In the spirit of the holiday season and all of the extra helpings of food we’ll be consuming, I thought I’d compare eating your three-course holiday meal to real estate investing.
What in the World?! How is real estate investing like a three-course meal holiday meal?
Think of it like this: Traditionally in a three-course meal, the family will bring out the appetizers first. Whether it’s a nice spinach-artichoke dip or baked brie (yum!), appetizers come out first.
Next, your entrée is served. I’m a steak kind of guy, but I won’t turn away a nice roast turkey or ham either.
Then, if you still have room (keywords, “if you have room”), you go for the dessert. I don’t know about you, but if it’s pumpkin anything, I’m all in!
When you’re evaluating the investment properties, think about it as being just like the three-course meal described above.
The Appetizer: This would be your cash flow. It’s nice, but you are left wanting more and are waiting for the main part of your meal. The cash flow is some money, but not as much as the entrée. Sometimes, you may take less of the appetizer (cash flow) in the current market for a great property while keeping in mind that you’re really here for the star of the meal – the entrée. Remember, your property’s cash flow protects you. It serves as insurance for interest rate increases, random maintenance that you have to repair, and potentially extra spending money for you if you executed the correct strategy.
The Entrée: This is your mortgage paydown. This is what will keep you full and work towards building up your wealth. This wealth is from your tenant paying down your mortgage.
The Dessert: This would be the property’s appreciation. This is definitely a nice to have, but you don’t always need appreciation to build wealth. Dessert is a nice bonus if you will, but you shouldn’t bank on getting full on it. If you have the mortgage paydown working for you already (i.e., already full after the entrée round), it could very much be worth it alone. You should never invest in real estate banking on appreciation, and this is exactly what I advise my clients. You should think of any appreciation you get as a bonus only.
Having this three-course meal frame of mind is exactly how you ride out market crashes and corrections. When the correction happens and if your property is paid for by the tenant, the mortgage is being paid down by the tenant. It doesn’t matter if there is zero appreciation. You’re making money from the cash flow and mortgage paydown anyways. Appreciation will come when the market rebounds.
So the next time you’re evaluating an investment opportunity, think of it like you’re walking into a holiday meal and asking yourself: “What would I like to eat?”.
Until Next Time, Happy Holidays!