Your first goal as an investor is to generate cash flow. Your second goal is to create capital growth, or equity appreciation. As your equity increases, you can borrow more to acquire more real estate.
So let’s assume you’ve purchased a property such as the one I spoke about in my previous post, the Indianapolis property. You have some equity, and you’re generating great cash flow. Now you have two options:
- Hold onto it forever and just keep the cash flow. As the equity increases over time, you can potentially leverage it to buy more deals by refinancing or getting a second mortgage. Or, you can just pay off the mortgage and enjoy the cash flow.
- Within a few years, after the property has increased in value, you can sell it to cash out, then use your cash to purchase another, bigger property.
Let’s say you go with the second option to leverage your first property to build your portfolio. We’ll assume the market appreciates well, and after three years of enjoying several hundred dollars a month of positive cash flow, the property is now valued at $120,000. You owe about $60,000 on your mortgage, so you have about $60,000 of equity.
You sell the property and, after paying closing costs, you walk away with $50,000. And in the meantime, you’ve saved more money and you have an additional $20,000 cash. You leverage your cashed-out equity and your savings to purchase a deal like this one, which I purchased in Orlando:
Triplex in Orlando, Florida
Purchase Price: $310,000
Loan Amount (80% LTV): $248,000
Down Payment (20%) plus Closing Fee of $10,850: $72,850
Building Size: 2,379 sq. ft.
Price/Unit: $103,333.33 (Per Unit Price)
Anticipated Gross Annual Income: $44,570
Operating Expenses: $10,470 (utilities, property taxes, insurance, maintenance)
Annual Mortgage Payment (80% LTV): $13,020
Total expenses: $23,490
NET ANNUAL CASHFLOW: $21,080
NET MONTHLY CASHFLOW: $1,756.67
Congratulations! You’ve leveraged your first deal, of $520 per month cash flow, to create $1,756 per month!
Of course, you don’t have to stop there—you can keep leveraging up over the years. It’s this ability to continually leverage into bigger and bigger properties that makes real estate so compelling and lucrative.
It won’t be long until you’re ready to buy your third property and keep moving toward 5 Day Weekend freedom. And, then your fourth. Over the years you’ll be building your personal balance sheet with value assets. Cash flow is your priority, but assets that continue to appreciate over the long run are a wonderful byproduct.
In my next post, I’ll introduce you to some actual 5 Day Weekend stories from people like you who found a new freedom.
In the meantime, I’d love to hear from you about your real estate deals, or your intentions and planning to enter into real estate investing. Have you seen anything that might work for you as an investment? Thank you for sharing.
Secure your copy of the “5 Day Weekend” book. 5 Day Weekend: Freedom to Make Your Life and Work Rich with Purpose [Nik Halik & Garrett Gunderson]
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