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Why Does Investing in Real Estate Create Wealth?

Aug 17, 2007
When investing in Real Estate, you may choose to buy and rent a property, or you may choose it flip it, buy and sell quickly. The safest way to invest is to buy wholesale properties that are in the sweet spot of the rental market i.e. they are not in the best or worst neighborhoods. The goal is to find an investment property with a good, or great positive cash flow. This is how you will create wealth.

Positive cash flow is the amount of money that is left over after all of the expenses have been paid on the property and what you can put into your pocket at the end of the month. Expenses that you deduct from the rent payments you've collected may include items such as operating costs, taxes, and the mortgage payment. The positive cash flow that one gets from a property will depend upon three different things: the amount of the rent being charged, the amount of the mortgage payment, and the cost of operating the building. To create wealth by investing in real estate, analyzing these three things is crucial.

Using borrowed money to finance your real estate investment is how many investors make a profit. They simply make money off borrowed money. One way to get good cash flow is to make a small down payment on the property, making certain you acquire a mortgage that is lengthy and low-interest. Basically, a lower mortgage payment means you will be getting a higher cash flow.

For example, if you purchase a four-unit apartment building for $125,000 and rent each apartment for $600 each month, you will receive $2,400 a month. Less your mortgage payment of $625 and operating expenses of $300, you should have a cash flow of $1,475. If, however, your mortgage went up to $925 per month, you would only have a positive cash flow of $1,175 each month. The key is to get the lowest payment possible and keep your operating expenses down.

Another method of keeping a positive cash flow is to take out an interest-only loan. This type of loan usually is a short-term loan, usually about a five-to-ten year length of time, in which you are paying the interest only. After the period of the loan is up, you will need to either sell the property or refinance. This, however, does give you a low payment and will help you to get a higher positive cash flow from your investment property.

With a positive cash flow coming in from your investment property, you can use this to help you acquire more investment properties. One way to do this is to refinance your current investment property, using the money you get to help you acquire another investment property and so on. In this sense, you are creating positive cash flow from several properties and you haven't had to pay the capital gains tax on the original property as you did not sell it, but instead, refinanced it to help you purchase more properties.

The most important thing to remember is that if you want to create wealth by investing in real estate, you must maintain a positive cash flow on your properties. By making certain your mortgage payment is as low as it could be, keeping the operating expenses at a minimum, and pricing the rent amounts correctly, you will find that you will not only create a positive cash flow, you will be able to create the wealth you want for yourself.
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