Let’s get one thing straight: real estate investing is not a get-rich-quick scheme. If you think you can just jump in and start making cash without a solid game plan, you’ve set yourself up for financial trouble.
When I first started my real estate journey in Australia, I quickly built up a huge portfolio and it burned me out. Many potential investors are confused about portfolio size and income – just because you own investment properties doesn’t mean they will generate income for you. It’s easy to own 10 properties and still be in the negative every month, which is where I’ve gotten to.
I believe real estate prices will always increase over time and I should be targeting appreciation. But what most real estate experts won’t tell you: investing based on speculation is extremely risky.
But this wasn’t my first mistake. There is no end goal in that. There is no strategy behind my investments other than acquisition, and no hope that one day these properties will generate positive cash flow. I ended up in a place where I was constantly chasing my own tail and trying to service these properties – but I didn’t get any richer.
My biggest mistake: Not investing with cash flow goals in mind
Why should we buy real estate? This is certainly not to say that we have million dollar investment portfolios and no cash in the bank. The goal for most of us is to increase our income, escape the 9-to-5 grind, or build wealth to support our retirement. But to achieve all of this, we need positive cash flow.
Do you want to easily earn $10,000 in passive income every month? This is a great goal, but you need a plan to achieve it. Break down your financial goals into how much property you need to own to easily achieve your goals. Next, establish a realistic timeline for how you want to achieve your goals.
Investing without a specific cash flow goal is like driving without a destination. Create a plan for what you need to accomplish yearly, monthly, weekly, or even daily to get to the finish line. No plan, no money – simple as that.
Stop buying real estate like you’re collecting baseball cards
Buying a property without knowing why you are buying it is foolish. It’s not about the amount of property you own, it’s about the amount of cash they put into your pocket each month. Forget about future potential – if today’s numbers don’t increase, you’re just gambling with a bigger stake.
Today, I never invest based on market or interest rate speculation. I found properties that could be turned into cash cows in areas that I knew were stable, which is why I chose Toledo, Ohio.
Start small, no leverage
Listen up, because I’m about to save you from making a huge financial mistake. Every time you apply for a loan, you put yourself at risk. I disagree with other real estate investors who advocate using “other people’s money” to purchase properties. What happens if the market crashes or your tenants stop paying and then you can’t repay the loan?
In fact, most people who encourage you to take out a large loan will make money when you buy a house (hello, real estate agents). If someone takes a commission from your purchase, never trust their word about finances.
If you get into a loan (or three) that you can’t repay, you’re going to ruin your credit and then you’ll be in real trouble.
We saw this before during the 2007 global financial crisis and it’s happening again during the COVID-19 pandemic: investors are losing billions due to high leverage and speculation-based market investments.
After restarting my investing journey in the United States, I built my investment portfolio by purchasing properties using all cash. Yes, it took longer and I had to find a market where I could afford the property without needing a loan (one of the many reasons I chose Toledo), but today I have a very safe portfolio . My property has withstood the recent pandemic, and I know it can withstand future black sheep events as well.
Start small and grow your portfolio organically. This is where your goals come into play. Do you have an extra $50,000 in income each year that you can use to purchase property? Great—you’re in a better position than most, and your goal is to buy at least one property every other year.
Once you own some real estate, your income will skyrocket. Soon enough, you’ll be adding another property every year and quickly reaching your ultimate goal.
Debt has a time and place
Leverage has its place, but only for those who are familiar with it, not for those new to real estate investing. Before you think about leverage, you need to understand the pulse, the heartbeat, of investing.
When you’re new, you should be afraid of taking advantage of more than you are of missing out. Real estate is about building passive income, not tying yourself to a mortgage, which can be a ticking time bomb.
If one or two of your properties are vacant at the same time, you’ll want to make sure you have enough passive income to cover the cost of the debt.
When you decide to use leverage—and after you have some real-world experience—stay conservative. The cap is 50% of your portfolio. The other half of your portfolio should be free and clear to give you the cushion you need if things go wrong.
Build a solid foundation and target collection cash flow
Building a house doesn’t start with a roof, it starts with pouring a foundation. Owning a debt-free property is the foundation of your investment portfolio.
Don’t be bothered by the amount of investment. Real estate is not just a numbers game; it’s about generating sustainable income. Invest with a clear cash flow goal in mind, not just to own a property. Remember, the true value of real estate is not its price, but its ability to generate regular, reliable cash flow.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
