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Archives for July 2019

Positive Cash Flow In Real Estate 101: Definitive Guide

Building wealth is not an easy concept for most people to grasp. You’ve probably heard a lot and read plenty about investing, but a lot of it sounds like it is out of reach. Like most people, you likely also feel like you have to have money to make money.

While the unfortunate cycle is true, it’s also something that can be broken by following different investing strategies. When it comes to real estate, generating a positive cash flow can be exceptionally difficult, so we’re going to try to simplify the things that you’ll need to do to get started.

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Defining Positive Cash Flow
Why Positive Cash Flow Is Important
You Could Be a Landlord
At the End of the Line

Defining Positive Cash Flow

Photo of US dollar bills on soil

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Positive cash flow is more than just generating profits. In business, you need to have money to pay employees, buy new assets, and cover associated costs. That money comes from money that had been invested into your venture or money that has come in via sales or other receivables.

Cash flow refers to the amount of money going into and out of your business to keep it running. A positive cash flow means that your business is bringing in more money than you’re putting out. A negative cash flow is where your business is making less money than you need to cover your base operating expenses.

Profitability is something that is typically measured at the end of a fiscal year. It is the leftover funds that remain after every single expense has been paid. If there are funds left after breaking even, then you turned a profit. If you’re short on funds for the year, then you’ve experienced losses.

Why Positive Cash Flow Is Important

When it comes to real estate, positive cash flow is critical to keep the real estate business moving. There is a constant influx of money as well as an outflow as people buy and sell all the time. It’s one business that seems to have a steady movement which is why people are tempted to invest in real estate.

Creating a positive cash flow is different from your household income. It seems a little counterintuitive, but you have to look at them as two different things. One is all about the money that you have to live off of, and the other is all about your business.

As housing needs change over time, you may also experience negative cash flow from time to time. When you have positive cash flow most of the time, it's assurance that you can make it through the bad times without worrying about meeting obligations.

Understanding Household Income


The gap continues to grow and become more significant between the levels of income a person is liable to make. It doesn’t help that the median annual household income was $60,336 back in 2017. According to the U.S. Census Bureau, that marks the fifth year where there was an increase in household income for the entire nation.


While that sounds promising up front, there is so much more to be considered. You’ve got areas across the country that skew that number to make it seem so much higher than it is. Also, when you take into account inflation, the country is experiencing the highs in income that were last seen in 2007.


The recession hit in 2008 and household income took a sharp drop over the following years. As recent as 2012, the total median household income was between $54,000 and $55,000. Over time, the economy has bounced back, but inflation keeps people living paycheck to paycheck.

Simply having a living wage is hard, so what is someone to do to begin to generate a positive cash flow when funds are limited?

Understanding Real Estate Leverage


Real estate offers you more leverage than most other investment opportunities. You can invest without having to pay the entire mortgage cost. Let’s put it another way - imagine that you’re buying stocks. To buy, you have to pay the whole amount up front, right?


It doesn’t work that way with real estate. You only have to pay a percentage of the home to be in complete and total control of the property and all of its associated assets. This, again, relies on creditworthiness as well as your debt-to-income ratio, but you may qualify for a mortgage with a minimum percentage down.


Real estate flippers use this leverage to take out multiple mortgages that are also known as home equity loans to put down another payment on a different property. The options at this point are to either rent the property out to a tenant or to sell the property for a profit.


As long as you have a tenant in your property or you’re selling properties, you stand to have a positive cash flow and a self-sustaining, budding real estate business in the making. It will take some time, but it can be done with wise investments and good financial sense.

Leasing With an Option to Buy


When you have no money to speak of that you could use to begin investing in real estate, this is the first option you want to explore. To go this route, you need to find a seller that is willing to lease their property to you with exclusive permission to buy it after a pre-determined amount of time.

Photo of a hand with keys

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Going this way means that you don’t have a closing to attend, but you do have a contractual obligation to make payments and eventually purchase the property. The next step would be to find what is called a tenant buyer.


A tenant-buyer is someone whom you grant the exclusive right to Option a given property for a price for a limited amount of time. There is typically a non-refundable deposit for this opportunity, and that deposit is yours. 


The tenant buyer then pays a set amount on a monthly basis. Typically, this should be between $100-$200 higher than the leased agreement you have with the buyer. It’s for two reasons. One, you build up money to cover any unexpected expenses if the tenant-buyer ends up leaving and tearing up the house.


The second reason is that if you don’t need to use the funds to cover expenses left by the tenant-buyer, then that money becomes yours. Keep in mind that with this approach, there is more risk involved, but it’s a decent starting point if you don’t have money to use up front.

Option a Property Instead


This method is a little trickier, but it can work wonders to make you some quick cash if done correctly. With an Option, the seller gets to continue living in their home until you’ve decided to buy it. You are also not responsible for making monthly payments in this scenario. Here’s how it all works.


Motivated sellers live in the home, taking care of payments and maintenance until the home is sold. This is a situation that may occur if they simply want to sell but don’t want to deal with typical real estate transactions, closing costs, etc.


Instead, these sellers simply want to get out of their home for a variety of reasons. One of those reasons is foreclosure. You can choose to Option a house that is behind on their payments if you can buy it in a shorter amount of time.


The other way to Option a property is to get a set time frame to buy a seller’s house and then find a buyer that is willing to pay more than you have the Option set at. Going this route will get people that are either paying in cash, or they can qualify for a loan on their own.

Wholesale Sales


You may think that it’s impossible to sell a home or buy a home at a wholesale price, but that’s not entirely accurate. It will take more work on your part to find them, but going this route can gain you lots of money very quickly.


The success of investing in real estate this way can also depend on whether or not you have extra cash to make it happen. Money isn’t always required, though, so it could work even if you don’t have money available.


Your focus here is on foreclosures that belong to banks. The way it works is that you have to accurately appraise a property value and buy it low to then sell at a higher price. The beauty of this technique is that you don’t necessarily have to fix anything either.


It’s not unheard of to do this with private sellers without money, but you’ll be more successful with money and going to a bank. Banks do require proof that you have funds available before considering your offer, so this may be a step better left for once you do have a positive cash flow coming in.

Up-and-Coming Neighborhoods


This may or may not be limited by your finances, but it is certainly limited by your credit score. If your credit is excellent, you may be able to invest in budding markets and flipping houses. That means identifying new areas that are just starting to build themselves up.


Over at Forbes, there is a neat tip that gives you an idea of how to figure that out. The author says that he would ask new and young residents where they moved. More often than not, they would mention a neighborhood that he was unaware of.


The follow-up question was whether or not more young people were moving into that same area. When the answer was yes, it signified an investment opportunity. Property values rise as earning power does, so with this group of people, demand increases while wages do, too.


If you can get approved for a home loan and flip the house for a higher amount quickly, you’ll start to make money back and therefore generate positive cash flow. Now, there is always the risk that you won’t be able to sell it right away, so you’re best off with having some cash to pay the mortgage while you’re biding your time.

Real Estate Investment Groups


Working with a real estate investment group is a great starting point for a beginner investor. You do need to have access to some sort of financing which again relies on creditworthiness and debt-to-income ratio.

Photo of two person shaking hands

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Getting involved with a real estate investment group also means you don’t have to be a landlord, so the mundane tasks become something you don’t need to worry about. It’s also a great choice because you will still receive some sort of income.


According to Investopedia, real estate investment groups are like mutual funds. A company will build or buy apartments or condos. That same company then allows investors to buy the units by going through the company. The company then handles the day-to-day operations like managing the units, maintenance, advertising, and taking care of the tenants. 


The company keeps a percentage while the remainder belongs to the investors. This kind of arrangement makes it incredibly safe for anyone to get involved in real estate investment. In a properly run real estate investment group, a company will also pool the rent to maintain coverage even if there are the occasional empty units.

You Could Be a Landlord

Photo of a man in suit near a body of water

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For some people, this is the way to go. You do need some capital up front for financing as well as maintenance costs that you’ll have to cover before renting out a property. You also need to make sure you have extra funds for those times that the unit sits vacant and to pay for repairs that a tenant will eventually need.


Rental properties are an excellent source of income assuming everything works the way you want it to. On the other hand, maintaining them also demands more of your time and energy unless you decide to hire a property management company to oversee your property. If you do that, then you’ll also lose a portion of your cash to the company.

Of course, on the bright side, if the property is completely paid off, then the majority of the rental fee goes in your pocket. If you want to go the rental property route, then you do need to be prepared to do it as a long-term investment.


Another perk of having a rental property is that real estate tends to appreciate over time. That means that at some point, you will be the proud owner of a valuable asset. Even when the housing bubble burst back all those years ago, the dip did not last and had since continued to increase.

At the End of the Line

Even if you start with nothing, your cash flow will increase as you advance in real estate investment. Your life will also improve as you move forward with the positive cash flow because you’ll have a greater amount of money to pull from as needed.


Your debt-to-income ratio will also improve because your income will grow while your debt remains manageable under your ever-changing revenue. That means your creditworthiness will also improve because you’ll have the cash to manage your personal debt.


Understand that true mastery in real estate investment is not a get rich quick scheme. People that try for that tend to be disappointed because it takes more work than they thought. Don’t forget that the first check you get might be on the smaller side, but it’s a start.


Take the time to learn the business and make it work for you. Just give yourself some grace and don’t expect the impossible. Soon enough, you’ll be a real estate investment pro.

​featured image source: pexels.com

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8 Questions to Ask When Buying a House

You’ve started looking into what it takes to buy a home, but you’re not sure about the nitty-gritty details. That’s when you start trying to figure out what questions to ask when buying a house.

Quick Navigation
What Questions To Ask When Buying A House?
1. What Is the Home’s History?
2. How Much Can I Afford?
3. Am I Fiscally Prepared?
4. What Should I Offer?
5. What Makes My Offer More Appealing?
6. Can I DIY My Way Through the Offer Process?
7. What Are My Mortgage Options?
8. What Exactly Are Closing Costs?
A Few Final Thoughts and Questions

What Questions To Ask When Buying A House?

There is some specific information you shouldn’t bypass to keep you feeling in control to know you’re making the right decision when you find the house you want. Ask questions, get answers, and ideally, you’re going to end up with the right house for the right price, too.

1. What Is the Home’s History?


This question is an important one to ask because looks can be deceiving. What if the previous owners had painted over a water damaged wall instead of taking care of the problems and only did it to make it look good? What if there was mold under a perfectly plastered wall because they didn’t take care of the issue?

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Those things happen, and they’re painful to fix after the fact. Because of that, it’s good to know the history of the house. You always want to request what is called the Comprehensive Loss Underwriting Exchange report because it contains any and all claims that may have been filed.

Couple that with a quality home inspection and you’re going to be better off getting the whole picture of what comes with the house. Of course, if it’s a brand new home, you shouldn’t have the mold issue to worry about, but still, don’t skimp on the 

2. How Much Can I Afford?


This is among the trickier questions to ask when buying a house. You may get approved for a higher amount than you can comfortably afford, so this becomes a case of just-because-you-can-doesn’t-mean-you-should. 

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If you haven’t been pre-approved before looking, then chances are you don’t know what you can afford. There’s nothing wrong with not knowing as it is a common misconception among potential home buyers.

On the other hand, if you do know what you’ve been pre-approved for, then you also need to consider any other payments that may pop up as a result of buying a home. Examples include possible renovations or installation of flooring that you weren’t planning to do.

Appliances can also impact affordability. Consider whether or not you want to or need to purchase appliances when you buy a house. If you include them in your budget, then you’ll be ready to handle the expenses even if they are unexpected.

3. Am I Fiscally Prepared?


To be fiscally or financially prepared, you need to know if you can close on the home of your choice. That’s where getting pre-approved on a home purchase along with having good credit becomes critical to finalizing your decision.

A preapproval shows both you and the seller that you’re serious about buying a home and that you have the financial capacity to handle a house payment. A credit score is especially important, too, in getting pre-approved because specific issues on your credit can automatically disqualify you for a mortgage.

When in doubt, one of the first things you do is to get your credit report in order. That means checking for anything that could impact your credit like debt collections or other outstanding issues.

4. What Should I Offer?


Knowing how much to offer may be a little more than a guessing game. If you don’t offer enough, you could very well lose the house to another offer. If you offer too much, then you may pay more than you needed to purchase the home.

You'll need the experience and expertise of your real estate agent when you're trying to figure out how much to offer. Your agent should be able to tell you the selling prices that other homes in the neighborhood are going for. You’ll want to compare homes that are similar, look at their lower and higher market values, and come up with a comparable offer.

Pricing the home correctly will give you a better chance at having your offer accepted. It also gives you the opportunity to be prepared to counteroffer if necessary. Having someone guide you through the process will help, so you know when to make an offer or to keep looking.

5. What Makes My Offer More Appealing?


Depending on how competitive the market is, you may have to get creative on how to make your offer stand out. That can include writing a personal letter or note to the seller that talks about why you want the home. Maybe you’re a grandmotherly type that wants to live in the same neighborhood as the grandkids. Telling the seller your story might be what tips acceptance in your favor.

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If the market is extremely competitive, it’s not unheard of to include hard-to-get tickets to a game or show as part of the offer. Some potential buyers will even wine and dine the sellers in order to attempt to gain their favor. 

Do keep in mind, though, that in some cases, actions like these may very well turn off your seller, so use your judgment wisely and consider your audience. You’ll also want to check the law because in some cases, doing this can also be illegal in some places.

6. Can I DIY My Way Through the Offer Process?


The answer to this is pretty much a no. While there are templates online that are supposed to make the offer process easier, it’s really not the best way to move forward. Remember, there are area-specific laws that are made to guide the entire process, and those forms don’t always take that into consideration.

wondering what questions to ask when buying a house

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Once an offer is accepted, the seller is legally bound to follow through with the acceptance as long as all applicable laws are followed. It’s also important to know that in many states the law says that you have to work with a lawyer to complete the paperwork.

From a legal standpoint, you’ll fare much better if you use someone that is knowledgeable in real estate transactions. Having a good real estate agent can ensure that you have access to everyone and everything you need.

7. What Are My Mortgage Options?


There are several different options when it comes to picking which mortgage is right for you, but to pick your best choice, you need to know the jargon, so it makes sense when you hear it. Since everything can be so overwhelming, it helps if you at least have a loan officer that can navigate the rough waters for you.

There is a lot of information to take in and understand from terms, rates, and various other types of mortgages like the ones available from the VA or for first-time home buyers. It’s enough to make your head spin.

With all of that said, make sure you have a loan officer that knows all of this information. Do some research and find one that can give you the best information, so you end up picking the best mortgage with the lowest payment. It can mean the difference of thousands of dollars in savings for you.

8. What Exactly Are Closing Costs?


First off, closing is the time that you meet with brokers, realtors, and anyone else involved to sign the paperwork, saying that you are buying the house. When you sign the paperwork, you’re also committing to how the other associated costs are going to be paid by either the seller or buyer.

As an example, there are sometimes attorney fees that need to be paid at the close of a deal. There are also fees or commissions that must be paid to the realtor for the job they did in helping you find the home.

Don’t forget title insurance or mortgage insurance as required. Keep in mind that, in most instances, if you put down less than 20% of the total cost of your mortgage loan, you’ll have to purchase mortgage insurance which is also due at closing.

A Few Final Thoughts and Questions

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There are several other questions to ask when buying a house, but they’re a little more outside-the-box as opposed to the ones previously presented. Ask if there are pets buried in the backyard, so you don’t find unpleasant surprises. 

You may also want to ask if the house is haunted or was home to a murder or suicide which can lower the property cost. It isn’t required to disclose something like that, so asking may be the only way to find out.

Don’t forget to request warranty documentation along with any other paperwork about infestations or water damage, too. Once you ask all the questions and get answers, you’ll feel great knowing that you have all of the information you possibly need to make the right decisions when buying a house.

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