Real Estate as an Investment

The best way to own Real Estate is to own it free and clear. In that way, and only in that way, is it an asset. A property you own free and clear is salable at any time no matter what the market conditions. It is rentable for cash flow.

The idea of leveraging is to own and control as many properties as possible. The strategy is to be able to have cash flow from multiple properties that can pay down principle balances in other properties. Throwing money at the principle is the only way to pay the property off. It’s best to pay the property down in the first fifteen years of the thirty year mortgage cycle.

There are four types of mortgages, thirty or fifteen year, FHA or conventional. Exotic loans are for turning a property for a profit. The strategy is however to own all of your properties free and clear to live off of the rental income while maintaining the property.

The theory is to own five properties free and clear to retire. One you live in, the second for food, third for living expenses, fourth for essentials, and the fifth for fun. Real Estate and rental income are tied to the Consumer Price Index. They then become a hedge against inflation or deflation. Free and Clear properties are recession proof.

Now back to leveraging. If you own twenty properties it’s easier to pay off the five you need to retire. First and foremost is that every property you own should cash flow or have that potential in the first year. Many people start in more rural or out lying areas for cheap properties. A fourplex in a rural community can cash flow out of the gate. Some sellers may just want the income without the hassle of owning the property any longer. If that sounds strange some owners have moved on. You will move on some day also.

That cash flow can be dedicated to a negative or as a portion of a payment on another property. The only reason to risk owning properties with mortgages is to pay the mortgage off.

An acquaintance of mine began buying properties in low economic areas. He bought mobile homes, with the land, run down houses, duplexes, fourplexes, pretty much anything that showed a positive cash flow.

I should mention that he had a good job when he began buying the properties. He made a profit and loss statement of what he was buying, a cash flow chart, an estimate of appreciation based on 4%, then updated it over the five years it took him to accumulate the properties.

After he quit his job it was possible to live a meager existence while improving these properties. He spent a couple of years in the area living in one place to the next while he fixed up and rented the properties out.

He came back to Seattle, got a job in a warehouse, and had his rental income augment his pay check. On paper this guy looked golden. After seven years of sacrifice he was ready to start owning in city properties by the same principles. He bought a house a year for five years. He’s into the game now twelve years.

He sold off a problem property in his rural portfolio, paid the capital gains, and applied the profit to the principle balance on his first house. That house began to amortize quicker. It became a game of paying off properties to increase his cash flow. Once a property was owned free and clear it was all income. That income was applied to other principle balances. in his over all fifteen years as a Real estate investor he was on his way to being retired.

It became kind of easy to allocate money to living, and maintaining assets. Of course in those fifteen years his net worth was huge. By simple appreciation of what was now twelve properties with high equity positions he looked really good on paper. Income plus equity put him into the category of being rich. Fifteen year to being called rich is pretty quick.