Happy July! A topic that has again become popular is that of real estate investing. There are different types of real estate investment. This month we will cover the concept and benefits of real estate cash flow investing.
Q: I’ve heard a lot about real estate investing, however I’ve personally only invested in the stock market. I know you are an avid real estate investor. Can you share with me your perspective?
A: Certainly. I am financially conservative and appreciate secure investments. I invest in real estate by buying and holding homes long term, focusing on cash flow. To start investing, you must have savings. Saving is basically spending less money than you make. To save more, you can either make more money, or spend less. Making more is often not in our control, but spending less certainly is. Lifestyle choices determine this first step.
Once you have savings, you must invest it. You cannot save to riches. With inflation, cash will always decrease in value over time. You have to do something with your money to make it grow over time. You worked hard for your money, so now make your money work hard for you.
Of course, there are many types of financial investment. Most of them are outside of my area of expertise. You should always consult appropriate professionals regarding other types of investment. What I know is real estate. I’ve written about different types of real estate investments before, including house-flipping. My personal favorite real estate investment is long term buy-and-hold where the focus is on cash flow.
When you buy and rent out a home, the rent you receive becomes your income. You then pay expenses such as property taxes, insurance, HOA dues, maintenance and repairs. You may also have a mortgage payment or professional management fees. Only when the rent is more than all the expenses will you have positive cash flow.
In the majority of financial investments, such as stocks, precious metals, or collectibles, you only make money if the value of your holding goes up. If it does not, you lose money. There is only one outcome that will pay off.
This is not the case with real estate cash flow investment. If you have a disciplined focus on cash flow, you should only buy homes that generate
more income than they cost to own. This is positive cash flow. If the home value goes down, you will still have positive cash flow. If the home value goes up, you will have positive cash flow PLUS appreciated equity. Either way you win. This is the foundation of the security that comes with cash flow investment in real estate.
Over the long term, real estate values have always gone up. I can sleep soundly at night and not worry about political changes, stock performances, or financial market fluctuations.
On this foundation, many important benefits of real estate investments are built. I have written about them in the past. For example, leverage. You can borrow money to invest in real estate! With a mortgage, you can borrow as much as 80%. There is nothing like it elsewhere.
I will stop here. In the future we will certainly discuss real estate investment again!