Don’t be a Real Estate Gambler
There’s one approach to real estate investing that’s like gambling. Don’t get me wrong, I enjoy Texas Hold Em and going to Vegas during March Maddness (BEST. TIME. EVER) but I don’t use that same gambling mentality when investing in real estate.
If I were to use that gambling mentality when investing in real estate then I would buy for appreciation. I’d buy homes, and not care about the cash flow because I would hope that the homes would appreciate in value over time so I could sell for a profit once they do. Then, I’d make my money.
Oh, but I am not that type of investor. I don’t buy for appreciation and NEVER will. Appreciation is an added bonus. It’s icing on the cake. But it’s not what I look at or count on when investing.
Instead, I buy for cash flow. Always have and always will. My focus is making sure the property produces monthly profit based on a methodical approach of running the numbers and doing due diligence.
Certain markets lend itself to cash flow investing better than others. That’s why market research and selection is so darn important to real estate investing. Like the Real Estate Guys say, “live where you want to live but invest where the numbers make sense.”
Even with all the good info out there on how to be successful in real estate, new and seasoned investors still make the mistake by investing the wrong way (i.e. for appreciation). Don’t do it.
Comments (5)
Joe, I have the same investment strategy too. I usually drop a deal unless it has at least two reasonably certain ways for me to exit with more money than I started with. Cash flow is the most important piece. If I can improve it and raise those rents, I refinance to get some equity out but keep the building. Finally, while I can't be certain of appreciation, I've become pretty good at picking properties that has all the reasons to appreciate in value. I recently met a client who does not care about cash flow. I think he does not think real estate prices ever drop...
Roger Lin, over 10 years ago
Great minds, Lin. :) Yeah, it's amazing that when we buy right the appreciation thing does happen - we just don't count on it. And, yikes about your client. Best of luck to him.
Joe Fairless, over 10 years ago
Exactly! I go out swinging for singles and doubles. I work to create the conditions for a home run but never expect it! Funny you mentioned the client. I just got an email from them this morning, I think I successfully turned their mind around on the issue and now they are interested in looking at the not so sexy industrial property that cash flows at 8% cap rather than the sexy Georgetown condo that cash flows at 2%. Yippy! I am glad that I am doing my job looking out for their best interest.
Roger Lin, over 10 years ago
Good point, the biggerpockets beginner's guide also says be sure to make money on the buy, don't plan on making money at the sell.
David Rundle, over 10 years ago
Thanks, David. Yes, definitely agree with that point since the tax advantages and fees are set up to favor the buyer not seller.
Joe Fairless, over 10 years ago