Real Estate Investing Secrets

By Steve Gillman - 2010

The three real estate investing secrets below are not so much secrets as they are principles that are not widely applied. Put them to use and you'll have less risk. You might also make more money.

1. Cash Flow Is King

You've heard it before, but maybe you haven't really understood just ho powerful a principle this is. A few years back it was fun for investors who didn't care about cash flow. Prices were rising fast, so in many towns and cities you could buy a house and sit for a year even if you were losing money every month. Maybe you paid out $10,000 holding a house, but then made $25,000 when it sold. This strategy burnt a lot of investors in the end of course.

When you buy in a real estate market with strong rental demand and you buy at a price that assures you'll have positive cash flow, what happens to prices isn't crucial. It's a point often missed by those who look at real estate not as an investment but as a bet or speculation. The value of your rental house can even drop for thirty years and you will make money if you had cash flow from the first month.

Let's look at an example. You buy a $100,000 house with a down payment of $20,000. You rent it out for enough to make $100 monthly in cash flow at first. This eventually becomes $200 as rents rise over time. By the time you pay off the mortgage thirty years later the neighborhood has declined and your house is worth only $50,000 or so. But you collected $54,000 in cash flow (average of $150 per month) during that time. Now if you sell the house you collect perhaps another $46,000 (after expenses). The home lost half of its value, but you still turned $20,000 into $100,000 ($54,000 cash flow plus $46,000 from selling). This demonstrates the safety of buying for cash flow, as well as the profit potential.

2. Profit Can Come from Moving Fast

Many people are tempted to do everything themselves when investing in a fixer upper. They do the repairs, improvements and even the selling by themselves. This can work, but if you are not very skilled you can end up spending just as much on some repairs and improvements as it would have cost to pay for them, and that's not the only problem. A bigger issue is the time it takes.

If time is money this is certainly true in real estate more than in other areas. While time passes you pay interest on the money you borrow, utilities, taxes, and insurance. Your cost of holding a property might be $700 per month or more. This means that if to save money you do you own repairs and so spend an extra six months on a project, you just spent $4,200 of your savings on holding costs - something to keep in mind when deciding whether to hire help or go it alone.

Your plan is also based on the market value you figured when you made the offer on a property. Sometimes conditions change while you are working on a fixer upper. You may end up selling for less than projected if that happens. Prices could rise as well, but making a little less profit from turning the property fast is not as big a risk as losing money because of slowness in a market where prices go down.

3. You Lower Expectations with Low Offers

First-time investors sometimes imagine an owner desperate to sell accepting a ridiculously low offer. The bad news: Offers of 20% or more below the asking price are rarely accepted. A seller might say yes - perhaps after a hundred tries. But it takes time to look at properties and now even a lot of time to write an offer on a house. After you spend a year trying to get that "great deal," the one who says yes might have the worst property as well.

Now here's an important real estate investing secret: low offers are not meant to be accepted by the seller. He might say yes, and if so - great! But the real purpose of a low offer is to lower expectations so you can negotiate a lower price. You won't get that 20% discount in other words, but you might lower the seller's expectation enough to buy the house for 10% less than the asking price. Making low offers then, is best seen as a negotiating tactic.

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