Welcome back to the Better Wealth edition with Matt for Ice Cream with Investors. Today, we'll break down the three essential rules to investing in real estate, offering a framework that can help guide your investment strategies. Real estate investing can appear complex, but these guidelines can simplify your decision-making process.
Rule 1: Buy for Cash Flow
Investing with the expectation of appreciation alone is akin to gambling. Instead, focus on properties that generate positive cash flow. Here's why:
- Cash flow provides a steady income stream, even during market downturns.
- It allows for reinvestment into additional real estate assets.
Remember, income minus expenses equals cash flow, and this should be your primary focus. Let appreciation serve as an added bonus.
Rule 2: Secure Long-Term, Low Leverage Finance
Avoid high leverage like 90-100% loans and aim for:
- Low Leverage: Typically between 70-80% to withstand market shifts.
- Long-Term: Preferably 30-year loans in residential real estate. Longer terms cushion cash flow, allowing funds to be invested elsewhere.
As a side note, the conventional 30-year mortgage is an incredible tool for building wealth, enabling payment with future, less valuable dollars due to inflation.
Rule 3: Keep Cash for a Rainy Day
Unexpected expenses are inevitable, whether it's a leaky faucet or a broken HVAC system.
- Prepare for maintenance, repairs, and periods of non-payment.
- Aim to maintain a 3-4 month cash buffer for mortgage, taxes, and insurance.
This buffer acts as a short-term insurance policy against unforeseen circumstances, allowing you to maintain a stable operation without needing a fire sale of properties.
Conclusion
These rules form a foundational framework for real estate investing, focusing on cash flow, prudent financing, and readiness for unexpected expenses. By emphasizing these principles, you can reduce risk and increase opportunities for financial growth.