Buying Real Estate for Cash Flow: Does It Work?

By
David
– April 8, 2011Posted in: Real Estate, Strategies

Can an investor buy a real estate property and reasonably expect it to produce positive cash flow right away?

This is a common question and it is also a common strategy.

The answer is unfortunately NO.

Why can’t you buy real estate and expect positive cash flow?

There are two main reasons why most people fail to buy real estate that produces positive cash flow:

  1. Many people buy real estate to live in as their personal residence. These owner occupiers often are willing to pay a higher price than investors for a property because it is a home, not just an “investment”.
  2. Too many people (including large investment funds like REITs) are trying the same strategy of buying for passive rental income; this competitive demand pushes prices up and yields down.

Additionally, if you pay “retail price” on the property you acquire for investment, any cash flow you may get from the property will probably not make up for the buying and selling costs, assuming the property’s value remains stable. The net result is a capital loss of at least the amount of transaction costs.

Therefore, buying real estate solely for positive cash flow is a very difficult strategy to execute successfully.

So, how can you profit from owning real estate?

There are two main methods to profit from real estate:

Method #1 – Buy and hold for appreciation.

The best description of this is a from a real estate speaker named Dave Stech, who said:

You buy real estate for capital gain and the existing cash flow is the GLUE that holds the deal together [until you can sell the property for far more than you paid for it]

Method #2 – Make changes to the property and resell for a profit.

This is essentially the flipping model. You make changes to solve problems or add enhancements to the property, which then “force” the property to appreciate in value.

Are either of these methods of profiting from real estate easy?

The answer again is NO, but they can be done.

So, what is required to profit from real estate?

For the flipping model you need to be able to acquire properties below the market price, factoring in any necessary repairs.

In the hold for appreciation model you need to be able to determine the pricing of real estate over the next 5 to 10 years for a given market. Once you have a market that will appreciate and you can acquire a property that “pays for itself” (where its cash flow covers the holding expenses), then you may have a winning real estate investment.

In the next post we’ll examine the numbers of real estate cash flow.

Be Sociable, Share!
Tags: , , , , ,