“Making money is easy. It is. The difficult thing in life is not making it, it’s keeping it.”
— John McAfee
I’ve got a question for you:
If you’re looking at real estate deals, how do you know if it’s the right deal?
Do you know if the property will make you money or be a pain in the butt?
If you don’t know the answers to those questions, don’t worry!
Today, we’ll be going over how you can figure out if a property will make you money.
Let’s jump into it!
1. Look at Your Current Investment Returns
I want to start by sharing a story with you
This story comes from a high-net-worth mastermind I’m in called The Wealth Forum.
We’ve had people like Ken McElroy and Russ Gray join in.
A lot of great people!
One of those people includes a woman named Sally.
Sally isn’t her real name, but it’s the name I’m going to use.
She wanted some advice from me and two other investors named Vinnie and Randy.
For context, Vinnie owns 8,000 units.
Randy owns about 1,500.
She had around 20 single family homes worth about $10 million.
At the time, she only had $400,000 in debt.
She wanted to know what she should do.
We started by asking he a simple question:
What’s the cash-on-cash return?
One of the guys asked what her actual return was after expenses.
The number she gave was around $30,000.
That’s a pretty small return.
When you’re in a large single family investment like that, returns can often be smaller.
This is because you usually have no debt.
Calculating your return is so important.
If you have a low number, you can start thinking about how to increase it.
Now, the real question:
How do you do that?
2. Making Money With Your Returns
First things first: You do introduce risk when you have more leverage.
So, I’m not saying you go upwards of 100% leverage when you’re moving investments around.
Instead, figure out a good leverage number.
In Sally’s case, Vinnie and Randy said 50% to 60%.
You can pull that money out and put it in other things.
You can increase your cash flow substantially.
This is a skill a lot of investors don’t understand.
If you have equity somewhere, maybe it’s even equity in your 401k, you need to look at the return from that investment.
A lot of the time, it’s much lower than you think.
In the U.S., about 40% of homes were owned in cash in 2022.1
If you own a house outright, and you’re renting it out, it probably would be in the 2% to 3% return on equity.
I understand there’s the comfort of having no payment on something.
Maybe you inherited property from a relative.
That’s totally fine!
There’s no problem with having housing security.
However, if you’re in the investing game, you probably want to see 10% or higher cash-on-cash for owned properties.
We see that in oil and gas and private businesses.
Sometimes real estate will reach that number, but it’s kind of rare, especially in the beginning.
We shared this information with Sally as well.
Single family is not very scalable.
She was also self-managing a lot of it.
That’s really challenging to do because you’re undervaluing your time.
Her time is super valuable, but she herself is not valuing it.
If she got a good manager, she could buy a 50-unit property with her equity and be very successful.
3. What Problem Are You Trying to Solve?
In order to have an investment make money, a valuable question to ask is:
As an investor, what problem are you trying to solve?
A lot of investors are not clear on this.
The number one thing for most people is cash flow.
This is especially important if you want the option to leave your job.
In order to do this, you need to find your rat race number.
How much will you need to cover the basics?
What’s your house payment?
Your car payment?
Your insurance?
My number was $6,000 a month.
That’s not a lot of money in the grand scheme of things, but it was achievable.
Once I covered that with my investment income, I was free.
Even people who are wealthy can benefit from cash flow.
It reduces risk.
According to the EuroMed Journal of Business, managing cash flow can also positively impact overall financial performance.2
A lot of wealthy people I know have obtained their wealth through cash flow.
Appreciation can also be great if that fits your goals.
But if you want a good place to start building wealth, cash flow is king.
Now I want to hear from you!
Are you going to turn some of your returns into cash flow?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
Works Cited
1. Johnson, Holly. “What Percentage of Homeowners Have a Mortgage?” Investopedia, July 24, 2024. https://www.investopedia.com/percent-homeowners-have-mortgage-8680325#.
2. Gerasimos G. Rompotis. “Cash flow management, performance and risk: evidence from Greece.” EuroMed Journal of Business (2024). https://doi.org/10.1108/emjb-09-2023-0245.
