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Understanding the Basics of Financial Freedom through Real Estate Investing

The phrase “financial freedom” is a term you’re bound to find on most of the real estate investing blogs and podcasts on the web. Often times the phrase will be found with the terms “commission”, “cash-flow”, “appreciation”, and “passive income” It’s important to note that while all these phrases contribute to the end-goal of financial freedom, they each represent a separate intent in the real estate space. We’ll dive into each one as it relates to financial freedom, and how understanding the differences will help educate you in the basics of real estate investing and generating wealth.

Cash Flow

Cash Flow, simply put, is the amount of money going in or out of a business. For anyone looking to get into real estate investing cash-flow is a big deal. Why? Because cash-flow is what allows you to pursue opportunities and prevent disasters.

For instance, if you’ve recently purchased a multifamily home (4plex) with a monthly mortgage payment of $2,000, and rents for each unit in the multifamily home are $800 a month, you’ll have $3,200 in rent payments each month. That means that you’ve now been able to pay your mortgage payment and have a net positive $1,200 in cash-flow. This money can then be used as an emergency fund in case of a broken pipe, or the need for roof repairs. In addition, positive cash flow allows you to allocate some of this money to the purchase of new properties.

Often times, down-payments on a property are 10 to 20 percent. If you’re buying a $200,000 property, the down-payment would be $20,000 to $40,000. With the cashflow from the property above, in less that a year and half you would have saved most of the down-payment for your next deal. The benefits are twofold: the multifamily building has in essence, allowed purchase another property, and your net cash-flow has increased as a result.

Appreciation

Appreciation equals an increase in value. This can be applied to a couple different situations in real estate.

  1. Your property increases in value as a result of renovations, market conditions, or local growth.
  2. Your properties rents have increased because of renovations, market conditions, or local growth.

Appreciation is a big deal in both cases. If you’re property increases in value, it allows you the ability to sell your property and put that profit into your next deal, or it allows you to raise monthly rent and increase your cash-flow. In both cases you should always be looking to purchase properties that have potential for appreciation.

Passive Income

This term is probably used the most in real estate investing. It means that you’re receiving income that requires little to no effort on a regular basis. For the most part, passive income in real estate investing is describing rent.

Once your properties have been renovating and require little to no upkeep, you’ve created passive income. The only effort required on your part is collecting payment and keeping in good standing with your tenants

As mentioned above, financial freedom through real estate investing is created through a slow and sustainable model of growth. Invest in property, use rental income and profits to buy additional deals, rinse and repeat.

Commission

One of the biggest factors in saving and preserving wealth in real estate investing is real estate agent commissions. Most often whenever a home is bought or sold there is a real estate agent representing both the buyer and the seller. On average, the commission for each of these agents is right around 3% of the total value of the home.

What does this mean for someone looking to buy or a sell a property?

If you’re looking to sell your $200,000 investment property, 6% or $12,000 of that total value will go to real estate agent fees and commissions. There are ways that many real estate investors are able to avoid such large commissions.

Flat fee local realtors are becoming more and more common. A flat fee broker often times has a flat fee for the sellers agent commission plus the buyers agent commission. Instead of paying $12,000 on closing costs a flat fee brokerage will charge a $3,000 flat fee for the sellers commission and 3% for the buyer commission for a total of $6,000 in closing costs and $6,000 in savings.

If you’re looking to buy a property, many states offer what is called a home buyer rebate or a home buyer credit. This credit is negotiated with your agent and will you allow you to get a rebate for up to 1% of the cost of the property. This equates to $2,000 for a $200,000 property. If it’s a multifamily investment property that could mean you’re able to cover the first months mortgage payment while you make renovations and repairs, or fund the repairs themselves.

What’s next?

You’ve got the basic concepts to finding financial freedom through real estate investing. Now comes the research phase.

Start by talking to a local real estate agent and getting setup for mls alerts. Take a look at all the properties in your area that are going up for sale. Go to real estate investor meetups and talk to veterans about their past successes and failures.

Most importantly, remain patient. The age old saying “if it’s too good to be true, it probably is, definitely applies to real estate investment. Remember, you make money when you buy a property not when you sell.