When you talk to real estate investors, they often tell you how many doors they own, or how many rental units they have in their portfolio. However, listing the door number can be misleading. In general, the actual metrics you should track are: Cash flow Because at the end of the day, profitability is what’s important in any business, right?
However, the two can sometimes be confused. In some cases, owning just a few doors can be a good strategy for building long-term wealth, regardless of cash flow.
Confused? Please don’t let that happen. In rapidly appreciating areas, it often creates far more wealth than simply adding a door that brings in $200 to $300 a month in revenue, without the headaches of multiple tenants. I can. In such cases, holding on to the side of the speeding real estate train may be the best investment strategy to create wealth quickly and give you investment options down the road.
Keep in mind that most homeowners in America are not Wall Street giants or incredibly successful businesses with hundreds of doors in their portfolios, but mother-son owners who own a few homes to supplement their income. please.
In other words, don’t worry if you still need to buy your first unit. Don’t be left behind by the wave of portfolio expansion touted by investment gurus. Owning just a few units puts you on par with most owners. If you already own your primary residence and are planning to move, converting it to a rental is relatively easy.
However, if you want to grow your portfolio, there are some important things to consider before you start.
Where do you plan to purchase your rental unit?
If you are looking to buy a rental property in an expensive area, your purchasing power is very limited. If you’re not in a trust fund or haven’t written a song for Taylor Swift or Beyoncé, there’s the practical question of how much you can borrow and earn from your day job, and that’s up to you. Directly affects purchasing power.
If you’re a high-income earner or have investors and can afford to start rent-to-buy right away, scooping up a few dozen properties on a cheaper market can help you scale. However, both approaches have advantages and disadvantages.
Which is more important: cash flow or gratitude?
In an ideal world, you could have both. If you buy a home in a transitional region and take advantage of the demographic and economic upturn, you’re in for a double whammy.
For example, many homeowners in New York City’s Brooklyn and Queens boroughs became a millionaire for over 10 years house hacking I rented a small apartment complex and lived there. Their valuations far exceeded the cash flow they would receive from purchasing rental properties in faraway locations.
I don’t really want to quit my job, I have no problem house hacking, I live in a big city, FHA 203K loan Renovating is a great way to start building wealth without the hassle of long-distance investing or leaving your property to a third-party management company.
Scaling wisely
if Grow your portfolio is your priority, so you need to decide how much time and money you can spend on real estate investing. If quitting your job is your immediate priority, cash flow is paramount.
No matter what method you choose—BRRR ringmultiple house hacks, or syndicate—You will need more income than you earn to cover the inevitable repairs and vacancies. However, leaving your job can impact your ability to safely expand.
Choose your location carefully
In their rush to generate cash flow, many new investors make the mistake of thinking that they can scale faster and earn more if they buy low around D+/C-. They could be preparing for disaster. High crime areas come with many risks. The most obvious to investors are vandalism and non-payment of rent. The only hedge against this is to buy very cheaply so that you can easily absorb rental losses.
It is usually more profitable to add fewer doors in better areas. Cash flow in low-cost areas is appealing on paper, but it is rarely achieved. Don’t overleverage, scale wisely, and stay in solid areas where you’re not afraid to walk down the street at night, if that means staying locked in landlord/tenant court, then simply adding more doors to your portfolio. It almost always makes sense to do so.
Your job is your first business partner
Another mistake new investors make is leaving a steady W2 income job too soon. Not only will a job make banks more willing to lend, but the income they generate will help you manage unexpected expenses that come with real estate investing, allowing you to expand your business more quickly.
Case Study
Rick Matos and Santiago Martinez live and invest in Lehigh Valley, Pennsylvania. They are friends and have done business together in the past. Both have the same number of properties in their portfolios, Rick with his 44 and Santiago with his 47.
However, their investment strategies are different. Let’s take a look at each here.
Rick Matos
Rick has amassed 44 units over a period of 10 years and is now generating gross rents of approximately $40,000 per month and cash flow of $25,000. When he started investing, he was earning his six-figure income as a full-time employee. he, HELOC We bought our first investment property in his personal home (paid off). At the same time, I got my real estate license so I could buy more properties and save money on fees.
“Many of the properties I bought at the time were REO/foreclosure properties in Center City, Allentown, and Easton, so I borrowed from a local lender and used my 401(k) to pay $20,000 to $30,000 in cash. I was buying it, a financier and my dad who owns real estate in New Jersey,” Rick says. “Additionally, I did some flipping and bought a few homes on credit cards. I was very keen to continue to scale up, and I knew I was making enough money through my job.” helped make that happen.”
Did Rick regret buying in a rough area? “Absolutely not,” he says. “In fact, when you look at how both areas have turned around and all the investment has gone into them and how property values have gone up, I wish I had bought more. I couldn’t afford to lose.”
“The rent paid off the loan quickly, and we were then able to do a few BRRRRs and scale,” Rick added. “But it didn’t happen overnight. “It took 10 years. During most of that time, I was making enough money from my job to get my hands on real estate money to make a living. I never had one. I could always put it back into business. In fact, when I bought properties, they were often in poor condition, so I used my job income to fix them up.”
When Rick finally quit his job to focus on real estate full-time three years ago, he supplemented his cash flow by doing more business as a real estate agent (he currently iron valley real estate We also manage real estate for out-of-state investors from New Jersey and New York.
“I learned from my father that real estate is not about getting rich quick,” Rick says. “It’s important to buy a home that makes sense and to buy slowly and methodically.”
Santiago Martinez
When I was in my early 30s, Santiago Martinez He was an Olympic standard wrestler representing his native Colombia when he earned his real estate license and began scaling up rapidly. He collected his 41 houses in his 4 years (previously he bought 6 houses from 2016 to 2019) and borrowed personal funds (usually 8%, on the back end he bought 3 points), then refinanced and established a team to oversee the renovation and management.
Today, his portfolio generates about $43,000 in gross monthly rents and has nearly $3 million in equity thanks to rapid appreciation in the Lehigh Valley, but his net profits go toward paying his virtual team of four. Santiago has little cash flow because it’s being eaten up. He employs five people, three full-time contractors, and various sub-employees.
“I expanded and built my portfolio and stocks, but personally I couldn’t make any money because the IV system I was using meant that even with all my expenses, I couldn’t make any extra money. Because we didn’t have cash,” Santiago said. “Now I’ve changed my strategy. I want to pay down my mortgage and actively earn income. My portfolio is great and I’ve gotten some great deals, so I’m looking to expand before interest rates go up. I’m glad we did it, but now it’s important to make it cash flow.”
final thoughts
Both Rick and Santiago benefited from the rapid increase in construction sales prices in the Lehigh Valley. capital. Rick started early, kept a full-time job, and slowly built his portfolio, allowing him to scale without sleepless nights and generate equity and cash flow for him at the same time.
Meanwhile, Santiago’s rapid expansion is a testament to his networking, determination, and risk tolerance. As he readily admits, it hasn’t been easy or stress-free, but his trade-off is capital and doors, not cash flow, and this is no small feat. The next step in his investment strategy is to pay down his debt and realize his portfolio’s enormous cash flow potential.
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