Buying Real Estate for Cash Flow: How the Pros Do It

This is the fourth post in the series Buying Real Estate for Cash Flow.

So far we’ve looked at real estate cash flow, the real financial numbers, and the pro forma. Most of the information presented so far shows that generating positive cash flow income from real estate is very difficult. Surely there are some people who do it. Yes, there are.

How do the pros create positive cash flow in real estate?

The pros do it differently vs. the typical real estate investor. The pros likely don’t buy off MLS at full retail price; instead they tend to buy off-market properties well below the market price.

Let’s look at two different examples of professionals I’ve run across who do generate cash flow from real estate and let’s see how they do it.

Super Star Real Estate Agent

This super entrepreneurial real estate agent works a defined market and is the number one agent in the market, selling millions of dollars of properties each year. He often represents both sides of the transaction because he is so visible in the market. The sellers choose him as their listing agent because he’s the top producer, and the buyers come to him because they see his signs and marketing everywhere so they assume he’s the best.

He does buy properties in his target market for long-term holds. The properties he tends to buy are from distressed sellers who call and say something like, “I need this sold now! What can you do to get it closed this month?” From there he may make a cash offer for the property; if not, the worst that happens is he gets the listing and generates a commission down the road! These properties tend to owned by out-of-state investors who incorrectly rely upon property managers to treat the property as if they owned it. Instead, due to mismanagement the property is hemorrhaging cash, which makes it very painful for the owner to look at the numbers each month.

Our super star agent then acquires the property at a cost basis far below the market price (it doesn’t hurt that he “saves” the real estate agent commission), so he has a built-in cushion (margin of safety) should he need to sell and he can afford to offer lower rents to prospective tenants to remain 100% occupied.

Of course, this super agent / investor also has his own management staff to handle his properties as their first priority, so his properties receive the best management possible.

Grizzled Veteran with 40 Years Experience

This long-time real estate investor is a true veteran with 40 years of experience investing in real estate. He works a reasonably wide market of 3-4 cities within a large metropolitan area. His target property to own for cash flow is older 200+ unit apartment complexes.

The veteran currently oversees around 1000 doors in the market that have been acquired over time. He primarily buys properties that are older, have been neglected by absentee owners, and are referred to him through his network of probate attorneys. With so many years of experience building his network, he sees many deals and gets the best ones before they go on the market for everyone else to see through the MLS.

The typical seller is a family who just lost grandpa who bought the property many years ago and managed it himself, although less so once he got older. Now the heirs just want their money quickly because the property is bleeding cash and thus their inheritance. So the probate attorney doesn’t want to take a lot of time and just calls the grizzled veteran, who will view the property within 24 hours, present an all-cash offer and close by the end of the week.

The veteran’s strategy is to fix up the property and manage it so that it is the best property in the neighborhood with the highest occupancy rate. After a few years of positively documented financial statements, he’ll sell the property for a huge gain and roll the money into two new properties.

Where does he get the money to buy a million dollar property within a week? From two sources: (1) his network of out-of-state investors who have worked with him in this model for the past 20 years; (2) proceeds from prior properties sold.

When I toured a property he listed for sell, I was shocked at how good it looked (easily the best in the area) and how well it was managed.

Here’s a picture of the property from the street in what is a very mediocre “C” class neighborhood.

Apartment building front lawn

Here’s a picture of the property sign.

Apartment building sign

I took lots of notes on how well the place was managed but I’ll give you just one example. The make-ready work inside the vacant unit was perfect. Not a speck of dust or chipped paint anywhere. It smelled great too; I almost wanted to move in.

This real estate veteran is very hands-on with his properties. Although he doesn’t manage them day to day, he does make sure to drive by and visit every property EACH week.

Summary

The real estate pros invest differently than the average investor. The pros acquire properties at costs below today’s market price and have the experience, network, and team to put themselves in a position to produce positive cash flow in their target market.

P.S.

Do real estate brokers sometimes keep the best deals for themselves or their own buyers?

Of course!

It does happen. It will happen. What are you going to do about it? The question is: how can YOU get on the inside?

Do probate attorneys refer deals to their friends for a quick sale that benefits everyone?

By now you know the answer is – absolutely!

If you are not on the inside, you’re on the outside.

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