Money… It seems to be all anyone cares about these days. It’s all over the news and all we’re hearing about is the implosion and consolidation of the banking industry.
Here’s a big hint of what this means to you. Your financing options have moved from Wall Street to Main Street. Take your local banker out to lunch and nurture that relationship. You’re going to need it because while you’re building your commercial real estate investment portfolio in a down market, you’ll need to borrow money to grow your wealth.
What else does big change this mean for you? The days of buying property and believing that an exit in 2-3 years with a big return from appreciation are over until the next expansion cycle. It’s time to return to buying property based on core fundamentals built around cash flows: solid, real, positive cash flows.
If you buy for cash flow and you focus on the fundamentals, the exit will take care of itself, your deal will be financible, and you’ll get your original investment back more quickly-something everyone’s concerned about these days.
A quick look at the math will demonstrate that purchasing for cash flow works. Let’s start with the purchase price. You decide to purchase a property for $1,000,000. You deposit $250,000 as your down payment and earn a 10% cash on cash return on your investment. This investment will pay you $25,000 in the first year and as the rent increases, so will your cash on cash return. Plus, while you’re holding the property, your $750,000 loan is amortizing or being reduced by your rental income. This means that you’re recovering your down payment while you pay down the debt.
At the end of the 10 years, you sell the building for $1,000,000. That may not seem like a great deal to some, but if you’ve already recovered your $250,000 in cash flow and paid down your mortgage by $100,000, you’re walking away from the closing with a check for $350,000 plus the $250,000 you already got back. My simple math may be wrong, but you more than doubled your money.
If you focus on the fundamentals first, buy for cash flow. Empires are built on durable, long-term cash flows. Once you have that in place, go out and play. You can afford to make mistakes because you have a base cash flow to insure your survivability.