Let’s get one thing straight: Real estate investing isn’t a get-rich-quick scheme. If you think you can just waltz in and start raking in cash without a solid game plan, you’re setting yourself up for a financial face-plant.
When I first started my real estate journey in Australia, I quickly built up a massive portfolio that was draining me dry. Many potential investors get confused by portfolio size and income—just because you own investment properties doesn’t mean they give you income. It’s easy to own 10 properties but still be in the negative each month, and that’s the point I’d reached.
I was sold on the idea that real estate prices always increase over time, and I should target appreciation. But here’s what most property gurus won’t tell you: Investing based on speculation is extremely risky.
But that wasn’t my first mistake. That was not having an end goal. I didn’t have a strategy behind my investments beyond acquisition and the hopes that maybe one day these properties would be cash flow positive. I ended up in a place where I was constantly chasing my tail and trying to service these properties—and I wasn’t getting any richer.
My Biggest Mistake: Investing Without a Cash Flow Goal in Mind
Why do we buy real estate? It’s certainly not to say we own a million-dollar portfolio and don’t have any cash in the bank. Most of us aim to supplement income, ditch the 9-to-5, or build wealth to last through retirement. But to achieve any of this, we need positive cash flow.
Do you want $10,000 of passive income rolling in every month without breaking a sweat? That’s a great goal, but you need to plan it out to get there. Break down your financial ambitions into how many properties you need to own to comfortably achieve your goal. Next, create a realistic timeline in which you want to achieve your goal.
Investing without a specific cash flow goal is like driving without a destination. Create a plan for what you need to accomplish every year, month, week, and even day to reach your finish line. No plan, no money—it’s that simple.
Stop Buying Properties Like You’re Collecting Baseball Cards
Buying properties without a clue as to why you’re buying them is asinine. It’s not about the number of properties you own, but how much cash they put in your pocket each month. Forget about future potential—if the numbers don’t add up today, you’re just gambling with bigger chips.
Today, I never invest based on market or interest rate speculation. I find properties that I can turn into cash cows in areas I am confident are stable, which is why I chose Toledo, Ohio.
Start Small Without Leverage
Listen up, because I’m about to save you from making a huge financial blunder. Every time you take out a loan, you are putting yourself at risk. I don’t agree with other real estate investors who promote buying property using “other people’s money.” What will happen if the market crashes or your tenant stops paying, and then you can’t repay your loans?
In reality, most people who encourage you to take out big loans make money when you buy (hello, real estate agents). Never trust someone’s opinion on finance if they are making a commission off your purchase.
If you get stuck with a loan (or three) you can’t pay back, you’re going to ruin your credit, and then you’ll really set yourself back.
We’ve seen it happen before in 2007 during the global financial crisis and again with the COVID-19 pandemic: Investors lost billions because they were highly leveraged and invested in markets based on speculation.
After restarting my investment journey in the United States, I built my portfolio by purchasing properties using all cash. Yes, it took longer, and I had to find a market where I could afford properties without a loan (one of the many reasons I chose Toledo), but today I own a very secure portfolio. My properties have withstood the test of the recent pandemic, and I know it will withstand future black-sheep events.
Start small and grow your portfolio organically. This is where your goals come into play. Do you have an extra $50,000 of income yearly to set aside to buy a property? Great—you’re in a better place than most and on target to buy at least one property every other year.
Once you own a few properties, your income will skyrocket. Pretty quickly, you’ll be adding another property each year and get on the fast track to your end goal.
There’s a Time and Place for Debt
Leverage has its place, but only for those who know the ropes, not for someone new to real estate investing. You need to understand the pulse, the very heartbeat of your investment, before even considering leveraging.
When you’re green, you should be scared of leveraging more than you should fear missing out. Real estate is about building passive income, not chaining yourself to mortgages, which can be a ticking time bomb.
You want to ensure that you have enough passive income to cover your debt costs should one or two of your properties go vacant simultaneously.
When you decide to leverage—after you’ve got some real experience under your belt—stay conservative. Cap it at 50% of your portfolio. The other half of your portfolio should be owned free and clear, giving you the cushion you need for when things go wrong.
Build a Solid Foundation, Targeting Cash Flow Over Collections
You don’t start building a house by building a roof—you begin by pouring a foundation. Owning properties without debt is your portfolio’s foundation.
Don’t get caught up in the quantity of your investments. Real estate is more than a numbers game; it’s about generating sustainable income. Invest with a clear cash flow goal, not just for the sake of owning properties. Remember, the true value of real estate isn’t in its price, but in its ability to generate regular, reliable cash flow.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
