In this article I will teach you how to invest in real estate with cash flow that you’re already making from your day job.
Using this real estate investing method I was able to purchase and renovate a foreclosed home that rents for $850/month just by leveraging $250/month I was saving from my day job.
This simple approach converts cash flow into working capital.
Cash is king for some people. And cash flow is king for others. By incentivizing people to trade you cash for your cash flow, you can turn $100/month of cash flow into $10,000 to $20,000 in working capital.
Before I walk you through my example I want to provide a little background on why I used this approach to raise investment capital.
For the last several years I was trying to save money to start a business. I’m a degreed Civil Engineer but I worked through a few sales jobs in an attempt to make more money. I wasn’t making any significant progress towards my savings goal so I decided to get more creative with how I approached the problem.
Real estate investing allows for the rare opportunity to double leverage invested capital. Financial institutions allow investors to borrow against the equity in a home, therefore I determined there was a reasonable way to put money into a house and then borrow against it, effectively giving myself a small business loan.
The method I used to buy the foreclosed house in the first place is known an interest-only loan. This is the terminology you will use when it comes time to file your taxes.
By selling your cash flow as an interest only payment, you can maximize the investment value. This is not a new concept in real estate investing. Many house flippers use a “hard money loan” from private investors.
For example, borrowing $100,000 as a hard money loan at a rate of 10% interest typically means at the end of 1 year you’ll pay back the entire $100,000 as well as a single interest payment of $10,000 for a total of $110,000.
Hard money lenders typically want 10% or more in interest to lend their money for a year or less. There is a good reason for this timeframe. House flipping deals in the speculative side of real estate. When someone buys and flips a house they’re betting on the market value to meet or exceed their initial guess. But a lot of bad things can happen by the time a house is actually bought, repaired, and sold. And this is risk the hard money lenders account for when setting their terms and interest rate. The more stable the investment, the lower the return the investor demands.
The most stable real estate investments are based on the capitalized value of a property. The capitalized value is a function of the cash flow a property generates. Rental income is significantly more stable than market value, and therefore is a more reliable valuation method for an investment property.
In a separate article I explain capitalized value investing in detail “How to buy a house and not overpay”.
Capitalized value real estate investments (as opposed to market value real estate investments) typically have much lower valuations, but they are stable enough that you aren’t limited to simply hard money lenders who require 10%+ interest payment for 1 year loans.
Regular every day people that you know are interested in investing $1,000 or $10,000 at rates greater than they can reliably generate in the stock market or their 401k.
What you can do is offer to make interest payments to these people that you know in exchange for their investment capital.
Set the interest rate by comparing risk and return to the rest of their investment opportunities. For most everyday Americans receiving a return of 6-8% is an exciting opportunity.
Securing their return against your personal income and the cash flow of a rental property makes this a more stable investment than just about any stock.
Finding an investment property is hard. Maybe 1 in 100 homes in this current housing market aren’t overpriced. I wrote about how I found my first foreclosed home in this article.
Before you even find an investment that makes sense, reach out to some friends or family that you think may be interested in a 6, 7, 8% simple interest return on their investment of $1,000. You may be surprised at how many people are interested.
For my personal example, I knew I could comfortably afford $250/month interest payments even if I bought the worst house ever that became a money pit and never generated any rental income.
That $250/month as a 6% interest only payment has an investment value of $50,000.
ie $250-interest/month x 12 months/year = $3,000 interest/year;
$3,000 interest/year / 6% interest/year = $50,000;
That $50,000 could come from fifty (50) $1,000 investments or one person’s $50,000 investment.
If I needed to pay a higher interest rate of say 10% to stay competitive with the prevailing market, that same $250/month has an investment value of $30,000.
Your cash flow becomes your real estate budget. Again working with rates of 6-10% will not deliver cushy budgets. But you will be able to find a deal that makes sense if you look hard enough.
This peak housing cycle won’t last forever. Since the housing market bottomed out a decade ago we’ve seen unprecedentedly low Federal Reserve interest rates among other factors, temporarily spike housing valuations across the country. An adjustment will come soon enough.