What is the secret formula for escaping the rat race and becoming financially free? Well obviously, your passive income must exceed your expenses. In Robert Kiyosaki’s Rich Dad Poor Dad, he discusses how the game of monopoly explained the way to wealth. In the Monopoly board game, 4 green houses are turned into one red hotel, right?
Well, let’s apply this to real estate. As one former mentor of mine stated, you use the 4 green houses as your “deals” to generate cash then converting that cash into a red hotel, which is in turn your “cash flow”. The red hotel could be a bigger deal like an apartment, an office complex, even a business, or anything that can earn money while your not physically there.
As an investor you should never focus on holding properties starting out to build wealth. Many of the late night infomercial gurus tell you how easy it is to cash out at closing and how easy it is to create cash flow in real estate. I want to inform you of something they forget to leave out: Single Family Homes are not designed for cash flow!!!
They are designed for one thing for investors – to generate cash. You should first focus on building a system in order to flip these types of deals so you generate cash. Then and only then, you should turn to invest the cash into a bigger deal for cash flow.
The benefit of this strategy is two fold.
First, this allows you to do deals without risk, while you learn the market. This way you learn your market and make money at the same time without getting in over your head with vacancies, tenants, and property management.
Next, and more importantly this allows you to build cash reserves for your business. In the early years of my career, I made the mistake of attempting to build wealth before I had cash on hand. I focused on creating passive income from Single Family Homes and here’s how the typical deal went.
First I would buy the property using my own credit. Mistake number one. Next, I would look for a tenant buyer to buy the property. So, usually within 30 days, I would find this tenant buyer. Now, after I had a tenant buyer in the property, I would make, at best around $100 – $150 per month. After a few months, my tenant buyer would move out or I’d have to evict or something dramatic always seemed to come up. Now after the tenant buyer would move out, I would have at least $3000 in expenses for fix-ups, clean ups, and miscellaneous expenses. Therefore, it would take 30 months before making my money back from that one person that moved out.
This is a simple example that doesn’t include vacancy rates, showing the property, any ads to re-sell the property, and more importantly the energy that it sucks out of you. After you have cash on hand, you may decide that you want to experiment with lease optioning houses for cash flow if you’re in a market that is climbing in values. But if you take this step before you have the necessary cash on hand to run your business, then its just plain ole financial suicide! I’ve seen more real estate investing businesses go under from making this HUGE mistake.
Thank goodness there’s a better formula to escape the rat race. And here it is, in detail:
First, generate cash through flipping homes to replace your current salary or income from your job.
Then, continue to flip homes to generate enough cash to invest with.
Finally, begin to look for larger deals that will bring cash flow whether it’s a business, apartments, or office buildings with the cash that you have on reserve.
Take these steps to build wealth and you’ll avoid the many problems and headaches that many new investors experience from owning real estate that keep them from attaining financial freedom.