By Stefan Aarnio, author, coach, entrepreneur and award winning real estate investor
Just like the Jungle, there is a food chain of predators and prey in the Real Estate Investor world. There are organisms at the bottom of the food chain like plants and plant eating animals. The organisms at the bottom are plentiful in number and the food they eat is abundant in nature. As we progress up the food chain, the animals become more sophisticated, larger and more carnivorous. There are far less lions in the jungle than there are gazelles because it will take hundreds of gazelles to support a few lions. The world of real estate investing is exactly the same; most investors belong to the herd at the bottom of the pack. They make very little money investing in real estate and are just producing enough money to survive. Conversely, there are a few highly skilled lions in the real estate jungle that are constantly seeking opportunity. These lions look for weak gazelles that can no longer operate and are looking to acquire their properties at a discount. The jungle can support far less lions than gazelles because even the weak gazelles are hard to catch. Whether we are in the jungle in Africa or the real estate market in Winnipeg, Manitoba, there is always the top 1% and the bottom 99%.
Stage 4 – Deal Holder, Monopoly Player, Farmer
After generating a small fortune from wholesaling and flipping properties, you may be wondering what to do with your surplus cash. Many investors are successful at buying fixing and selling real estate over and over again and eventually build up a considerable cash pool from multiple income sources. With excess cash, it is now time to enter Stage 4 and transition from “buy and sell” strategies into “buy and hold”.
So many new real estate investors get into real estate for the “passive income” that it can produce. Although cash flow is essential to building and maintaining a successful rental portfolio, no one ever gets rich off of cash flow. The greatest gains in “buy and hold” real estate are made through market appreciation or even better, sub market appreciation.
Two different investors can invest in the same city, lets call them John and Paul. Both investors buy cash flowing rental properties, John chooses to invest in a recovering up and coming neighborhood full of artists and multi family dwellings. The area has some crime, some poverty and can be unglamorous to look at. Paul on the other hand, chooses to invest in a mature neighborhood with good schools, established families and lots of homeowners. His rental property looks nice and his friends are very proud of him for investing in a “good area” of town. Who makes more money? John or Paul?
All things being equal, assuming that the city is growing at a steady rate and that the local industries, net migration and transportation remain strong, John will make considerable equity gains over a 10 year period while Paul will make very little.
Both investors are cash flowing, both take good care of their properties, both investors are in the same city. Why does John’s investment in the transitional neighborhood outperform Paul’s in an established neighborhood? The answer is simple, John’s neighborhood has lots of room to improve and become better. As the neighborhood cleans up and transforms, as most transitional neighborhoods do over time, John’s investment skyrockets in value. With John’s investment skyrocketing, Paul’s investment in the established neighborhood stays relatively flat because his neighborhood has very little room to improve. If anything, Paul’s neighborhood may decline over the same period as the houses age and the demographics may change.
Smart investors like John make monthly cash flow, which is always a bonus, but they make their fortune and get rich by earning $100,000 plus per deal in real appreciation by investing in transitional zones that appreciate in real value, not inflationary value.
An investor who amasses hundreds of rental properties can build very strong cash flows of $10,000 or $20,000 per month passively and this is where an investor will transition from earning cash in real estate to building long-term wealth through real estate.
Many investors become very wealthy by refinancing their rental properties to buy even more rental properties. This creates multiple streams of income and a compound appreciation effect and harnesses the power of finance. As long as the acquired property earns monthly cash flow, this process can be repeated indefinitely to build massive rental portfolios.
In this stage of investing, because we have started to earn passive income through investing, we can start to enjoy more family time and more time away from the business rather than spending long hours actively managing the “buy fix and sell” or wholesale business. If the rental business is built properly with the right management and financing in place, an investor can create a stress free abundance with passive income that rolls in month after month.
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Stefan Aarnio, award winning real estate investor, entrepreneur, author and coach was recently inducted into the Rich Dad Hall of Fame. His book, “Money People Deal: The Fastest Way to Real Estate Wealth” is currently available on moneypeopledeal.com. To learn more about Stefan Aarnio please visit StefanAarnio.com