When I purchased my first investment property [A one-year-old duplex that I purchased with my parents] I was sold on the idea that every ten years the value of the property would double. Even though it would take $90,000 out of pocket as a down payment, the property would lose about $200 per month though what’s $200 per month in the hole when in ten years we could be rich?! The problem was, this was 2007 and the next year happened to be 2008, and suddenly the market went down instead of up like it was supposed to. By 2009 the property was worth about $50,000 less than what it was purchased for and that $200 per month loss was pretty frustrating. I learned my first lesson on why I should have bought for cash flow.
What saved this investment was the fact that the interest rates had gone from 7% to 5.35% and because there was so much money put down, we were able to refinance it and get it to break even.
Through smart decisions, we have always kept the rents at fair market value and now this property cash flows $800 per month and after 9 years is worth $25,000 more than when it was purchased. But we were lucky…
What did I do with this lesson in real estate investing? I purchased more real estate of course! I went on to purchase at least one property per year, and this time I had figured out the strategy. My strategy was very simple: I would only buy the property if it would cash flow, and I set the cash flow minimum at $300 per month. I figured even if we experienced another downturn, if the rents went down $300 per month [This would be extremely rare BTW..] then I would at the very least be breaking even.
You see…the appreciation game only works when properties appreciate, and if they does not, you are not only forced to fund this negative cash flow asset every month, but you are forced to watch any equity you thought you had go down the drain.
When an investor buys for cash flow, it truly does not matter what the market does. If the market goes down, it means there is a real estate sale so you should go buy more. If the value goes up, then great, that sure is nice to see on the balance sheet.
When investors want to work with us, this is one of the most important value propositions our investor division offers: we will only suggest properties that cash flow!