All
Members
Companies
Blog
Forums
Podcast
Webinars
    User Log in  /  Sign up
  • Forums
    Newest Posts Trending Discussions Followed Forums Real Estate News & Current Events General Landlording & Rental Properties Buying & Selling Real Estate Deal Analysis See All
  • Education

    Read

    BiggerPockets Blog BPInsights: Expert Analysis Coronavirus Content & Resources Guides Glossary Reviews Member Blogs

    Watch

    Webinars Video Library Financial Independence Blueprint Intro to Real Estate: Rentals

    Listen

    BiggerPockets Real Estate Podcast BiggerPockets Money Podcast BiggerPockets Business Podcast Real Estate Rookie Podcast Daily Podcast (Audio Blog)

    Topics

    Business Operations Finance Finding Deals Property Management Property Types Strategy
  • Network

    Recommended Vendors

    Real Estate Agents Mortgage Lenders Companies Hard Money Lenders Contractors Investment Companies

    Search

    Members Events Jobs
  • Tools

    Calculators

    Rental Property Fix and Flip BRRRR Rehab Estimator
    Wholesaling Mortgage Payment 70% Rule Airbnb

    Services

    BPInsights: Property Insights Tenant Screening Property Management Lease Agreement Packages

    New Feature

    BPInsights (beta)

    Quickly analyze a property address or ZIP Code to compare your rent in your neighborhood.

    Analyze a property
  • Find Deals
    Real Estate Listings Find Foreclosures External Link Ads, Jobs, and Other
  • Bookstore

    Real Estate Books

    Profit Like The Pros Bidding to Buy See all books

    Featured Book

    BiggerPockets Wealth Magazine book cover
    BiggerPockets Wealth Magazine

    Written by financial journalists and data scientists, get 60+ pages of newsworthy content, expert-driven advice, and data-backed research written in a clear way to help you navigate your tough investment decisions in an ever-changing financial climate! Subscribe today and get the Oct/Nov issue delivered to your door!

    Get the Magazine
  • Pricing
Log In Sign up
User
Quick search links
Podcast Hard Money Lenders Books Washington
BlogArrowMortgages & Creative FinancingArrow4 Golden Rules of Real Estate Investing
Mortgages & Creative Financing Jan 07, 2021

4 Golden Rules of Real Estate Investing

Jeff Brown
Expertise: Personal Development, Personal Finance, Mortgages & Creative Financing, Real Estate News & Commentary, Business Management, Real Estate Investing Basics, Flipping Houses
251 Articles Written
conservative-investing

Previously, I wrote about the cartoonishly low interest rates we’re currently loving. In this post, let’s explore what we might do with the tax-free cash we just took out of our home and/or investment property. Where’s the best landing spot for all that cash—or is there even one?

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

After over 50 years being licensed—mostly as a broker/owner—allow me to share some of what I’ve learned in that time. Here are a few points that I consider golden rules.

  1. Knowledge: We can’t get the answer to a question we simply don’t ask.
  2. Strategy: Everyone has their favorite. For most, a combination of thoughtful strategies has proven to be infinitely more productive than the one golden strategy—whatever that may be.
  3. Expertise: A fancy word denoting that a person has the ability to do certain things at the expert level of execution. In my experience, this concept has been nearly reduced to rubble.
  4. Experience: I mean actual experience, not just years in the real estate investment industry. Experience in success, learning from disastrous failure, and accepting that you’ll never know it all. You’ll also never see it all.

Investing Is Not One Size Fits All

I recently had a client pull out $540,000 via multiple refinances of several small investment properties. It was tax-free by definition. The monthly debt service on every property went down. What should he do with it? Experience screams the answer at me: There’s no one right answer for every investor. Period. End of sentence.

For this guy who’s approaching 50 years old at the speed of sound, there are a few very solid answers—or should I say, solutions. He’d worked himself into, at one time, 10 duplexes, none of which is 10 years old yet. They appreciated like crazy, due to the fortunate timing and strategic locations. At the time of purchase, I told him that they would appreciate. What fueled my belief was simple: Demographics combined with supply and demand.

He also had, over the years, acquired six figures’ worth of notes secured by homes in multiple states. They were all in first position, though that certainly isn’t required. The income isn’t totally taxable as his accountant has been able to “shelter” some of it.

Related: Investing in Real Estate Mortgage Notes: How to Earn Passive Income Without Tenants or Toilets

The Power of Cash Flow

First, let’s talk about cash reserves, a subject some treat like dodgeball. He already has roughly $150,000 or so in reserves. Knowing him, he’ll add to that just a bit. He’s like me—meaning, conservative. Investing is just that—investing. It’s not a fun night in Las Vegas.

He bought three brand new nightly rental homes in the southern part of Utah. The homes he bought were already zoned for nightly rental, so that wasn't an issue. It's the reason I haven't entered into that market until now. The huge majority of nightly rentals around the country are illegal in one way or another.

He's now taking all the cash flow from his remaining half-dozen Texas duplexes and will speed up the principal paydown of those Utah loans one at a time. The cash flow from the nightly rentals will, of course, be added to that figure. Once the first home is paid off, the second home's loan won't last long, as the NOI (net operating income) is greater than the GSI (gross scheduled income) for the same home rented to a family of four.

Free ’n clear, those Utah homes alone will conservatively give him—wait for it—five figures of cash flow, monthly. How did we arrive at those numbers? With incredible conservatism. That’s how.

Related: How to Accurately Calculate Cash Flow on Your Next Rental Property

The management experts in the market told us all about demand. But we wanted to know about vacancy and operating expenses. Turns out that in a good year, the vacancy is roughly a couple months. In a down year, the vacancy runs more like four months, or twice as much. We then decided our numbers would reflect nothing but down years. See? Conservative is the way to go, as over the years, I’ve found nobody seems to mind when the numbers are better.

We then immediately added 40% operating expenses over and above the 34% vacancy factor. We’re also satisfied with the overall demand, as it comes from two completely unrelated sources. It’s already been proving itself nicely, even with COVID-19.

Note Income and Synergy

Though this post isn’t about discounted notes, I wanted you to see how they can be used for far more than making a capital gain, or simple cash flow. They can be employed in the use of actual synergy. That word has been bastardized to the point of worthlessness in this industry. Here’s the definition: The interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects.

What we’re doing here is almost laughably simple in design. We’re not just using the Utah properties’ combined cash flows to eliminate the debt but also bringing in note income to enhance that process immensely. When the Texas cash flows are added, it builds upon itself. But then we don’t apply the extra payments the way you might imagine.

We are free ’n clear one property at a time. Why? First, I’ll tell you why not. It’s not faster.

Typically, if all loans are paid down simultaneously, they’ll all arrive at the debt-free finish line around the same time as my way. However, it depends on the starting loan balance. This assumes the same amount of cash is distributed in each technique. The key reason we choose to do one at a time is that the cash flow on the newly debt-free property will then be available if life intrudes. Always be thinking worst-case scenario—aka be conservative.

Once he has one debt-free property, the second one will be debt-free much sooner, due to the massively increased cash flow. Once the second property’s loan is eliminated, the third property’s debt will be gone before he knows it. It’s about safety, right? If it’s only a matter of a few months either way for the final results, why not have one, then two, then three free ’n clear income producers on the way?

If the market changes, or the national economy cycles into unfriendly times, how happy is he going to be that he has one or two properties without loans? Kinda sorta answers itself, right? Besides, when was the last time we didn’t cycle into relatively bad times? Real synergy is the gift that keeps on giving.

Related: 7 Steps to Managing Your Money in a Volatile Economy

The Takeaway

Please, please, please do not think I write this as a template. What we had him do was due to his financial status. That would include job income and status; independent sources of investment income; investing experience; and most of all, his personal comfort zone. The comfort zone of the investor vetoes anything I might suggest. Think about it: Who’s going to override your comfort zone? OK, maybe The Boss, right? But you get the point.

The idea is that when you begin actually investing, you want to follow the principles that will get you to retirement with the most and best-secured income safely.

And never forget: We only spend after-tax income, right? There’s a reason why we employ some of the principles spoken of in this post. Not all these principles are applicable to all investors, or even all scenarios. We’re all different. Because we’re intelligent beings, we apply the principles that will work for us. Sounds simple, right? If only.

Recession-Proof Real Estate book blog ad

What golden rules do you have for investing, and do you agree with my conservative approach?

Share with a comment below!

By Jeff Brown
Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.
Read more
10 Replies
    Chris B. from Crested Butte, Colorado
    Replied 18 days ago
    Interesting and looks pretty simple. I have 9 rentals generating 11k month gross (5k net) and I'm sitting on half a million in cash and trying to decide if I should pay some of them off or continue to take advantage of the 3.3% rate my bank is giving me to buy more property. I'm in a 57% leverage position on them and I'm 50 so I've definitely been thinking about lowering that %. I've been easily getting 20% cash on cash so the half million could get me around 100k more passive income.
    Neil Aggarwal Lender from Richardson, TX
    Replied 13 days ago
    The answer is simple: Can you get higher than 3.3% return on investing your cash? If so, make that investment. If not, pay down the mortgages.

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Jeff Brown from San Diego, CA
    Replied 17 days ago
    Chris — Your circumstances are far to involved to discuss here. However, we both know you're in an enviable position. Feel free to contact me for a relaxed chat. I think you'll find it, at the very least, informative. You've done very well for yourself, and the next six months, along with your next move, will be critical. Good job so far!!

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Kevin Betancourt New to Real Estate from Miami, FL
    Replied 17 days ago
    Great article!
    Jeff Brown from San Diego, CA
    Replied 17 days ago
    Much appreciated, Kevin! What about it seemed to speak to you?

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Tola Kehinde Rental Property Investor from Vaughan, ON
    Replied 15 days ago
    Great Article

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Satwant Singh from Buffalo, New York
    Replied 14 days ago
    Great Article, I will love to chat with you more about this!

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    JP Murphy Rental Property Investor from Copper Center, Alaska/Indiana
    Replied 14 days ago
    Thanks! I’m using that strategy now!

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Greg Houts Flipper/Rehabber from Bermuda / Atlanta GA / Greenville SC
    Replied 14 days ago
    Thanks Jeff for the thought provoking article. These are great strategies to consider as I look towards "retiring" from my career job and building sustainable, passive cash flow. I'm in a similar demographic as your client. As much as I want to hit the accelerator, maintaining (more than) adequate reserves and conservatively analyzing deals is key. Nobody has a crystal ball, but one can assume this Goldilocks economy and housing boom will come grinding to a halt over the next few years. And if it doesn't, then even better. That was one thing dissuading me from short-term/vacation properties. However, this is eye-opening how varied passive cash flow streams can supercharge returns while adding diversification.

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Rob Hallowell Rental Property Investor from Gilford, NH
    Replied 14 days ago
    Great read. Thank you for sharing!

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
Rotate Log in or sign up to comment

Related Blog Posts

Mortgages & Creative Financing Jan 07, 2021

4 Golden Rules of Real Estate Investing

By Jeff Brown

Real estate investing looks different for everyone. But being conservative with your investments can pay off in the long run

Read more →

Mortgages & Creative Financing Dec 23, 2020

Syndication 101: How to Present a Deal To Investors

By Sterling White

Do you have a great real estate deal but not enough cash on hand? Present this information to potential investors to get their buy-in.

Read more →

Mortgages & Creative Financing Dec 10, 2020

How Much Debt Is Too Much When It Comes To Real Estate?

By Brandon Turner

The more properties you own, the more debt you add to your life. How can you tell how much real estate debt is too much?

Read more →

Mortgages & Creative Financing Dec 01, 2020

A Well-Kept Secret for Buying Property With No Money Down (& Growing Your Portfolio Quickly!)

By Matt DeBoth

Coming up with the down payment to purchase property consistently and grow your real estate investment portfolio is a struggle. Enter lendable equity.

Read more →
Log in Sign up

Log in

Forgot password?

If you signed up for BiggerPockets via Facebook, you can log in with just one click!

Log in with Facebook

Or
btn_google_dark_normal_ios Created with Sketch. Continue with Google

Let's get started

We just need a few details to get you set up and ready to go!

Use your real name

Use at least 8 characters. Using a phrase of random words (like: paper Dog team blue) is secure and easy to remember.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.

Or
btn_google_dark_normal_ios Created with Sketch. Continue with Google

Why create an account?

Receive a free digital download of The Ultimate Beginner's Guide to Real Estate Investing.

Connect with 1,000,000+ real estate investors!

Find local real estate meetups and events in your area.

Start analyzing real estate properties, we do the math for you.

It's free!

Explore

  • Membership
  • Community
  • Education
  • Marketplace
  • Tools
  • FilePlace
  • REI Resources
  • Perks
  • Glossary
  • Reviews
  • iOS App
  • Android App

Company

  • About Us
  • Press
  • Advertising
  • Careers
  • Stats
  • Contact Us

Important

  • Editorial Guidelines
  • Terms of Use
  • Rules
  • Privacy
  • FAQ

Social

  • Facebook
  • Twitter
  • YouTube
  • Instagram
© 2004-2021 BiggerPockets, LLC. All Rights Reserved.