Why do we buy multi-family properties? If I were to frame the answer in very romantic terms, I’d say that the two reasons are Financial Freedom (which is a function of Passive Cash Flow) and Financial Wealth (which is a function of Net Worth).
In my view, the order of importance is: One – Financial Freedom, and Two – Financial Wealth. The reason behind my perspective is a medical diagnosis of Multiple Sclerosis (MS).
I won’t bore you with the details here suffice it to say that MS will likely significantly impair my capacity to move as time goes on. This reality creates a problem – I can’t very well go to a job if I can’t move…
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Solution to the Problem
I am not at that place yet; I can still move. However, with this in the back of my mind at all times, everything I do in my professional life has a narrow focus on addressing the reality of needing to create a circumstance whereby the money comes in regardless of my capacity to perform work. Simply put, my life in real estate represents a solution to this problem; I buy assets which generate passive cash flow, and thereby alleviate the need for traditional employment / self-employment.
Therefore, by definition in my consciousness real estate represents a vehicle toward Financial Freedom; not by choice, but by necessity… Not financial freedom in a sleazy guru selling you on a dream kind of way, but something a lot more profound than that – do you understand?
Therefore, the romantic ideal of financial freedom translates into reality in terms of Passive Cash Flow which when large enough will cover the cost of living. Buy enough assets which throw-off cash flow and you can be financially free!
Couple of Things to Note
There are several important distinctions to be made here. First of all, buying investment property is easy – anyone with some money can do it. But the fact is that not just any property will provide you with stable cash flow. Also, in order to fully capitalize on all of the available advantages, we must remain in the game for a long time to allow market forces such as appreciation to do what they do. In other words, we must not “burn-out” on management of our assets. If there ever was a statement of truth, it is this:
Your longevity in this sport is a function of the type of tenants you attract – period!
And having said this you must note another statement of truth, perhaps even more profound than the previous:
YOU are very limited indeed in what you can do to attract tenants. It is not YOU who attracts tenants; it is YOUR PROPERTY…
Therefore, the question becomes –
What Type of Property Attracts the Right Tenants?
The main driver of value in a society based on free markets is Desirability – if people want what you have then they will choose to pay you money for it; in other words, desirability drives demand. This is no different in real estate from any other commodity. Thus, if I had to crudely summarize in one sentence my thoughts around what it takes to succeed in real estate investing, I would say the following:
Buy only those assets that are deemed desirable!
Well – in principal it is as simple as that, however, in practice things are a bit more complicated. Here is the problem – not everyone involved in the life-cycle of an asset deems the same attributes desirable. In fact, what is desirable to one party is often undesirable to the other. So, the problem of choosing the right building becomes a three step process:
Step 1: Define all of the parties of interest.
Step 2: Define what each deems desirable.
Step 3: Buy property which represents a compromise.
Relative to income-producing real estate, the parties involved in the life-span of the asset are:
- Buyer (when the owner is ready to sell)
That was easy. Unfortunately, this is where “easy” ends and difficult begins, because what we have to do now is to understand which features will be considered attractive and desirable to each of the three groups, and how to isolate the type of property which represents an acceptable compromise for all. Let’s focus our thoughts a bit more…
Basic Thinking Goes Like This:
- If you can buy a property which is attractive to potential tenants, then you won’t have any trouble keeping the building full of good tenants who pay on time and are respectful of your property and their neighbors. This means that you will be generating consistent income and have the ability to reinvest into the upkeep of the structure making it easier to manage.
- If the tenant base is easy to manage, and the physical property is easy to manage, then you as the owner will like having the building in your portfolio.
- If you like owning this property, then your potential buyers will like owning it, which will drive the value of the property up over time and guarantee options down the road.
Options are What we Want!
Well – this pretty well covers it. All that is left is to define and itemize desirability as it relates to everyone involved. I think 20,000 words may do it but I’m saving it for later… Thoughts?
Photo Credit: house42