Start by creating a long range plan
In creating a long range plan for investing in real estate, you should consider how best to leverage any and all rental properties you may acquire. After you successfully start with purchasing your first rental building (this assumes you are, and should be, in a positive cash flow position), you’ll want to utilize the equity from the first property to help with the acquisition of your second property.
This “rolling over” of your equity in your first property is what helps give real estate a distinct advantage over other forms of investments. Your ability to leverage each property you own to aid in the acquisition of the next property is crucial to successful real estate investing.
How to leverage successfully
By laying out a long range plan, complete with your property investment goals for a 5, 10, 15 and 20 year period, you can see on paper how often you’ll need to purchase a rental property. This timing pattern is important for you to feel comfortable with accomplishing. It also creates a written “agreement” with yourself to adhere to. As an ambitious, but simplistic example, let’s say you propose to acquire one rental property each year for the next 20 years. Each property must throw off positive cash flow. If they don’t, your plan will have to either be adjusted to a different acquisition timing structure, or you’ll need to sell off the underperforming (read: negative cash flow) properties as you learn more about why they’re underperforming.
Work with only one lender
Next, you’ll want to have a good working relationship with one mortgage broker/lender. Someone you can talk to about your plans ahead of time, and who will essentially become your partner over the long haul of property investing. Working with just one lender will create a kind of lovely business shorthand – one in which there’ll be no need to continually explain what you are trying to do with each refinance of your investment properties. You’ll also be able to create a long history with one lender – thus increasing your credit rating, trust and potentially yielding better long-term mortgage interest rates, as well as greater loan-to-value ratios than your lender’s norm. Never underestimate a bank’s desire to work with the same, consistent borrower over and over again. Many benefits will accrue to you over time by doing so.
In the above example, after you’ve purchased your first property, it will be time to acquire your next one in a year’s time. After you’ve located the next one (and have crunched your numbers as to what you feel it’s worth to you), go to your lender and discuss what equity you can reasonably pull out from your first property. Then back into the amount you’ll have to cover “out-of-pocket” to make the second rental building purchase a reality.
Long term progressions…
In the same way, by the time year three rolls around, and it’s time to purchase your next investment property, go back to your lender to discuss the possibility of “packaging” both your first two properties, pulling equity from both of them, either by refinancing both mortgages, or adding a new mortgage to just the second property. In this way you can help pull out more cash for the down payment on your third “installment” of your rental property long range plan: your third rental building purchase.
So by now you can start to see the progression this “rolling” of your properties is taking, as you and your lender are always re-evaluating what your current stable of properties will fetch in terms of equity. The fourth year, you do the same thing – locate your next purchase, go back to your lender, and see how much equity your “package” of investment properties will allow – either individually refinanced, or as a group. In this way you can determine how much you’ll have to put in to the next deal out-of-pocket.
After several years in this example, you can start to realize the ability to invest in properties without putting in any cash on your own . You’ll simply be leveraging the equity in each and all of your stable of investment properties, and utilizing that equity to enable you to acquire even more properties. In this way, you can build your own real estate mini-empire – at least one that may throw off a sizeable amount for you to some day retire on.
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