Success Mindset: The Best Time to Make Money in Real Estate is NOW!

Lots of investing strategies that are currently being presented to people who want to begin a career as an active or even casual real estate investor are urging potential investors to invest in real estate by promising them that real estate offers amazing future returns. While it is true that real estate is a fantastic long-term investment, it is also true that the best time to make money in real estate is NOW! In this article I want to help you understand that there is no need to put off your financial plans while waiting for your real estate to mature as an investment. If you have a Success mindset, you can make money in real estate now. Read on!

Cash on Cash Return

Truly successful real estate investors who are serious about pursuing their financial freedom only invest in real estate that makes them money NOW! When I say money “now”, what I mean is that they invest in properties that are profitable from day one, not just properties that will hopefully make them money someday in the future. Let me be clear in what I mean by ‘profitable.’ Profitable means that regardless of appreciation and without factoring in tax benefits, the properties that I invest in make money for me from day one or I am not interested in purchasing them at all. The properties that I invest in make me an immediate cash on cash return.

Let me show you what I mean by a “cash on cash” return. If I were to put down a down payment (deposit) of $10,000 on a $90,000 property I would have invested $10,000 (my actual out-of-pocket investment). If I were then to put someone into that property, the amount of money that I received from that transaction above and beyond my expenses (excluding tax benefits) would be my factual cash on cash return (or loss). So, if in the above example at the end of the year my expenses were $8,000 and my income was $12,000 I would have made a $4,000 profit. I would then take the $4,000 profit and divide it into the $10,000 (my original investment) and I would come up with a first year cash on cash return of 40%.

That is what successful investors look for in a real estate investment. They pursue a factual (not projected) cash on cash return that puts a profit in their pocket immediately. Any appreciation or tax benefits that are received as a result of the deal are just a bonus.

The Ice Cream Analogy

Think of it this way. Most people like ice cream. Yet we all know that ice cream is better with chocolate sauce on the top, and even better with lots of whipped cream. The successful real estate investor looks at the real estate as the ice cream, any appreciation is the chocolate sauce, and tax benefits are the whipped cream. Certainly the chocolate sauce and the whipped cream make the ice cream taste better, but they are not the primary thought, just extras. If you get them, great, but if you don’t you still have a bowl of great ice cream.

The problem with investing for appreciation and tax benefits is that these outcomes don’t always occur as planned. Real estate doesn’t always go up, does it? And if there is one thing we know about tax benefits: we know they can change at any time. So, instead of buying real estate for the tax benefits and appreciation, make sure that you are acquiring properties that will make you a factual cash on cash return in their first year. Otherwise, you are purchasing real estate speculatively and that’s how people lose money in the investment real estate market.

Negative Cash Flow and Negative-Gearing

I know that many people throughout the world have been led to believe that negative-cash flow or negatively-geared real estate is a sound investment. From a successful real estate investing point of view, nothing could be further from the truth. I do not know of any successful real estate investors (not a real estate marketer or speculator) who buys a property with the primary motivation being potential appreciation or anticipated tax benefits. That is Level Three thinking and investing. I say this because appreciation and tax benefits are both completely unknown and absolutely not guaranteed.

Tax Benefits

I know what the real estate marketing companies say: “Negative Cash Flow is a good thing because you get tax benefits.” Think about this for a moment. What do you really get when you negatively gear? Today the top tax rate for most of my students (America, Australia, Singapore, Europe, etc.) is 30-50%. That means for a $1.00 deduction you would receive 30-50 cents. That means you lost 50-70 cents! It makes absolutely no sense. Yet people line up like lemmings to give away their dollars in order to receive cents. It just makes no sense.

The advisers (who are not successful real estate investors), and the real estate marketers who buy the properties wholesale and then often resell them for prices far above any realistic value, tell potential investors that the tax deduction (negative-gearing) is a good thing. Negative-gearing is not good. It is bad. Do not buy investments that are guaranteed to lose money, especially when that is their main selling point. The clear cold investment facts are that you are buying an “investment” that is designed to lose you money!

Appreciation

The other incentive that people are given for investing in real estate that loses money every month instead of gaining a cash on cash return is the claim that the property will go up in value or that it will appreciate. Most marketers pedaling the tax deduction negative-gearing schemes use the same hypothetical number. They say that real estate goes up by 10% per year, every year, like clockwork.

Let me ask you a question, does real estate really always go up in price? Does it sometimes go down in price? And when it does go up, does it really go up 10% per year? Because if it was going up 10% per year that would mean that the property would double in value in just over 7 years. Does most Real Estate double in value every 7 years? Not according to most government figures. In the United States the average rate of real estate appreciation is just over 4%. What happened to the 10%?

Yes, some areas do enjoy high appreciation for extended periods of time, but it is not the norm and a successful real estate investor does not gamble on appreciation? They invest in cash on cash return.

The Problem with Yields

Generally, when an unsophisticated investor is considering investing in real estate they are shown the great “yield” that the property will return. Sophisticated investors know not to be fooled by “yields.” The reason: the touted “yield” of an investment is completely and totally made up. It does not exist in any way shape or form.

Marketers factor in tax benefits and appreciation (again almost always that mythical 10%) and then they determine your “yield.” The successful real estate investor understands clearly that “yields” mean nothing. The success minset of the investor invests in property that provides positive cash flow (positively-geared) and makes a cash on cash profit (for real). Do not be suckered into the “yield” trap. Only invest in real estate that is properly valued and is positively-geared from the outset.

Think about this with me, if you pay taxes isn’t it because you made money? Isn’t making money the reason for investing in the first place? If you are left out of pocket every month to support a negative cash flow (negatively-geared) property aren’t you actually losing money?

As you continue on the fast track toward your personal financial freedom through active and successful real estate investing, make sure that you don’t get stuck in a situation where you are waiting to make money on a property that you invested in. The best time to make money in real estate investing is NOW! Money can be made when the numbers work and when you only purchase properties that provide you with an immediate cash on cash return.