Understanding Cash Flow Strategies and Private Money Investors (VIDEO)
Have you ever wanted to increase your cash flow by using others people’s money? Keep reading. Investors are usually much closer than they realize. I want to touch on an investment strategy that is near and dear to me that might help you get there.
Increase Cash Flow by Using Simple Strategies
Several of our private money investors have used one simple strategy to increase their monthly cash flow. In fact, one of our investors implemented this one strategy and was able to retire. She got bored and is working again but now it is for fun! One of our most trusted advisors, who happens to be an attorney, gives this advice to clients and I use and have used it with tremendous outcomes.
I want to get started by being very clear of my intent. I am not telling anyone to run out and do this. In fact, this might not be the right strategy for you at all. I am not trying to give you legal, tax, or investment advice. I am simply sharing with you what I do and what I have seen others do, with some success. The love leverage, but whenever you use it you are taking on additional risk, and that should be a consideration before implementing any new method.
Cash Flow and Rentals
If you currently have a rental portfolio there is a good chance you have built up some equity over the last few years. I am absolutely amazed at the values in some neighborhoods where I own property. For example, I own a few properties in Northern California, a starter home area with good rents. A few years ago we could easily find houses in this area for under $100K. A few years before that, I purchased two for under $70K each. I have an appraisal sitting on my desk right now for a client that is doing a flip in this area for $180,000.
This report is from an appraiser that has proven to be accurate over the years. If the values of these really are in the mid to high $100Ks, I have some equity and some options to consider. Some people love equity and it makes them feel good to have it. In fact, it is some people’s goal to actually pay off their houses. I feel strongly that this is a poor growth strategy for most investors. When I have this conversation with them, they tell me the reasons they want to do that, which almost always includes increased cash flow.
Cash Flow and Low-Risk Approach
I will typically share my opinion and change the topic so that we remain friends. What almost all my conversations have in common is that the people who are trying to pay off their rentals agree that the equity in those houses is producing a zero percent return. The equity itself is not helping them accomplish their goals. I understand the good feeling that comes with the low-risk approach of paying off your properties. If that is more important to you than growth, it is something you should do. With that said, if you have some risk tolerance and understand it, you may consider putting that equity to work.
There are two ways to access equity. You can pull it out in the way of a loan and keep the property or you can sell. In a hot seller’s market, it might actually make sense to sell, so that is certainly a valid option. Whether you decide to refinance it or sell it, what your plan is with the money is vital to your decision. If you don’t have anything to do with the cash and plan to stick it in the bank, then don’t do anything. You need to have a plan and the ability to generate returns in excess of what you can borrow.
Many Investment Options Are Available
The difference between what you can earn and what you pay for the money needs to be significant enough to justify the additional risk. Let’s say you purchased a property in Aurora North several years ago and owe less than $50,000 on it now. Also, assume that it is on a good street out there and that this appraisal on my desk is accurate, meaning your house now might be worth $180,000. Let’s also say that you can only borrow 70% of the value meaning your maximum loan is about $125,000. That gives you $75,000 to put to work on this one property. I don’t have a good reason for this, but whenever I leverage to create cash flow like this I like to see a minimum of a 3% spread; anything less than that and I typically won’t do it.
You have many investment options, but if you want to stay in real estate you will most likely either look for another rental property or get into private lending. Another rental is likely a fantastic option for you, but with it being so tough to find them, it might make sense to get into private lending now while you wait for the market to shift again. With private lending, you should be able to earn 8% or more.
Increase Monthly Cash Flow
If you are working with a professional, 8% is probably in the ballpark of what you should expect. If you are doing this on your own, you should be able to get much higher than that. For this example let’s use an 8% return, knowing that you should get at least that. With your one little property and the $75,000 you were able to access, you can increase your monthly cash flow by almost $200. This takes a little work up front and then is on autopilot- spitting out cash until you tell it to stop.
- $75,000 * 8% /12 months = $500.00
- $75,000 *5% /12 months = $312.50
- $500 – $312.50 = $178.50 each month
This is one strategy for a smaller house. This, of course, also assumes that both loans interest only to keep the math simple. What if you are able to borrow money for less than 5%, or invest it for more than 8%? What if you have more equity or can borrow more? If you have two or three or more properties you can do this with? This might sound funny, but you can also use this additional cash flow to pay off other higher-interest debt, which of course would further increase your monthly cash flow. There are a lot of advantages to getting a little more creative and setting yourself up to have passive income.