Invest for Appreciation, Not Cash Flow

There are plenty of ways to lose millions investing in real estate.  But, investing for appreciation and not cash flow has got to rank very high on my list of sure fire ways to lose a bundle.

I’m a big country music fan.  George Strait is one of my favorite artists.  He had a hit recently called “I Hate Everything”.  A friend of mine (I’ll call him Roger) and I were at a local bar discussing real estate investing recently.  He bought three houses in 2006, one of them in Arizona and the other two in New Mexico.  He told me that he’s losing over $1,100 a month in negative cash flow and the value of his properties are down over $100,000 because of the housing bust.  Roger went on to say that he hates real estate investing.  He said he has no interest in buying rental property again, doesn’t want to learn any more about real estate investing and would like to change the subject immediately.

 At that moment I couldn’t help thinking about the George Strait song.  He sings, with passion, about hating his job and life.  My buddy Roger hates real estate investing with the same passion.  So I asked him, “If your rental properties made you $1,100 a month, would you still hate real estate investing?”  He said no, of course not.  Then I asked him if he would care that his portfolio lost $100,000 if he was receiving net cash flow of $1,100 per month.  He gave me another no answer.  That’s when I made my point…there is never a wrong time to invest in real estate, only a wrong way (I stole this line from a mentor of mine and he probably stole it from someone else.)

 Robert Kiyosaki likes to say that if you own something that costs you money it is not an asset.  In 2006, I owned $16 million in single family residential real estate that was costing me over $30,000 per month (this included overhead expenses.)  Talk about negative cash flow.  At the time I was overcoming this huge deficit by “cash chunking”, a term a real estate investing colleague of mine named Sue Walker introduced me to.  I’m sure you’re familiar with the concept of cash flow…your assets generate income through rent payments, interest, etc.  Well with “cash chunking” you sell your assets periodically to generate income. 

 Little did I know that the housing bust was looming and median home prices were about to plummet.  It was about this time that I learned another important lesson…real estate is not a commodity; it is an investment (I stole this one too from a hard money friend of mine and I’m certain he stole it from somebody else.)  Once it got tough to obtain financing my “cash chunking” business quickly went out of business.  In order to sustain a full-time real estate investment business model you need a reliable, consistent cash flow stream that doesn’t involve selling illiquid assets that you hope will appreciate.  This is very difficult to do. 

 In my search to learn how to do it better next time I made a surprising discovery.  The best and brightest in real estate investing have a cash flow producing business of some kind to cover negative cash flow and potential losses.  For example, Robert Kiyosaki is in the education business.  He uses his profits from his business to invest in real estate.  I have a friend who owns a property management company.  He devotes a portion of the cash flow he generates from his fees to buying rental property.  In your case your job may be your source for cash flow.  My point is get the cash flow business going first, the real estate investing business can come later.

 And if you’re like me and went from “cash chunking” to blowing chunks, remember what Henry Ford once said, “Failure is simply the opportunity to begin again, this time more intelligently.”

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