Cash flow is one of the primary reasons people are attracted to real estate investing. In their desire to escape the rat race, many real estate investors have the primary goal of generating enough cash flow so their expenses are covered by the income they generate. Once this occurs, they can take that true first step towards a state of financial independence for perhaps the first time in their life. The process of transitioning from earning a paycheck to replacing it with real estate income may not happen overnight, but it will happen if you have the dedication and acquire the how-to knowledge of becoming a successful real estate investor.

Single-Family Homes

As with most area in real estate, the same principles apply at the beginning of the real estate investing process. Some of these principles include estimating property worth, analyzing repair costs, and finding motivated sellers. Motivated sellers are essential to almost any real estate strategy as one of the key principles in real estate investing is buying right. Once you have located a potential motivated seller, there are many techniques in which you can utilize to negotiate the buying of a property for little to no money down in a deal that makes sense for both sides.

Step 1: Find Motivated Sellers

It is important to remember that a motivated seller is someone who needs to sell their home, and not someone who simply wants to sell their home. This need can be the result of financial hardship or acquiring a new job out of state. Whatever the reason, the seller must have a strong desire to get rid of their property as soon as possible.

In today’s economic climate, motivated sellers are perhaps easier to find than ever before. While they do represent a small percentage of the overall market, motivated sellers can be discovered if you are willing to spend the time and know where to look. A few techniques to find motivated sellers include:

• Research classified ads in major newspapers
• Search internet ads
• Review radio and TV station classified ad sites
• Review the Multiple Listing Service (MLS)
• Research old or expired MLS listings
• Call on for-rent signs and ads

Whatever techniques you use, look for keywords that indicate the need to sell. At the end of the day, you want to be looking for motivated sellers, not properties. Motivated sellers are the building blocks of many real estate strategies.

Step 2: Buy Right

You need to be very selective about the properties you are going to own as long-term rental properties. You will own these properties for a long period of time, so due diligence should be done in the investigative stage in at least the following areas:

• Determine the crime in the area
• Determine the ratio of rental properties to owner-occupied properties
• Find the vacancy rates for similar properties
• Determine proximity to selling points (schools, public transit, etc.)

A little homework done on your end can go a long way to avoiding frustration in future months and years. This step is simply to identify properties that will be easy to rent, and to pick communities that you will be personally comfortable dealing with.

Step 3: Determine Cash Flow

Cash flow can be calculated by a simple step-by-step formula:

1. You need to evaluate what you can reasonably charge for rent based on what similar properties are renting for
2. Deduct all monthly expenses (property taxes, insurance, utilities, and maintenance)
3. Include vacancy factor
4. Deduct management fee
5. Deduct maintenance fund fee (for future repairs)
6. Deduct cash flow you desire

The resulting number will be the net rent to pay the monthly payment created by step four—financing the property. (Not included in this calculation are any repair costs before the property can be rented. Be sure to include these in your calculation if applicable.)

Step 4: Finance the Property

There are many cases where traditional financing is not available. In addition, for most investors, it is unlikely that traditional financing can get us to the point where we can buy enough properties to generate the type of cash flow we are looking for. Some people turn to private-money options at this point to finance their deals.

Private-money lenders are usually just average professional people or other real estate investors who have access to capital. These individuals are far more likely to invest in your projects if you have demonstrated that you have successfully completed a few real estate projects in the past for a profit. Finding private-money lenders does take some effort, but it is not as difficult as you might think. Work on your presentation, utilize your networking skills, and utilize social media. If the potential deal is solid, then you will likely be successful in your private money search.

Another alternative to traditional lending is seller financing. If you find a motivated seller, then it is important at some point to ask if they are willing to consider seller financing. Using the seller as a source of funding your investments is a highly practical and popular means utilized by experienced real estate investors. This type of financing can create a true win-win scenario for both parties.

One of the most popular methods of seller financing is the lease with an option to buy, better known as the lease option. In the September issue of this newsletter, lease options were reviewed as an exit strategy, but they can also be used as a potential entry strategy. For example, assume you want to buy a property for a long-term rental. You have located a motivated seller in a neighborhood in which you would like to own property, and they are open to seller financing. If you utilize some sort of lease option, here are some factors you will need to consider:

Option Consideration: This is the initial down payment that the buyer would require. It can vary in size, and naturally you would want to be as low as possible.

Length of Lease: This is usually directly tied into the final payment discussed in the next point.

Balloon Payment: In a traditional lease option, there is usually an option to buy at some point, where you pay the remainder of the balance and purchase the property. You may be able to eliminate the balloon (or at least reduce the balloon payment amount) by negotiating graduated payments into the deal. If the option to buy is in five years, this payment can be quite large, and could force you to refinance or lose the property. Graduated payments in each year (50 per month second year, 75 per month third year, etc.) should be offset by increased rents. For every year the final payment is delayed, it makes the final payment due more manageable.

Seller financing is a crucial skill not only to rental properties, but to many other real estate strategies. If you want to learn more about seller financing, contact a Rich Dad Education representative today to see what courses are offered in this field.

Step 5: Find tenants

Choose your tenants wisely! Your number one goal in this step is to find qualified tenants. Describing the ins and outs of the tenant screening process could easily justify an article itself. There are many legal requirements that prohibit what you can and cannot ask. If you don’t gain the knowledge through your coursework, be sure to consult a real estate attorney once you get to this stage to receive proper guidance.

Step 6: Being a landlord

Many people who strictly want to invest in rental properties for cash flow purposes budget in property management in step three of this process. Property management can do all aspects of managing your properties, or you can contract them to just do tasks you don’t enjoy or don’t have time to handle. It’s up to you which services you want to do yourself, and which services you want to have the management company do for you.

A few parting tips once you reach the landlord stage:

• Take good care of your property
• Treat your tenants with respect
• Always maintain a professional relationship with your tenants
• Make sure your tenants know all the rules.
• Enforce the rules

Rental properties can be a wonderful source of cash flow, and with every property you own, you come one step closer to escaping the rat race.