This is a comparison of 3 Investors with the same financial goal to have 10K of monthly cash flow in 5 years. Their “Why”, “How” and objectives are different. Some things you may notice are the risk and challenges faced in achieving their goals and how not having clear goals can impact the outcome. These are simple and hypothetical situations, assumptions will be used.
Investor 1 – Hot Neighborhood
My goal is to have 10K of monthly cash flow in 5 years by investing in properties in this neighborhood because I just want to make some money. I do not have an expected return, I just know that neighborhood is a “Hot” area, properties are hard to find and there is low vacancy. I am a local investor that knows and am comfortable with investments in this particular neighborhood and I know others who own and invest here as well.
With this scenario, the Why is very unclear as “I just want to make money” could mean anything and there really is not clear motivation or clear goals. It is always important to define “Why these financial goals?” Actually the answer to that are the real goals, the financial goals are more of an objective that will help you meet your actual goals. Many want to quit their job, retire, provide for loved ones, financial freedom, and/or do other things with their time.
Investing only in a specific neighborhood that is “Hot” may leave investors with few available investments, so finding deals can be a challenge and those available could be around retail and purely speculative. One thing to understand is that people will invest in “What They Know and What They are Comfortable With.” A good idea for this investor is to clearly understand what it is about that area that makes them comfortable. A few things we know are high demand, low vacancy and other known investors have property in this area. Would you agree that learning about additional areas that are similar and fit the criteria that make this investor comfortable that there will be more investments to choose from? And from a numbers game, having more properties to choose from could result in more and better deals? If this particular investor sticks to only this Hot neighborhood that has 3 properties to choose from, what do you think the chances are of achieving 10K of monthly cash flow?
Investor 2 – High ROI
My goal is to have 10K of monthly cash flow in 5 years by investing in rentals with a 20% ROI to cover my retirement so I can focus on helping loved ones also achieve cash flow goals. While it is possible to find gems at 20%, it can be difficult to find them in mass. If you prefer C properties, sometimes you can find these returns, and sometimes you find issues in the form of bad tenants, vacancy, maintenance, vandalism, etc. What is on paper in a pro forma may not become reality. That is why DUE DILIGENCE is absolutely critical whether you are buying one C class property or buying in mass. The same is true in A and B areas, thorough due diligence can filter out a lot of dud properties and significantly mitigate risk when done right.
This investor may have trouble finding his 20% ROI gem properties and may end up only doing 1-3 deals per year which will not come close to 10K monthly. Additionally, the returns on paper may not be realistic. There are savvy investors that make things work with A, B and C class areas, all investments require proper due diligence and definitely expert property management. Would you agree that this investor has a chance to meet the financial goals, while there are some real challenges that will have to be overcome with finding deals and realizing the expected returns? An option for this investor may be to target safer deals that have a much higher probability of realizing a lower but still decent return. Then the only challenge becomes financing which can be easily overcome with portfolio lenders, blanket loans and more creative financing.
Investor 3 – Clear & Realistic
My goal is to have 10K of monthly cash flow in 5 years in order to retire and spend more time with my grandkids, travel, hobbies and items that will make us happy that we have put off for many years. First off, the “Why” and motivation are quite clear with this investor’s goals. This investor targets properties that meet specific criteria, areas with a long track record of success and all inspection and due diligence check out. The properties have been renovated up to a specific standard that will be confirmed by an inspection and excellent property management is in place.
This investor prefers a safer investment and assumes the average property from a hypothetical rental portfolio has $300/month in positive cash flow. It is very clear that to build 10K in monthly cash flow, around 33 properties will need to be added to a portfolio over 5 years which is around 6.5 per year. This investor has trustworthy sources of properties and knows that to achieve the desired goals, the only challenge left to face is financing. With the help of this investor’s trustworthy sources and contacts, there are a lot of options. After maxing out on Fannie and Freddie loans, there are portfolio lenders and local banks that will blanket multiple properties into a loan without strict requirements. There are even more aggressive strategies and creative strategies that take a little work, then when in place can really work great. With clear goals, specific criteria, strong due diligence, solid property management and the right team there is very little this investor cannot accomplish.
What goals and objectives do you have? What challenges have you or investors you know faced? Please share your experiences, ideas and questions.
A big part of what we do in addition to educating investors is assist investors with identifying goals and objectives and match them with certified cash flow properties in order for them to succeed. Please contact us if we can assist in any way and feel free to browse available properties.