Real Estate Income: An IDEAL Investment for Cash Flow, Early Retirement, and Financial Freedom
If you’ve been sticking with us and reading our blogs, you’ll know what we are all about. The various real estate investing topics we discuss all share common themes and give you a solid knowledge base to get started, keep moving, or enhance your successful real estate empire. Real estate will help you achieve not only a comfortable and secure retirement, but also an early retirement due to your entry into financial independence.
We think real estate is the best investment you could make. As Robert Kiyosaki says, “Real estate investing has created more millionaires than any other form of investing because of its many advantages. Whether you’re investing for cash flow or capital gains, your success is dependent on your education.” There are many more reasons why real estate is great and there are a total of 5 “IDEAL” ones that stick out in our minds. We’ll outline these advantages that Kiyosaki just mentioned and educate you to help you take your success to the skies. Our simple mnemonic device is as follows:
[bctt tweet=”Real Estate is an IDEAL Investment: The ‘I’ is for Income! #RealEstateInvesting http://wp.me/p6GBMd-I”]
Income – The road to cash flow and financial freedom (covered here)
Depreciation – Less to Uncle Sam, more to your pocket
Equity – Take more ownership
Appreciation – Let your ownership grow
Leverage – Carefully control a lot with a little
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When it comes to the benefits of real estate, we totally get it! We don’t need to be convinced, but how about you? Don’t listen to the investing myths that can hold you back. Perhaps you are a young fledgling who hasn’t quite left the nest, but you are getting ready to flap your wings and give Donald Trump a run for his money. Of course you’re ready–you see the potential through the successes of others. You have friends who are buying up properties to hold or flip and perhaps they have started leaving the proverbial “rat race” behind. How do they live off of real estate investments when they are in debt with mortgages and busy enjoying their lives? What is it about real estate that works so well?
Income – The Road to Cash Flow
Let’s review the income benefits of real estate. Income is perhaps the most important ingredient, especially to a buy and hold investor. If you buy right, this will lead you to positive cash flow, financial freedom, and early retirement; we ALL could use some of this action of course. In real estate, you make most of your money going in. For example, if you buy a $100,000 property at 10-20% below market value, you essentially made $10,000-$20,000 by closing on the property. One signature increased your wealth that you can get back in cash via a refinance or home equity loan (if you borrowed). Use that money on your next purchase and have an infinite return on your second property. That is truly a “no money down” property!
Income is not the be-all and end-all to the real estate holding game. One you own and rent out the piece of real estate, you will get either positive or negative cash flow depending on your rent price and your expenses (more on cash flow here.) You could have income from your property and a nice fat rent check from your tenant, but if you are borrowing and giving it all to the bank while covering other required expenses, you could end up with negative cash flow.
Let’s go into a quick explanation of net operating income vs. cash flow:
Net Operating Income (NOI): Say you have made $1000 in rent this month. You know you need to pay expenses such as property management fees, insurance and taxes on the property. After that, you might have around $550 left from that original rent if you deducted for vacancy and possible repairs (you should!). That is your net operating income. Check out this great post on Net Operating Income.
Cash Flow: Take your Net Operating Income (NOI) and subtract your “external” monthly expenses such as debt repayment, i.e. your mortgage. You can calculate your cash flow before or after taxes. The best thing about your cash flow “after tax” is that it is probably higher than your cash flow before tax! All that mortgage interest you are paying is also going to be tax deductible, lowering your tax responsibility even further.
The premise behind cash flow in real estate investing is that over time, your cash flow becomes a passive income source for you and your family. Sure, you may not think $200-300 a month is a lot for one property, but combine that with a good property manager who answers your tenant distress calls and handles repairs for a small fee. With very little of your time at stake, the idea of passive income can become a reality!
How many properties do you need to be buying to support your income needs? As many as you can get your hands on! Once you start getting 10, 20, or more properties using smart calculations, analyzing deals, and buying right, you are talking $3000-6000+ a month. This income is nearly tax free after depreciation. Don’t forget that glorious day when the properties are paid off via the tenants and your cash flow will be nearing that wonderful NOI we discussed earlier.
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So now that you are well versed in NOI and Cash Flow, you understand that income is a very important and useful advantage of real estate investing. You will have the ability to pull cash from your investment month after month, without having to actually sell the asset to earn that income. This extra cash could be saved for re-investment, supplement your lifestyle, or maybe even allow you quit your day job! Every property added to your portfolio gets you one step closer to achieving financial independence, which is an alluring proposition!