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Creating Cash Flow in Rental Properties

August 6, 2021

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Real estate investments are my favorite topic to talk about, but also my favorite type of loan to help a client with why because in an area where loan officer gets to be creative, often purchasing investment isn't cut and dry. It requires strategy and planning. If you've ever joined me from my building investment empire class in the second Thursday of each month. 

And you know, I advocate purchasing a home as a primary, living in it for a year and then doing it all over again. Why? Because when you purchase a home as a primary, you can put as little as 3 to 5% down and that frees up cash when you compare it to purchasing it as investment property, which requires 15 to 25% down. 

But of course, the follow up to the strategy that I get asked most is how do I make that purchase? 

Cash flow because the less you put down, the larger the monthly mortgage payment is, and so that's a fair question to which unfortunately has no straightforward answer. 

I mean a lot of times this concern can be avoided if you know upfront going into a property that you're going to convert that into a rental. Then you can assess with the current economics in the market rents, will this home fit my model? 

But what if you weren't able to find that type of property or you didn't have the forethought or the chance to strategize then what? Because sometimes there just isn't enough money being made from the tenant to cover the costs of that property and let you pocket some cash flow if that's what you're looking to do. And in my mind, the not pocketing additional cash flow is OK because I viewed my rentals as a long-term investment for retirement, not extra monthly cash flow today. 

But let's say you do. I mean, how do you get that property to generate more wealth after you purchased it with only three to 5%? 

Down now, this is where you want to be able to strategize with your team and know your options. One of the options you can do is and it hurts me to say this is sell that property instead of keeping it now as much as I advocate keeping a rental property, there is something called a 1031. 

Exchange, and that's a tax code. A tax code that allows you to take the proceeds from that sale to purchase another type of real estate. As long as it's the same or higher value. 

So let's say for example, you purchase a single-family home two years ago with three to 5% down. You lived in that home for two years before moving on to the next home, and you decided to rent out that property instead of selling it. But with that home, you couldn't make the cash flow work. There's no garage to rent out. 

There's no way to create 2 units out of one. It's not zoned for an 80. You at the end of your first year renting it out, you realize that the current market rent and let's say for that example is $2500 only covers the more. 

Rich and you want more for your investment and this particular property just isn't cutting it. Given the market over the last few years, you could have 50 to $100,000 in equity in that home. You can sell that property using a 1031 exchange and purchase another home as mentioned in the same or greater value. 

And take that ability to multiply your current equity in that first home. Now I'm not a fan of selling homes you own, but maybe that next property is a duplex or single family with a basement that can be turned into its own unit. So instead of just getting that $2500 from the rent. 

On that initial single family, you can charge $2500 for the top unit, 1100 for the bottom, and all you had to pay was closing costs and realtor costs. 

I mean, this property is now going to gain you $1100 more a month in rent and because you had all that equity in the home you sold, you're able to put down 20% on this next property. Getting rid of the mortgage insurance, putting even more net rent in your pocket. 

Becoming a real estate investor opens the door to financial independence. Don't let the idea of finding the perfect property right off the bat scare you away from taking the first step forward. It all starts with the first one. So if you want to begin your journey into building with wealthy real estate, give my team a call. Let us go to work for you. Nicole rooms with real-time. We look forward to serving you.