHLY frugal. This is something I learned from talking to the people on my podcast and from just studying successful real estate investors.
In this economy you HAVE to make sure that you are protecting your property with substantial cash reserves. This can be six months to a year of reserved cash flow in your savings just in case. Over the last two months we have received unexpected maintenance issues, both of which we took in stride because we had the reserves.
To take it a step further, I believe that you should actually just stack the cash flow and NEVER spend it. Take the cash your properties generate and buy more property, buy more deals, keep that real estate train going. Net worth, net worth net worth.
This sacrifice puts you in position to do a lot of things like scaling and refining what you have. I recommend 6-12 months. That is small window of time in forever.
Invest a portion of your profits back into the community
If you are familiar with the principal of tithing you know that what you give you get back. I am a huge advocate for tithing and giving back and I believe that this is something we have to do as real estate investors and landlords. For too long foreign property owners take rents out of African American communities and pour them back into their communities. This is why their communities look amazing and ours are dilapidated.
What our company does is we invest back 10% of our net revenue by providing funding for local small business owners. We want to help you go into business for yourself. It is more noble to give a man money to start a business than it is to give him food.
I think that EVERY African American investor can afford to pour back into their residents well being. Engaging in business like this will improve the morale of the community, it will improve their thinking and it will be a write off! I am just 100% for US being the change we need to be in our communities. If we want a neighborhood to be great again all we have to do is invest in it. We can determine what we want to do well and what we want to not do well and we do that with our dollars. Instead of spending our dollars on trips and stuff, we can paint homes, mow lawns, redo streets, etc etc. As a real estate investor in the hood this is your duty, do be a community developer not just a real estate developer.
This is how we invest responsibly and these are just a few of my ideas. What are some of yours? Sound off in the comments with some ideas for how a person can invest responsibly in the hood and other urban communities.
If you are interested in investing with our club on either the stock or real estate side we would be happy to welcome you into the partnership. Email firstname.lastname@example.org today to join.
Be great, invest well,