Appreciation - VS - Cash Flow

"Today's Investments Are Tomorrow's Profits"

This quote was beautifully framed and proudly displayed in the reception area of one of my property manager's office -- the company's founder was also an investor and owned quite a lot of property. This says it all, but read on for more advice

From my years as a real estate investor and advisor, I have noticed that the majority of people who desire to invest in income units have NO CLUE as to the realities of the business. Yes, folks, it is business; you are not going to have tenants throwing their money at you without some effort. Some of the toils of landlording include: maintenance costs, vacancies, remodeling expenses, and the costs with hiring a manager to oversee your investment.

I enjoy sharing my knowledge because 15 years ago when I had a desire to own real estate and started taking real estate training, I, too, was clueless.

Well, here's a little lesson in appreciation and cash flow.

Often novice investors want to put down as little as possible and falsely expect to reap immediate income. That is not always the case. Depending on the type of property, location and rental income, the return on investment may be low or even non-existent. However, if you buy right, the appreciation of the property will more than make up for any cash deficiencies that appear along the way.

If you wish to invest in a nice fourplex in a decent part of Los Angeles, where I live and work, the price range is about $875,000 to $1,200,000; there is no way an investor can put down 10% and cash flow, even on a Neg-Am loan (a negative amortization loan is when additional principal is added to the original amount of the loan). In fact, an investor needs to come up with anywhere from 30% to 60% as a down payment just to break even or cash flow (depending on rental income, location, and other factors).

In other parts of the country, breaking even on 10% to 20% down payment is very possible. Recently, I've even seen investors cash flow with as little as 10% to 15% down in Texas and Louisiana on some smoking deals.

But the general rule of thumb is that if you invest 10% down and can just about break even, you are in pretty good standing as a beginner investor, especially if you don't have a lot of time or energy to scout out those unique, higher-return properties, many of which are here today-gone tomorrow opportunities.

To better understand cash flow and appreciation, let's evaluate your money at work in two different scenarios: One, a standard 6-month CD and the other a duplex for $136,000 in Texas that are currently available (My company, www.cashflowcows.com, has six of these properties currently pending!)

The numbers work out to where the down payment of $18,000 (10% down payment plus $4,400 for closing costs) would generate you about $76 per month on a CD returning a 5% interest rate (this is an example); the property would generate you approximately $51 per month based on a conservative note at about 8.5%, interest-only. Of course, cash flow depends on it being fully occupied and running smoothly.

Upon first glance it seems that the CD would be the best way to go, it certainly is the safest, after all, it is insured.

But being an investor has its unique rewards. First of all, an investor of real estate can take advantage of great tax shelters, such as the deduction of: mortgage interest, property taxes, insurance, and maintenance costs. Even your visits to the property or research associated with real estate are tax deductible. (For specific tax questions, please consult your tax advisor.) Also, a real estate investor gets to depreciate a property, which increases your savings even more! Furthermore, real estate is an excellent hedge against inflation. Plus, you can't "leverage" your savings account.

While I'm not advocating dumping your FDIC-insured investments (money market accounts and CDs), I have found that investing in real estate has skyrocketed my wealth faster than merely trying to "SAVE" dollars the old fashioned-way: Working for and stocking away one Benjamin at a time.

The appreciation of my properties outperforms my ability to "work" and "save."

Appreciation in real estate can increase a person's wealth quickly and steadily. While cash flow is important (my company, after all, is indeed http://www.cashflowcows.com/ ) however, the wealth of your investment especially IN THE BEGINNING OF YOUR CAREER AS AN INVESTOR will come from APPRECIATION instead of CASH FLOW.

Granted if you put a big chuck down or not even carry a note on a property, you will have great cash flow; however, if you're only putting 5% to 10% down, it's going to be hard to get money out at the end of the month.

If you put in the minimum amount, you will receive the minimum back.

I did not make any cash flow for years when I started out as an investor back in 1994. In fact, everything that was generated out of the property was put back INTO the property, and then some! Yet, I knew real estate was going to be my saving grace for retirement, so I stayed patient, waited for the right exit strategy, did a 1031 Exchange, bought two properties instead of one, cash flowed a tiny bit more, refinanced one, bought another one, sold one, then bought two more... etc...

You get the picture... $ : - ) $

HINT: When you can buy more property, be sure you increase your CASH reserves. The key is to wait and leverage smartly, yet conservatively. Make a few good choices and, before you know it...

SHAZZAAM... Now you've got a few Cash Flow Cows!

It could take a few years or perhaps decades; an investor can control the growth of their property portfolio depending on their drive, desire, risk tolerance, plus their mental, emotional, and physical energy. Plus, you have to be dedicated to constantly educate yourself and push yourself to be and stay at the TOP of your game.

Every property acquisition produces unique stresses and challenges, as well as rewards.
Investing in real estate may not be for everyone, but even in my own neighborhood of Culver City, Calif., I see the financial advantages of being a landlord.

My elder neighbors who are retired and own income property are by far better off financially than those who are the same age and do not own real estate, other than their home. Many of the non-landlords are still working past the age that they would like. The rich landlords around me, retired quicker and enjoy more vacations, newer vehicles, more home improvements, etc...

Having a stash of cash in a CD and money market account is great! It's important to have a healthy emergency wad of bills collecting interest. It's important to have that 401(K) and IRA account and to own stocks and mutual funds and be adequately insured. After all, a diversified portfolio is healthy one. But don't be afraid of mixing in an income-producing property or two. With technology and the speed and the relatively low-cost of travel, it's never been easier to be a landlord: If you can't afford your own backyard, then go to a neighboring area or state.

Real estate investors, the REAL ONES who are committed to this choice of lifestyle and profession and pledge to be in the game LONG-TERM, will see great financial rewards as the years roll on.

Now, take that to the bank and get 5%!

Real Wealth Affirmations: Want to Propel Your Wealth to New Heights? Be open to the illogical; be open to the mystical. Can we explain why a butterfly flapping its wings in Japan causes a tornado in Kansas? No, I can't personally explain it. It seems totally illogical, but that's the way this world works, folks. So, even if you are not in the game of real estate investing, if you want to be, you've got to act like YOU ARE ALREADY THERE.

This is the MINDSET that propels people towards wealth. The following affirmations are meant to be said ALOUD in the Present Tense, daily practice will speed up results!

"I am a prosperous real estate investor right NOW."
"The right property is waiting for me. When I find it, it will be mine."
"My properties generate me unlimited income."
"I know the Light, God, Jesus, Creator (insert your spiritual strategy here) will guide me toward real estate riches."
"The more I get, the more I share. I demand wealth NOW so that I can share it abundantly and unconditionally."
"My wealth is multiplying at every moment, even while I sleep!"
"I don't work for my money, my money works for me!"

• COMING SOON:
  If you enjoyed reading this bog, don't miss the first issue of Realty411, a free magazine for real estate investors! Developed by Linda Pliagas, founder of http://www.cashflowcows.com/
• Realty411 will feature real-life real estate success and horror stories as well as motivational advice and tips by TOP real estate investors from around the country.
• Linda Pliagas, CH.t., is a real estate blogger, a national real estate investor, California real estate sales agent, clinical hypnotherapist, and veteran journalist, editor and publisher (can someone say: "compulsive, neurotic, over-achiever"?)

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No part of this blog may be reproduced or transmitted in any form or by any means, electronic or mechanical without prior written permission except by a member of the media who wishes to quote brief passages for inclusion in a magazine, newspaper or broadcast. The advise in this blog is solely based on personal opinion. Always seek the advise of a trusted attorney, broker, financial planner, accountant or other professional before investing in real estate.