How To Start A Real Estate Investment Business...
That Is A "True" Business
My real estate investment business is a "business" in the true sense of the word. At least based on my own definition of what a business is. What do I mean by that? Let me explain.
If you were to go to dictionary.com and type in the word "business", here are just a few of the definitions you will find...
1. an occupation, profession, or trade: His business is poultry farming.
2. the purchase and sale of goods in an attempt to make a profit.
3. a person, partnership, or corporation engaged in commerce, manufacturing, or a service; profit-seeking enterprise or concern.
And those are just the first 3 of about 20 definitions. As you can see, there are many different ways to describe what a business is. Now, here's my definition...
A business is truly a business if the owner doesn't have to show up and it still makes a profit.
In other words, if the only way a "business owner" makes money is if s/he shows up for work every day, then what they really have is a job. For example, if you are an accountant, and you own your own accounting business, but you are the only person working for that business, is it really a "business"? Not in my books. Why? Well, if you didn't show up for work tomorrow, the business would not make any money. And in fact, it would lose money because the expenses would continue to accrue.
Compare this with a company/business like ExxonMobil. If you went and bought a share of ExxonMobil today, you would become a part owner of that business. Would you get a call tomorrow from the folks at Exxon telling you to come in to work? Of course not. In fact, what you will get every quarter is a nice dividend (ExxonMobil has been paying dividends since 1882) because you are now an owner of the company. That's my kind of business... do nothing, make a profit.
Unfortunately, to "own" an established, well managed business like ExxonMobil you need cash, and you have to pay market value. Most successful business owners on the other hand either started their company from scratch or bought an existing underperforming business. Then they worked their tail off to get the business to the point where it runs and generates profits with or without them.
Every business that I own is built on this model, including my real estate investment business.
Here is an example of one "real estate investment business" that I own that generates a profit with or without my day-to-day management.
About 13 years ago now I bought a 23 unit, multi family property that I knew I could add value to right away. (Actually, first I bought the contract, and then I bought the property.) In fact, within 8 months I increased the value by $225,000, at which time I refinanced the property for the entire amount that I paid for it. In other words, the deal was 100% bank financed. I have a professional property manager in place and the property generates a nice monthly cash flow. I am a little embarrassed to say it, but I really do nothing but cash the checks (usually in the $4,000 to $5,000 range) each month. And in fact, I don't even physical cash a check, the money goes right into my bank account!
Aside: There are lots of little techniques I use to when purchasing and financing investment properties in order to reduce the down payment required and increase monthly cash flow. Here is an example of a simple yet powerful technique you can use.
In my mind...
This Is A True Real Estate Investment Business
My time is not spent working on this business, it is spent creating more profit centers, whether that be more commercial real estate projects, or other types of businesses.
Keep in mind as well, the cash flow is just one of the profit centers of this "business".
Every month my tenants pay down approximately $2,000 of my mortgage. Since the initial "forced appreciation" of $225,000, the building has appreciated another $450,000. And of course, a portion of the income is tax deferred.
Are there risks involved in this type of real estate investment business? Sure. But if you have a solid, proven strategy that you follow (I have been following the same real estate investing strategy for over 16 years and have made money on every deal I have ever done) then you will have an excellent chance of success. And when compared with the success rate of most other businesses, the real estate investing business has a solid track record.
Let's recap my example.
1. Property 100% bank financed within 8 months of purchase due to value increasing strategy. (ie. none of my own capital in the deal at this point)
2. Mortgage pay-down over 12 years approx. $200,000
3. Initial increase in value (first 8 months). $225,000
4. Subsequent appreciation due to market forces. $450,000
5. Average monthly positive cash flow. Approx. $4,000
All in all this "real estate investment business" has earned me over $1,000,000 during its lifespan. (And it still earns me money hassle-free every month.)
And that's just one of my businesses.
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