Cash Flows and Leveraging Make Real Estate Investing Unbeatable
Investing in positive cash flow properties is the best way to make money in real estate. If you look at unleveraged, income producing properties you’ll find that they tend to yield cash flows of 5% to 12% or even more when looking at commercial real estate. If you can create positive cash flow and you can increase rents or income, you can significantly increase profits which will outperform inflation. This reason alone should be enough for you to start researching profitable real estate investments.
Now let’s add leveraging to the mix using debt financing or generally using other people’s money. If we look at commercial real estate, for example my business focuses on parking lots. I love them as you’ve got the benefits of real estate appreciation and a strong cash flowing business with notoriously low carry costs.
In this example let’s say the deal was a 10 million dollar parking lot and I put down $2 million in equity and borrowed the remaining $8 million from the banks. Now let’s also assume that the $8 million you financed was over 30 years at a 5% interest rate and you were receiving a ROI of 7% from the parking lot operations.
In this case, 7% ROI on a $10 million piece of real estate means your net income equals $700,000 and your 5% loan interest repayment would be $500,000. This means you would be walking away with $200,000 profit per year - Sounds great right? Well if you now work out your ROI on your initial investment by dividing the $200,000 earnings by your original equity payment of $2 million, you’ll see that you’ve also increased your ROI from 7% to 10%.
It gets even better when the penny drops, and you also realize that this was not including repayment of principle but on interest only. The strategy here shows how you can create a passive income producing investment paying you $200,000 per year solely benefiting from leveraging and cashflow which outperforms inflation. And as each year passes, you’ll also be benefiting from price gains through appreciation where reselling at a higher valuation would give you a great payday or refinancing which allows you to draw tax-free debt from the property.
So the big take away here is, if you combine cash flows with leveraging you can achieve unbeatable consistent returns when compared to almost any other investment class.