Most Real Estate Investors Invest Wrong

Most real estate investors invest incorrectly or with a higher level of risk than necessary. As we have just seen through this gigantic mortgage fiasco and the failure of several banks, most people buy properties in the hope that they will appreciate in value over time and do not take into account the financial implications that this implies for themselves. . That type of investment objective is considered capital gains investing, investing to increase the capital of your property based on an appraiser’s opinion of value. The other way to invest in real estate is more about strategic investing than capital gains and the value of the real estate you own is based on the amount of cash flow it produces for you relative to your investment, NOT in the opinion of an appraiser. .

Lots of investors come to me telling me they want to be a real estate flipper and make big bucks selling bank properties. Let me tell you first, that type of investment is definitely not a passive cash flow investment by any means and you will end up spending 70 hours a week trying to do it. It is also extremely specialized. You need to know your market very well and know what the appraiser’s opinion will be before you buy the property. You also need to understand renovations, the closing process, the sales process, the loan process, and most importantly, how to market to sell your properties very, very quickly (within 10-15 days). To sell that fast, you need to search and search and search for that property where you can buy it cheap enough that you can sell it. Typically, this means reviewing and analyzing the market values, renovations, and areas of over 100 properties before finding a good property. I ask many of the people I know who are interested in wholesaling and selling property what their long-term goals are. And guess what, their long-term goal is to make enough money selling properties so they can buy enough properties to have enough cash flow to cover all their expenses so they can be financially free. My response to them is, “Did you know you can do that without having to sell properties and without having to accumulate these massive savings to re-invest in cash-flow real estate investments?” Most have never heard of such a thing.

In my opinion, the best way to invest in real estate is to invest in passive income first. But how do you do that without money? How do you invest without the capital. Simple, you raise the capital. Instead of focusing on finding buyers, focus on finding equity investors to invest with you. Do you think it is better for YOU and the INVESTOR to find an investor who has $250,000 for an investment or to find a buyer who has $250,000 for an investment than for you to make $10,000 by selling them wholesale? It’s actually better to raise the money, especially when it comes to real estate investments. There are many reasons for this.

First, when you partner with the investor with capital, you can structure the transaction where they get paid first, before you make any money, and get paid based on your performance. This builds a significant amount of trust between you and the equity investor because you are making money when they make money instead of making money off them. For example, suppose you find a single-family home that is worth $100,000 but that you can buy for $65,000 already fixed up with a tenant in the place you rent for $1,000, you can structure the transaction as follows:

The investor gets a 6% return on investment before they get paid. Which means they get $325 a month on their $65,000 of rental income and then split the rest 50/50. That would mean that of $1,000 in monthly cash flow that generates $650 after all expenses, you’ll get $162.50/month ($650 – $325 investor 6% return = $325 left x 50% = $162.50). I know $162.50 doesn’t sound like much, but look at it yearly. You are now earning $1,950 per year in cash flow as long as you maintain the investment AND own the property at 65% of market value. On top of that, your upside potential from the $10,000 you would have made selling the property wholesale is still there in equity, you didn’t lose it. If you were to hold for 10 years you would have earned $19,500 in cash flow assuming NO RENT INCREASES and if you sell in year 10 assuming only a 3% appreciation rate you would earn about $29,000 on the sale. That means over the 10 years it made $48,500 instead of $10,000 and the investor who bought it also made more money, so it’s a win win scenario.

Additionally, there are multiple tax benefits to holding the property for the long term rather than selling it. You can take depreciation deductions against the income you produce in rental income, causing the cash flow to be taxed at a much lower rate. Also, if you sell a property, you will most likely pay short-term capital gains rates, which is one of the highest tax rates, so you won’t even be able to keep all of your $10,000 wholesale gain.

You get more tax breaks, the benefits of long-term appreciation, and you’ve hedged your money against inflation (which, let’s face it, we all see coming pretty soon, and it’s already happening). You can also collect passive cash flow (income you don’t have to work for) unlike wholesale. Focusing on investing cash flow and raising capital for investments instead of finding buyers for wholesale can make you very rich and can get you there much more effectively than wholesale. Most wholesalers are full-time real estate investors because it takes a great deal of time to wholesale. If you are an investor and attend 2 networking events per week, I can almost guarantee that you can raise the capital for one deal per month to increase your passive income and cover all your expenses slowly and effectively with that cash flow.

Think about it, if you raised capital for 1 investment per month and were earning $162.50 per month on each investment property at the end of the first year, you would have $1,950 per month in cash flow. And that is if you don’t have any money of your own in the bids. If you had $325,000 to invest, you could easily buy 5 properties and automatically receive $3,250 per month, which is a 12% return on your money and that’s without using leverage. If you leverage your money with a loan from a bank, you can boost your returns above 25% very easily with very low risk as well.

The moral of the story is that cash flow investing is much more lucrative than trying to sell properties full-time for the long haul, unless you’re a professional real estate investor who has 70 hours a week to commit. Cash flow is the key to your real estate success, cash flow is what makes you financially free, cash flow is what keeps you financially stable in retirement, and cash flow is what keeps you financially stable. makes you more financially stable during economic crisis like the one we are going through in the current economy. If you are going to focus on making money in real estate, focus on cash flow investing instead of the much riskier type of investment, capital gains through investment.