Investor Tips - 8 factors that determine success or failure
By Peter Conti
May 23, 2006
The Eight Major Business Success Factors
Real estate lets you automatically harness the 8 biggest Business Success Factors in a way to consistently produce big cash profits. Let's look at all 8 Business Success Factors.
Business Success Factor One: Leverage
Real estate lets you leverage yourself into the property using other people's money. Our students typically have less than 10 percent of value of the property in the deal as their cash and over 90 percent of the funding coming from outside sources. That means they have a leverage multiplier of 10-fold! For every $1 their money earns as a return on their investment they actually collect $10! The best part of real estate leverage is that you can use what's called upside leverage to get the benefits of the magnifying return of leverage without the downside risk that's normally associated with it.
Business Success Factor Two: Appreciation
In very few businesses do the assets of that business appreciate in value year after year. In fact in most businesses, the capital assets depreciate in value year after year, that is go down in value year after year. Real estate is one of the few capital assets that a business can own that goes up in value over time. What this means is, that at the same time your real estate business is generating cash flow month in and month out, the underlying assets, the real estate itself, is going up in value adding to your net worth.
Business Success Factor Three: Tax Savings
In almost no other business, are your profits so potentially shielded from the wealth diminishing effects of taxes, as they are when investing in real estate. The government wants investors to be providing housing and commercial real estate and incentivizes investors with powerful tax advantages that even the smallest of investors can tap into.
Business Success Factor Four: Simple to Sell or Rent
The biggest challenge for most businesses is to find their customers. In fact, for many businesses, this is the single greatest challenge they'll ever face-to establish the customer base to generate the cash flow to support their business.
But with real estate, this is much easier. Take the case of an average rental house that rents for $1,500 per month. By finding one renter for that house who lives there for a year your real estate business will generate $18,000 of gross income from the rents. And what if you are able to keep that tenant happily living in that property for just 3 years? That means that one tenant will generate $54,000 of gross profit for your business. All that monthly income from leasing out one property.
Now multiply that by ten houses and you have a simple part-time rental business that generates $180,000 per year of gross income, or over $1.8 million of gross income over ten years. In very few other business can an average person generate that type of sales volume without an expensive and highly skilled sales team. But with real estate it's a simple and straightforward process. Why? Because there is always ready market for quality real estate. And this is true whether your goal is to rent out a property, sell it to a retail buyer, or put a tenant buyer in your property on a rent to own basis.
Or if you prefer the route of buying low and selling high with your real estate, in what other business can you so easily make a $400,000 sale like selling a house? Or have highly skilled sales agents fighting to get the rights to sell your house for you for such a small sales commission? We think you get the idea here.
Business Success Factor Five: Inflation-Proofed
By its very definition inflation means that the purchasing power of a dollar is diminished because the cost for staples like food, shelter and clothing has increased. Built into the very formula by which inflation is measured is the assumption that as inflation goes up, so does the cost of living, and of course, with it goes the cost, whether it is sales price or rental amount, of real estate.
This means that as you build your cash flow generating investing business, your profits are inflation hedged because your real estate will rise with the tide of inflation. While over the short-term this may not seem to matter, over 20 to 30 years this will make a huge difference to your quality of life because your cash flow will have doubled as it keeps pace with inflation. Plus the underlying equity you have, which is a large component of your net worth, will have also gone dramatically higher, partly pushed higher by inflation.
What if you knew how to buy millions of dollars of property with nothing down? How much would this be worth to you?
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Their personal real estate holdings are valued at over $15 million, and their students have bought and sold close to $800 million worth of real estate over the past decade.
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Business Success Factor Six: Forced Appreciation
One of the best parts of real estate is that it exists in an imperfect market place. There is no absolute determiner of value because personal circumstances, market conditions, and individual skill and expertise have a dramatic influence the price and terms with which you can acquire a property.
This means you can buy a $400,000 property for 30 to 40 percent below value and the very moment you buy the property, because your circumstances are different, that property is instantly worth $120,000 to 160,000 more! Remember, value does not exist independently of the owner's context. This makes real estate one of the fastest pathways to building great wealth.
Business Success Factor Seven: Easy to Autopilot
Real estate is one of the easiest businesses to put onto autopilot. By building your investing business the right way you are able to transition out of the day to day oversight of your investing company, and into the passive role of a hands off investor who works a few hours a day or less overseeing his or her investing business.
Business Success Factor Eight: Cash Flow!
By far the biggest benefit that the typical investor craves from real estate is the cash flow it can generate because this cash flow means freedom. Freedom from working for a boss or company that doesn't value you. Freedom to be in control of your own life. There are essentially four types of real estate cash flow.
First, there is the "monthly cash flow" that is derived from the spread between the monthly income a property generates and the monthly expenses it costs. This positive cash flow is what most investors think of when they think of real estate cash flow. But it isn't the only source of streams of income from a property.
Second you have "up front cash flow" that comes from the larger chunks of upfront payments your buyers or tenant buyers pay you for the property. For example, if you put a new tenant buyer in one of your homes on a rent to own basis and they give you a $10,000 non-refundable option payment, this money in essence is a form of up front cash flow.
In many ways this type of cash flow is even better than monthly cash flow because you get it all up front instead of having to wait every month for it.
The third type of cash flow is "re-fi cash flow" which comes when you take a property that you own that has gone up in value and tap into the equity by refinancing the property to pull out money from the property. This type of cash flow is tax-free since it's a "loan" and not actual "profit"; still it is spendable and investable.
The key to intelligently using this type of cash flow is to make sure the property comfortably still rents out for more than the real cost of maintaining it, which includes the new mortgage payments from the refinance, so that you have a safety buffer built into the deal in case the rental market cools. In our opinion the very best reason to tap into re-fi cash flow is to invest the money into another property. This way you get the profits from two properties instead of the one you had before.
And the final type of cash flow is the "back end cash flow" that comes when you re-sell a property. For example, we have many students who buy 6 to 12 new properties every year, and sell 2 to 4 of their existing portfolio. They earn a few thousand dollars a month and growing from the monthly cash flow, but they earn another $150,000 or more each year from the back end cash flow they get from selling a few of their properties each year. One other benefit of this type of cash flow is that often times this income is taxed as "long term capital gain" versus ordinary earned income. This saves you about 50% on the tax bill!
We strongly urge you to hang onto all of your real estate you can over the long term, but there is nothing wrong with pruning your real estate portfolio and selling off some of your properties each year for cash flow, provided you are acquiring even more properties than you are selling each year. In a way this lets you upgrade your portfolio as you sell of the trouble properties and keep the very best of the best over time.
If the other seven Business Success Factors form a solid foundation upon which you can build your real estate fortune, then factor eight-cash flow-is the fuel that you'll need to reach your destination. And ultimately you are going want your real estate business to generate all four types of real estate cash flow to fuel your journey on the Real Estate Fast Track (this is the proven pathway we've created and mapped out for our clients that takes them from the start of their investing at Level One through to Level Three success when they go passive with their real estate cash flow.
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