Investing Architect

Category: Strategy

Appreciation play: How to make money in real estate when there is no cashflow
As most our regular readers already know, our cornerstone Blueprint real estate investing strategy relies on the long term acquisition of cashflow positive, quality assets to grow your capital base and reach your income goals at retirement.

So surely, many of you must be squinting at the title, rubbing your eyes in disbelief at the prospect of an investing strategy where cashflow is not present. But the fact is that many long term investors just like you, equate asset quality with location quality alone. The problem is that usually the more centric the location, the higher the price to rent ratios. Think of the price to rent ratio as an indicator of how much money you pay for each dollar of gross income. As the ratio increases, the cashflow first declines, then disappears and finally becomes negative.

So how can you make money in real estate where the location you have to have demands a price that won’t produce any positive cashflow?

You could apply our Domino strategy and pay off these assets using your job income instead of the cashflow (which isn’t there). That would work but it would amount to a savings program rather than an investing strategy.

The best viable investing strategy under these circumstances is the leveraged appreciation play. Here’s how it works: Suppose you buy a condominium for $100,000 in a great central location you put 20% down and you hold it for 15 years. As I have previously outlined in Why investing in condominiums doesn’t work in the Houston market, this property will break even and will not have any positive cashflow due to high maintenance fees. That makes it unsuitable for our Blueprint real estate investing strategy.

But, if during that time, the property appreciates at the annual rate of inflation (roughly 3%), your return on investment for that timeframe was 15% per year. How? Your invested capital in the deal is 1/5 of the acquisition price – that means the return on your investment will be 5 times the rate of appreciation. More specifically, if your $100,000 condo appreciates 3%, your “return” for that year is $3,000 – a 15% “return” on your $20,000 investment. I put the air quotes around the word return because its only realized when you sell the property. So in effect, this is a future cash on current cash return.

However your total return on investment isn’t limited to the appreciation rate alone. During the holding period, even though the property is breaking even, the mortgage balance is being paid down slowly but surely every month. In the example above, over 15 years, the balance is reduced by $27,000 if no additional payments are made. That adds further to your return on investment.

Last but not least, there are the tax benefits from depreciation. Tax laws allow for the straight line depreciation of improvements (about 80% of the value) over 27.5 years. That means, you can deduct just shy of $3000 per year in your tax return resulting in a paper loss. This loss can be utilized in two ways depending on your income level: If you make over $150k a year, those paper losses are piled up in an accumulated account and can be used to offset gains when you sell the property later. If you make under $100k a year, those losses can be taken against your income and produce tax savings of the loss times your tax rate. Either way, this adds to your total return on investment.

Important principles to live by when investing for appreciation:
1. NEVER buy a property with negative cashflow. It’s one thing to purchase a breakeven property and hold it for appreciation. It’s another to dig a hole for years hoping that there will be enough dirt at the end to fill it up and overflow.
2. If you insist on taking this route as opposed to buying cashflow positive properties, make sure that the location is absolutely stellar. No compromises here. After all, this is the fundamental reason you chose this investment in the first place. It would make zero sense to buy a property that has no cashflow and an average location. In Houston, stellar location means Inside the Loop, Galleria or The Woodlands.
3. One major factor you want to pay close attention to when investing for appreciation is the absorption rate in the immediate vicinity. That means looking at how many listings are available and how many have sold in the last 6-12 months. Generally what makes prices go up, is an imbalance between supply and demand – more specifically, a shortage of supply coupled with high demand. You don’t want to buy investment properties for appreciation in a market where there are more listings available than demand for them.
4. Make sure you are prepared to hold the property long enough for this strategy to work. If you plan on buying it and selling it in a couple of years, that’s just speculation and I’d advise you against pursuing the property in the first place. Chances are that selling costs will erase most of your returns if you exit the investment that fast, anyway.
5. Last but not least, you have to be okay with the possibility that appreciation might not happen. This is crucial and there are no exceptions. Due lousy manufacturing, everyone’s crystal ball is cracked and no one can predict the future with certainty. Even though the current inventory drought in the Houston market ought to lead to rising prices, there are many factors that could counter that tendency (i.e. economy, interest rates etc). That’s why it’s important that assets of this kind make up at most, only part of your portfolio. If you put all your eggs in the appreciation basket, you might find yourself a decade or two later with no returns to show for it.
Esther Gibbons via Compfight
February 26, 2013
Does your real estate investing strategy offer flexibility?

In my last post, I discussed one of the most important advantages of our Blueprint real estate investing strategy: Built in performance benchmarks. Well, today I want to tell you about another unique advantage that’s just as important. Unlike other strategies that by their very nature are rigid and resistant to change, our Blueprint strategy allows real estate investors the flexibility to make adjustments midstream to account for potential changes in goals, personal finances, portfolio performance and the overall economic environment.

Why does flexibility matter? Well, because real estate investing doesn’t happen in the vacuum assumed by cash flow analyses and multi year projections. The circumstances surrounding the portfolio and the investor herself don’t remain static – they are always changing. And unless your investing plan can change with them, it might be “providing answers to old questions” and leading you down the wrong path.

So let’s take a look at some specific case studies where flexibility in your real estate investing strategy can make the difference.

First, a case where a change in investor goals can require a course correction. Suppose that when you started investing, you were aiming for a second source of income to subsidize your job income or to allow your spouse to stay home with the kids. You thought all you wanted was an extra $35k a year. Until you saw the plan in action and realized its true potential. Until you realized that you don’t really like your job after all and if you could replace that income you’d quit without batting an eye. So now the goal has changed substantially: Now we need $100k a year and we need it in 10 years. This change of pace would throw most other strategies in a tailspin of confusion. With our Blueprint real estate investing strategy, we can figure out how many additional assets you need to acquire and figure out a plan to get you to that income in a decade.

Next, let’s say that Murphy moves into your guest bedroom as you’re executing your capital growth phase. Your company downsizes and you’re unemployed for some time. You were working the plan and making measurable progress – in fact you were aggressively attacking your mortgages at a rate of $2800 per month – when it all came to an abrupt stop. We can press pause on the capital growth phase so you can draw cashflow as income during this period until you steady the ship and find other employment with similar salary. Then resume your flexible Blueprint plan.

Or say that you’ve completed your acquisition phase and are now in the fifth year of the capital growth phase. All your properties are doing great except for one – what once was a good neighborhood has now taken a bad turn and the location no longer meets your high quality standards. It’s even become more difficult to find good tenants and you find yourself tempted to lower your standards to keep vacancy rates low. To be honest, if given the chance for a do-over today, your wouldn’t purchase the property again (litmus test). No problem. Our Blueprint strategy calls for a recurring re-assessment of your holdings every so often to identify situations like this and it offers the flexibility of a course correction. We exit the problematic property and acquire a replacement asset in a location that does meet our high standards. If the market at the time won’t allow for an advantageous exit, we bide our time and wait till the conditions are in our favor.

Further, if you are a regular Investing Architect reader, you know that (with rare exceptions) a well executed Blueprint strategy works best when the properties within your portfolio are recently built (new or less than 6-7 years old). The primary reason for this is that, over time, older assets consume a higher percentage of incoming rent as operating expenses (due to major repairs required) resulting in lower cash flow and return on investment. In addition, you probably also know that the road to retirement can sometimes take 10-15 years. If you purchase a 5 year old home today, it will be 15-20 years old by the time you reach retirement. So how do we reconcile the fact that right around the time you need to draw maximum income is when the property will need capital expenditures? Our Blueprint strategy provides the investor with the flexibility to trade into newer assets. This process of “freshening up” your portfolio can be accomplished by either exiting your current investments and acquiring newer properties or by doing a like kind 1031 exchange to defer taxes. Or depending on asset performance during the holding period, it may make more sense to incur one time capital expenditures and keep holding on to some properties as you trade others. For instance, if you’ve got a great property that’s been well maintained by long term tenants in a location that seems to get better every day, it make make more sense to make the capital expenditures (i.e. change the roof or A/C system) so you can keep holding it hassle free for another decade or two. If instead we’re talking about a property that’s progressively requiring more and more repairs each year, that might not be the best way to go. Again, flexibility rules.

Last, suppose that due to changes in the economic environment, investments that were once not feasible are now attractive. For instance, commercial real estate might offer some opportunities to consolidate your capital base into larger properties with established business tenants at a good capitalization rate. Or changes to income and capital gain tax rates might offer a window to take a gain under more favorable terms. Or a high interest rate environment may offer opportunities in profitable deals where you finance the property for a Buyer and collect note payments at a good rate of return. Regardless of the scenario that life might throw at you, our Blueprint strategy can adapt to it and get you back on track to your ultimate investment goals.

There is no universal strategy that works the same for every investor because every investors’ goals and situations are different. It’s a sure bet that things will change – Change is indeed the only constant. But it pays to have a real estate investing strategy that provides flexibility to allow you to ride out the wrinkles and resume your path to retirement.

February 4, 2013
Debt free real estate investing for income and appreciation

When I have previously outlined our Blueprint real estate investing strategy, I have usually given examples that involved the leveraged acquisition of quality assets followed by an aggressive campaign of debt elimination to produce maximum cashflow at retirement. But as crucial as smart leverage can be to the investing success of some investors following our strategy, it is not required or necessary. At its very essence, our Blueprint is the road map from where you currently are to where you are trying to go at the end of your investment horizon. So in that spirit, the right investment strategy for you is determined and shaped by your current financial situation. For instance, an investor with limited capital will follow a very different path to retirement than another investor with a large enough capital base to generate sufficient debt-free income to retire tomorrow.

Next, let’s take a deeper look into the main reasons and motivations that push some real estate investors to the path of debt free real estate investing for income and appreciation.

Risk aversion to debt

Most investors that make the choice to avoid leverage completely do so to avoid the perceived risk that debt inevitably adds to their portfolio. And it does not matter that the added risk is usually accompanied by a higher, leveraged return on investment. A very conservative investor is content with a lower rate of return if they can avoid the risk of financing. They view leverage not as a temporary tool to grow your capital base in a shorter amount of time but as a fatal risk that could bring the whole thing down. And often they have the time and/or the patience to build their wealth at a slower pace as long as it’s done within their risk comfort zone. This isn’t neither right nor wrong – every investor should operate within “comfortable” risk and return levels. In the end, it does not matter how good is the return on your investment if you perceive it so risky that you can’t sleep at night.

Lack of access to investment property financing

The investor that sidesteps debt due to this reason does so out of necessity, not choice. Take as an illustration a 58 year old teacher that takes early retirement and has some liquid capital to invest. He gets a pension every month but it’s not enough to fully retire. And also it’s not enough to qualify for financing on an investment property. In this case, the only available option to this investor would be an all cash strategy to increase his monthly income through some well placed real estate investments. Another example would be that of a newly minted entrepreneur that just ditched his corporate shackles with plenty of capital to invest but with no regular 9-5 income to qualify for financing.

Lack of need for financing

In this case, the investor already has a large enough capital base that the unleveraged yield on that capital is sufficient to provide the income she’s seeking. File this under, “good problem to have”. Say you have an investor that has $1.5M in liquid capital to invest and they’re trying to create an income stream of $120k per year. This investor has no need to leverage that capital further – she could purchase $1.5M in paid off real estate and reach her desired income right away.

Lack of necessary time

One critical ingredient in the utilization of leverage as a tool to grow one’s capital base is time. Without sufficient time to execute a proper debt pay off, leveraging your capital is simply risk for the sake of risk. You should only take calculated risks if you have a) an exact idea on how to eradicate that risk as soon as possible and b) sufficient time to carry out that idea. As an example, take a 65 year old investor that needed to retire last Friday at 11:30 – he just doesn’t have the time to execute a plan that involves the undertaking and paying off of leverage. The only option left is to use the capital that he has accumulated and generate the highest yield possible on quality asset(s).

The numbers

Now that we figured out some of the reasons why an investor would choose (or be forced down) the path of all cash real estate investing, let’s take a look at some of the numbers. Since the investor is not utilizing leverage, her return comes from exactly two places: Yield on capital and Appreciation. Yield on capital sounds like a big ten dollar term right out of a finance textbook but it’s actually pretty simple. If I purchase a property all cash for $140k, and after paying all operating expenses I have $11.5k in cashflow left over at the end of the year, my yield on my invested capital for the year is 8.2% (11.5k/140k). It would be the same as you going to the bank to open a CD where you put $140k and the bank pays you $11.5k in interest at the end of the year. Except that your banker would think you are on something if you asked for an 8.2% return these days! Depending on the relationship between the acquisition price and the incoming rent of the asset you acquire, your yield on capital on free and clear investment properties will vary from 7-9% annually.

On the lower end of that spectrum, you will find premium properties in highly desirable locations that are in high demand – which results in higher acquisition prices and lower yield. The higher end yield will come from more standard properties in good locations. But here’s where it gets interesting – the properties that produce lower yields have a higher potential for appreciation than their counterparts. So when it’s said and done, opting for a premium property at a lower yield may end up giving you a higher overall return. But in the end, it all comes down to the needs of the investor: If the investor is mostly concerned with income, the higher appreciation may not matter as they may never sell the property to realize it. Otherwise, if they’re just opting for an all cash strategy to avoid risk, going for higher quality assets may result in higher returns and lower risks over time – a pretty rare combination.

Last but not least, cash is still King – a generous monarch that at times allows an investor the patience to pursue and negotiate bargains on quality properties. This could be a dual boost to returns: 1) It would allow the investor to acquire the same income stream for a lower purchase price therefore increasing her yield and 2) the built in equity captured at purchase can act as instantaneous “appreciation” that can be tapped later. The challenge with pursuing bargains is to never lose sight of the quality of the asset you are purchasing. An inferior asset at a great price is not a quality asset. So as long as property standards aren’t compromised, patient chasing of good deals is the recommended route.

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Are you interested in debt free real estate investing? I can help lead you in the right direction. 713-922-2702 is my cell. Or if you prefer email, Contact Us

Camdiluv ♥ via Compfight

January 11, 2013
Asset allocation in a Blueprint real estate investing portfolio
As more and more investors come to the consensus that a well-crafted real estate investing strategy can help them achieve their financial goals (even the R word itself: Retirement) a fundamental question arises: How should you allocate your real estate holdings within a Blueprint real estate portfolio? Now, the whole notion of “allocation” within a portfolio containing 100% real estate assets may come across as unnecessary. But keep in mind that even in an “all-stock” investment portfolio, there are different types of stocks that bring different returns (and their accompanying risks) to the portfolio. In much the same way, different real estate assets bring different benefits and risks to a real estate portfolio.

Standard assets

These properties are consistent performers and reliable money makers: They are easy to lease and keep leased. Their weakness is that they don’t offer much in the way of property appreciation. Typically they follow the appreciation curve of the overall market or come just under it. These assets offer higher returns for moderate risk. They are recently built (under six years) or new properties located in areas that aren’t yet established to their full potential. Remember, if an area is already popular, it’s already too late for real estate investors. That train has already left the station – prices have risen to the level where price to rent ratios no longer allow for reasonable returns.

Approximate returns for this category of assets: Cash on cash returns of 15%+ and Internal rate of return of 17-18%. Prices range from $100k-$150k

Premium assets

These properties are typically located in established and highly desirable neighborhoods. They offer moderate returns for lower risk when compared to the standard category. There is always high tenant demand for these properties which results in rising rents over time. They tend to be well cared for, older homes (10-20 years old). Their strength is that they offer higher than overall real estate market appreciation so whatever they lack in cashflow returns they tend to make up on value increase over time.

Approximate returns for this category of assets: Cash on cash returns of 10%+ and Internal rate of return of 12-13%. Prices range from $150k-$200k

Note: There are some properties that have no place in a long term real estate investor’s portfolio, regardless of the “outstanding” returns they appear to offer. The reason their “paper returns” are so high is due to the fact that their extremely high risk is “baked into” that return. That risk often takes the form of a property located in a rough neighborhood with high crime rates, low school quality, higher turnover and eviction rates and property damage from defaulting tenants. These assets are the real estate equivalent of penny stocks. Just say no and thank me later.

So back to the big question: What types of assets should be part of your real estate portfolio and how should they be allocated?

If you just purchase 100% standard assets, you will have good cashflow and return on investment but you won’t be able to take advantage of appreciation waves to the extent that you should. If instead, you purchase a portfolio full of premium properties, you would be relying heavily on appreciation to accomplish your goals. Without appreciation, the cashflow produced may not be enough to get you over the finish line within your investment time frame and that just smells a little too much like speculation for my taste.

The optimal solution is to own a combination of the two asset types within your portfolio so you can have the best of both worlds: Solid returns and appreciation. The exact allocation will depend on the goals of the investor, their available time frame for investing and their income level.
- Investors with short time frames to retirement (under 5 years) more than anything else need all the cashflow they can muster during their short capital base growth stage. They don’t have the luxury of time to wait for appreciation. These investors have no other choice but to build a portfolio made up of 100% standard properties.
- Investors with medium time frames to retirement (5-9 years) need a portfolio weighed heavily towards standard assets but should add some premium properties in the mix to take advantage of value appreciation. Exact percentages will vary with each individual investor’s situation but a good rule of thumb in this case would be a 80% standard, 20% premium allocation of assets within their portfolio.
- Last, investors with long timeframes to retirement( 10-15 or more years) do have times on their side so in their situation it makes financial sense for them to add even more premium properties. Generally we advise these investors to adopt a 65% standard, 35% premium allocation of assets within their portfolio.
When I bring up appreciation in a conversation with a client, they always have a conflicted look on their face. After all, I’ve just finished telling them moments ago, that we don’t account for any appreciation in our cashflow analyses for potential acquisitions. So now, why are we even concerned with appreciation?

Appreciation is an elusive and manipulative animal. It’s hard to empirically quantify how much appreciation an area is likely to experience (if any) and when. As such, we cannot build our analysis based on a factor that may or may not come into play. But understand one thing – normal appreciation is an innate characteristic of real estate assets. It’s common sense: The cost of materials and labor to build new homes goes up every year in response to inflation. So the same property will cost more to build in 10 years than it does today. Home builders are in business to make money and they can’t make money unless they sell their homes for more than what it costs to build them. So therefore, the same home should cost more in 10 years than it does today – it’s just plain economics. So why should that matter to a real estate investor? Well, let’s look at the arithmetic. Say you purchase a 125,000 property and you invest 25,000 of your capital as a 20% down payment. If the value of that property appreciates by 10% to 137,500, your return on investment from that appreciation is 50%! That’s due to leverage- since your investment in the property is $25k, a $12.5k increase in value represents a 50% return – in addition to any cashflow returns you might have enjoyed that year. That’s why it’s a big deal and that’s why you should purchase assets that have the potential to capture it in your portfolio if your investing situation allows it.

Are you looking to build a real estate investment portfolio that can get you from where you are to where you want to be in the future? I can help so don’t hesitate to call my cell at 713-922-2702 or if you prefer email head over to our Contact page

Dave Dugdale via Compfight
January 7, 2013
Four stages of executing our Blueprint investing strategy
Every wise real estate investor’s journey begins with a clear, overarching investment strategy. This strategy is the roadmap to get you from where you are to where you are trying to go. So needless to say, to come up with a worthwhile strategy, you must know your destination and be able to distill it into specific, time limited and written goals. If you can provide your goals, our Blueprint real estate investing strategy can provide you with a path to get there. More specifically it will show you what type of assets to buy, how many, as well as where and how to buy them. Setting out on an investment path without such a plan all but guarantees you a long journey into the wilderness of investing confusion – jumping from one fad strategy to the next.

But as crucial as it is to have an overarching strategy, the really hard part starts now. It’s what makes or breaks the plan and separates the best from the rest: Execution.

Four Stages to execute our Blueprint real estate investing strategy:
1. Asset Accumulation
2. Capital Base Growth
3. Maximum Cash Flow
4. Exchange or Exit
Asset Accumulation

The first stage of executing your Blueprint investing strategy is Asset Accumulation. At this point you have the exact number of assets you must acquire in order to achieve your goal so we must begin the acquisition of these assets. This phase should be completed as fast as your income and assets will allow because it is a prerequisite of all other stages. If the necessary liquid capital and financing prowess is readily available from the start, you have nothing standing in your way but your own fears and doubts. It’s okay to tread lightly on the first deal or two just to get some assurances that the properties will be rented in a reasonable amount of time and for the same amount as the cashflow projections. But once you’ve exhausted that bit of skepticism, execute and complete the acquisition of the necessary assets right away. If instead you are facing liquid asset limitations at this stage, it helps to sit down and put together a plan of saving the necessary additional capital within the fastest amount of time your income will allow. Complete the acquisition of the assets you can acquire with your existing capital and figure out a way to save the remainder as soon as possible. Think about it this way: The amount of time it takes you to start the engine will be added to the trip time towards your destination. Yet another reason for speed at this stage is to lock in fixed low interest rates on your debt before they rise.

Capital Base Growth

Now that you’ve acquired the necessary assets and they’re stabilized with good long term tenants in place, you have positive cashflow coming in every month. At this moment you have a very important decision to make. You could opt to take the cashflow now and enjoy your returns while you accumulate wealth at the 30 year schedule set by your Lender. Or choose to use that cashflow to grow your capital base and build wealth now. The chosen path we advise our clients to take is to focus on building wealth first so later the cashflow from your real estate portfolio can reach critical mass and allow you to retire on it. To illustrate this concept, let’s say you put together a portfolio of five properties worth about $120k each which produces $4800 in positive cashflow per property per year and you hold these assets for 10-12 years. If you opt for income now while building wealth at a 30 year pace, you would earn $24k per year and you would build approximately $95k in equity during that period through debt paydown. Instead, if you follow our advice and grow your capital base first, in that same time frame you would have a free and clear portfolio worth $600k without a penny in appreciation during that period and that portfolio would produce $60k in annual income thereafter. Don’t get me wrong – $24k per year is nothing to sneeze at and it certainly would be very nice to have. The problem is that small money has a tendency to dissipate over time leaving investors wondering what happened to all that cashflow ten years later. I call this “Starbucks money syndrome” – when you don’t focus the power of your money to achieve a larger scale goal, it tends to turn into minutia.

Maximum Cashflow

Now that your real estate investment portfolio is free and clear, it’s time to enjoy your maximum cashflow stage. Since none of your incoming rent is going to service the debt, your portfolio is now free to produce income at it’s maximum potential at the very time when you need it most. You have arrived at your destination after a long journey of disciplined execution and now it’s time to enjoy the fruits of your wise decisions and your commitment to stick to them. So quit that job you no longer want to do, take that long trip you always dreamed of taking or fund that college for your grandsons and daughters. Whatever you imagined and hoped that your investment portfolio would do for you when you first started – Do. That. Thing.

Exchange or Exit

But wait, we’re not quite done yet. Just because you are rightfully enjoying the results, it does not mean that we let our guard down. With debt service out of the picture, all that’s left on the expense side of the ledger are operating costs. Since now is the time we need the income most, we need to be watchful and make sure that capital expenditures (major component replacements: roof, HVAC system etc) don’t eat up our precious income stream. So that may call for the investor to replace older assets with newer ones, or to exit an investment and cash in on the value appreciation it has incurred during the holding period. This can be done two different ways: A 1031 like kind exchange to defer property taxes on any capital gains/reclaimed depreciation or through a straight sale/exit of the investment. The road we will advise you to take will depend on several factors. The investor’s exposure to income taxes and any available tax shelters certainly come into play. Also, the investor’s plan may call for a shift of some of their capital base to a different type of investment.

Bonus

One more concept to think about here: What do you have most Time or Money? If you have plenty of time (15+ years) you can let the positive cashflow alone do all the work. If time is scarce (you need to retire last Thursday around 1:15pm), you have to employ your income to feed the wealth building fire so it burns quicker. Let’s take that one further: If you find yourself completing the plan and still have got time on your side, it’s not illegal to start again and pursue even bigger goals. 🙂 In my experience, I’ve found that one major limitation for investors is that their goals usually go as far as their current “horizon”. However, a beautiful thing happens when they reach a higher level: Their horizon changes. And so do their goals. So it’s okay to be limited by what you think is your current capacity to achieve as long as you allow yourself to reassess that capacity once you reach higher plains.

Marcin Wichary via Compfight
January 4, 2013
On Cashflow – How to build real estate investment income the right way

In the word of long term real estate investing, cashflow is the holy grail. Everyone wants it, searches for it and wants to know how to get it. And who can blame them? Build enough positive cashflow without undertaking excessive risk and you’ve made it. Free to do whatever you wish with your life without worrying about that monthly overhead “anchor” that keeps you tied down for decades. But most real estate investors have a mathematical understanding of what cashflow is but not a conceptual one. They see cashflow as the difference between incoming rent and expenses. That definition is correct – but it doesn’t explain what cashflow is at its very essence. And in the end, that essence makes the difference between a strategy that achieves your goal and one that falls short.

In a nutshell, positive cashflow is the yield on capital – similar to the interest you earn on your CD without the sorry rate. The more money you put in, the more interest you get out. Generally speaking, interest rates paid on CDs of the same term are about the same. So the only way for you to get more interest is to invest a higher amount of capital upfront. Paid off real estate tends to behave in much the same way. If you were to purchase a property in a suburb of Houston for $140k in cash, it would produce approximately $11,000 in positive cashflow – 0r about an 8% yield. Want to make 10 times more money? You better figure out a way to grow your capital – or equity ten fold.

It seems like I’m suggesting you need to have large sums of money to invest to be successful in long term real estate investing, but I’m not. What I’m suggesting here is that if you seek cashflow, your first and only priority going forward should be to grow your capital base. For example, say you have $100k to invest. Even by leveraging your capital, acquiring three properties with 20% down and creating a 12-13% return you’re looking at an annual income of $13,000. Better than a poke in the eye but certainly not retirement money. If your goal is to increase that to triple the size, you have to figure out how to turn that $100k into $400k between now and the time you retire. And you can do that by utilizing your cashflows and your job income. That’s the magic. The leveraged cashflow you create when you acquire your properties is just the tool you use (in conjunction with your income) to increase your capital base/net worth/wealth. So that when time comes to draw yield from that capital base, it’s big enough to provide sufficient income for you to retire. Subscribers to the perpetual leverage method will disagree with me on this but they’re wrong. Creating your cashflow by purchasing and accumulating 4x to 5x the number of assets involves increasing your risk ten fold. And having a portfolio with a boatload of homes leveraged up the nose for thirty years isn’t retirement – it’s an open invitation for Murphy to become your roommate.

The way to an annual investment income that sets your free goes through “Build your Wealth First” city. Any shortcut and you won’t reach a place worth going.

Eric Gjerde via Compfight

July 24, 2012