If you’re reading this, then you know real estate investing can make money. But maybe you don’t quite understand how? Well, you’re in luck, because there are five ways and we’re going to talk about them. Firstly, they’re called the 5 profit centers, because well, that’s how you profit (make money) from real estate investing. You don’t do one of these at a time, they aren’t a pick or choose kind of option, but some of them will be more prevalent for you at different times in your real estate investing journey and some will be easier to come by. They are cash flow, principal paydown, tax savings, inflation hedging, and appreciation. Let’s talk about it.
What is Cash Flow?
To start us off on our journey, we introduce you to Cash Flow, the first of the 5 profit centers.
Cash flow is the most engaging of the 5 profit centers because of its apt naming. Think of the word: Flow. Like water in a river, you can just imagine cash flow is a literal river of green money flowing your way. There’s nothing more enticing than that when you contemplate going into real estate investing. That’s the dream, right?
But as enticing as cash flow is, it’s very market dependent. There’s some specifics that need to be in place in order for your property to produce any sort of cash, let alone the proverbial flow.
How Do You Get a Cash Flow with Investment Properties?
To start with, your mortgage needs to be at a lower amount than what you can charge for rent. Meaning, if you buy a property, and your monthly mortgage payment is $1000, you need to be able to rent that property in excess of $1000 a month. That type of housing isn’t available in every city in America. In fact, it’s really good in areas of consistent and unprecedented growth. (Yet another reason why Jacksonville is perfect for investing!)
This means one of two things. (1) You need to be buying in an area that has lower house prices, and comparable rates or (2) you need to have the cash to put 30% (or more) down on the home so that your monthly mortgage payment is less than what you need to charge a future tenant.
The lower your mortgage and higher the rents, the better that cashflow can work for you. It’s a pretty simple equation and it’s not that people don’t understand how (in theory) this all works, but really it’s about how we get there.
How Do You Get Started Making Money with Investment Properties?
That’s where JWB comes in. We’re vertically integrated which streamlines our processes and increases profits for our investors. You can set up a consultation call and we can walk you through your options.
Is there always Cash Flow?
Now we’d be remiss if we didn’t explain that cash flow negative is still an option. Let’s clarify a bit, cash flow is just the general term. You can be positive or negative. Positive (what we discussed above) is where you’re making money in excess of the mortgage payment you’re responsible for.
The negative side of cash flow is having to pay your mortgage yourself, because your rental income can’t cover the total payment. Now, this isn’t inherently a bad move, if the future can yield either area appreciation and demand where you can raise the rents to compensate for that overage over time, OR you have more money that you can put towards the principal and refinance at a later date to get your mortgage payment lower.
However, being responsible for more money in addition to your living situation is always a risk. But again, any type of investment is risky. It all comes down to what risks you’re willing to take. Average investors take average risks; JWB investors make Not So Average Decisions that lead to great rewards.
No matter who you choose to be, the best advice we can give is the sooner you can get into the market, the better off you’ll be.
Follow along for Part 2 of The 5 Profit Centers of Real Estate Investing: Principal Paydown.