Safe Secure Investment Gains Require Slow Reasonable Decisions – Together This Creates Cash Flow

Investors should seek strong gains. Not only this, they should seek a strong secure position. Unfortunately, we are often tempted to get in a hurry to earn better returns or capture more income. As a result, our investment go south costing us cash and giving us anxiety Avoiding this result is relatively simple to avoid. First, if the opportunity is too good to be true, then you should conclude that this is the case. Not only will you protect your investment capital, but you will save a lot of time. Second, even if the results are proven, but they are too outsized then you should assume that the opportunity carries too much risk.

With these thoughts in mind, some simple maxims should govern how you invest in real estate in my opinion:

1. Buying with no cash down is a risky premise because debt is risky. Proverbs states that debt makes the borrower the slave of the lender. Whether you are a Christian or not, this premise is a good place to begin. So, if you use debt, keep the leverage very modest. Don’t try to pump up the return percentage with excessive leverage. Protect your investment by keeping the leverage at a level that will protect you from value changes and will enable extending any debt easily regardless of changes in the market.
2. Invest for cash flow. Place enough equity in your investment that the property returns reliable cash flow after debt service and expenses every month. The way to measure this is to consider what will happen if the occupancy drops substantially for an extended period of time or you have extended vacancy for a single unit rental, will you be able to meet costs or recover quickly once the unit is filled.
3. Maintain a strong reserve. If the property is a single unit, hold reserves to support the property for several months should it become vacant (6 is a good plan) and also account for needing potentially drop the rent because of market changes. Have cash on hand for a major unexpected repair or replacement cost that is not covered by insurance or must be advanced before insurance is paid.
4. Pay or accrue taxes and insurance in order to be able to pay current at all times.

Taking these steps places the investor in a very good position to work with lenders and investors in good times. Combined with the long term appreciation rentals have traditionally enjoyed and that market conditions are poised to deliver, you can expect strong returns, safe cash flow, and peace of mind.

Blake Ratcliff owns and operates residential property. Blake founded the International Residential Real Estate Investors Association (IRREIA) for investors in 2010.

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