You’ve heard the stories and you’ve seen the shows—real estate investing appears to be a great investment opportunity. But as you’ve researched and looked into the process, you may not be aware of every twist and turn throughout. You can certainly build streams of cash flow through real estate investment. It’s absolutely possible. However, it’s not as simple as buying a few stocks and sitting back to watch your investment grow.
Here we have five incredibly important ways to secure true real estate cash flow through investment. This isn’t an exhaustive list of everything you need to know, but these are cornerstones for navigating the process as best as you can.
Just remember, with any investment there are certainly risks. If it was a sure-bet, then everyone would be doing it and you wouldn’t see the same amount of returns.
Let’s jump into these five ways:
#1 - Experience is your best friend
As with anything in life, experience teaches you tremendous lessons. The same is true for real estate investing. If you’re new to this type of investment, it’s best to seek experience from someone, or a group, who has been there and done it. In this case, we’re your group of help and experience here at Memphis Cashflow!
We guide and assist many investors looking into properties here in the Memphis market. We have experience in this market and know each location within the Memphis metro. It’s extremely difficult to jump into an unknown market and invest, hoping for a positive outcome. This is where we can assist you. Not only our team here at Memphis Cashflow, but you can network with other investors within our group to learn from them.
#2 - Create a plan for your real estate investments
Real estate investing isn’t a short-term investment. While it is important to have short-term goals, you need to have a plan for the long-term. Your desire is to develop passive income streams from your property or properties, but how much income? How long do you need to have those streams? How much do you want saved from your streams?
Before you look at any properties, we highly recommend writing a plan that fits your financial goals. This will be your roadmap throughout your investing journey. If you’re not sure how to start, take these questions into consideration and starting creating a detailed plan:
- How many investment properties do you want to own?
- How much are you willing to invest?
- Do you want renter-ready properties or some that need rehab?
- How much cash flow do you want to see each month?
- How long do you want to be invested in these properties?
- How much do you want to have saved by the end of your investment period?
- How much are properties renting for in the area you want to invest?
Creating a plan will also speed up your process and allow you to make quicker decisions because you already have a plan and know what you need, rather than going into everything blindly.
If you have friends or know of anyone who has invested in real estate, take a moment to ask them what their plan is or how they developed a plan before they began investing. This goes back to the “experience” described above. Always be willing to ask someone who has experience.
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#3 - Understand risk and reduce it
Real estate investing comes with risk. This doesn’t mean you shouldn’t take the leap into develop cash flow with real estate, it just means you need to understand the risks. So, what are the risks of real estate investing?
- If you aren’t paying cash for a property then you are taking on additional debt. While this is common for many, it’s likely you could have considerable debt on a property that ends up losing money over time.
- Real estate markets change, and fast. We all know about the Great Recession and the housing crisis. When markets get too good, they can easily slip in the opposite direction. You could purchase a property toward the higher end of the market and when everything swings, you could lose some of your gains. However, with nearly all property, if you’re in for the long haul then you will likely regain your investment and possibly earn your gains back.
- There are always risks with tenants. Some tenants are going to be great and others are going to be terrible. You always hope you can keep the great tenants for a long period of time. This is where our property management team comes into play. We work diligently to find great tenants who won’t cause you problems. However, it’s never a guarantee, which creates some risk.
- Expect to have unexpected costs with your property, especially if you purchase an older property. Aging properties are likely to cost more due to the need of replacement and remodeling. However, if you keep a close watch on these factors you will be able to improve the property over time without losing anything. Remodeling and improving the property will benefit you by attracting renters and keeping your cash flow streaming in.
Of course, there are a multitude of risks and it’s important to consider them while also developing a plan to address the risks.
How can you address and reduce the risks?
One of best ways you can reduce risk is by keeping a sizable amount of cash on hand within an emergency fund. This emergency fund is your safety net when something needs to be replaced or you lose a tenant and go a few months without a tenant.
You don’t want to be so in debt for your investment property that unexpected costs could ruin you personally. For this reason, you need to consistently put money back into your emergency fund for that rainy day.
Remember, there will be swings in the market and you are likely to experience a few poor months without a good cash flow stream. That’s part of the investment and risk. But if you’re prepared with an emergency fund and a plan, you won’t have any trouble navigating those months.
#4 - Don’t buy cheap real estate
For most first time real estate investors, you’re not looking to complete a total facelift for a property. So if you buy cheap, then you must rent cheap. And if your rent is cheap, that means your margins are also low and you reduce the amount of cash flow you receive.
If you’re willing to invest more, especially in an area where rent is competitive, then you’re likely to have higher profit margins. To build true cash flow from your property, you must have higher margins.
The few times it makes sense to purchase cheap are when you have the ability to rehab the home and raise the rent price, and when the cheap property is within a competitive neighborhood with solid rent prices. If you can rehab the cheap house in the nice neighborhood, then you can absolutely discover great margins.
Beyond that scenario, don’t look to buy cheap because it won’t end well for you and you will be frustrated with your investment.
#5 - Make room for the investment
Unless you happened upon a large sum of cash, you’re going to need to make room for your investment within your current budget. This means you’re going to need to revisit your budget and cut excess spending to make room for your investment. It’s tough to maintain your current lifestyle and invest in real estate at first. It’s a trade off. You cut back and become more frugal now so you can invest.
As time goes on and your income streams grow and are steady, you can enjoy more and live the lifestyle you want. But if you don’t make room at the beginning, you’re only going to be left with stress, little cash, lots of debt and fewer returns on your investments.
Again, everything else we’ve explained comes into play here - in order to make room for your investment, you need to consider the risks and reduce them. We recommend building up an emergency fund. You can also learn to make room for your investment by asking how others got started and what they did to maximize their potential.
Remember, Memphis Cashflow exists to provide you with professionals who can guide you through this process, provide helpful insight and experience, while also addressing some of the greatest frustrations—property management. This is why we are turnkey property investment company. We want to make real estate investing in Memphis a great option for anyone looking to invest.
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