While buying single family rental properties has become the darling investment strategy of Wall Street, it may not always make sense for individual real estate investors — particularly in some markets already picked over by the large institutional investors. But there are still markets where the numbers work for the conservative, individual investor looking to purchase foreclosures and other homes as single family investment properties.
The Investing Pyramid
There are three major areas when it comes to real estate investing. Each of these can be seen as the corner of a triangle as shown here.
It's important to understand these three major areas and the relationship among them.
The first corner of real estate investing is called creating cash. This is where you use real estate to generate chunks of cash or regular cash flow from your income property.
Chunks of cash represent the type of profit made when assigning a contract to another investor or fixing and flipping a property for a larger profit. Depending on the price point of the properties you’re assigning or flipping, you can earn some good money in a relatively short period of time. This often makes for great supplementary income.
In fact, some investors make a living doing nothing more than using real estate to create chunks of cash. Creating cash in this manner is great, but it rarely leads to true wealth; that is, building up your net worth.
Cash Flow Will NOT Make You Rich
Don't get me wrong. Cash flow is good (assuming it's positive), but absolutely NO one has ever become rich from cash flow alone. Think about that for a minute.
Let’s look at a quick example. Let’s say you have a $100,000 property that generates $200 per month in positive cash flow. That’s $200 per month after all your expenses and debt service. That would give you $2,400 per year or $12,000 over five years in cash flow.
Assuming you follow our advice of maintaining a reserve account for each of your properties to cover future maintenance and repairs, you will have made $12,000 in net profit over those five years. This assumes that nothing unforeseen happens along the way such as a hot water tank or leaky roof requiring replacement, or a long-term vacancy.
If you’re going to put your investment capital, credit, and possibly your income at “risk” for $12,000, then you’ll need more than just cash flow to make it worthwhile. You need to be investing in markets that offer good appreciation potential. That is how you become rich!