PM Update

From Generating Cash Flow to Building Wealth

House and piggy bank balanced on scalesYou’ve performed a careful property analysis for your investor client, who has obtained the necessary financing and acquired a single-family property to generate income. This is the first step in wealth building, using the buy and hold formula as described in the book “HOLD: How to Find, Buy, and Rent Houses for Wealth.” Your client’s next step? Grow his or her investment portfolio and formulate a wealth management strategy for these properties.

The “grow” phase of the HOLD approach is perhaps the most exciting for a residential rental investor. This is where you can help your investor clients meet their long-term financial goals by recommending properties that will bring them closer to attaining those goals. You can also advise your clients about changing real estate values or other changes in your target areas that could affect property prices or indicate investment opportunities.

The Real Estate Investment Planning (REIP) program provides a Wealth Management tool that lets you combine several investment property profiles to create an overview of what your client’s real estate portfolio will be worth in the future. Additionally, REIP makes it easy for you to organize your clients’ portfolios and devise investment strategies that are based on them.

The authors of HOLD lay out a list of growth strategies that can help residential property investors build wealth. Here’s a quick summary of these approaches.

Fund new opportunities

Successful real estate investors are continuously looking for ways to fund their portfolio growth. Not all strategies will work for everyone or in all areas, but here are three that are typically safe bets:

  • Leave an investment trail — Buy a home and live in it until you’re ready to trade up. This approach gives you the best mortgage rates, lets you finance the purchase with a lower down payment, and gives you the flexibility to fix up the property yourself.
  • Buy real estate with an IRA — You can use tax-deferred retirement funds to invest in real estate.
  • Turn necessary expenses into gains — Find where housing expenses may exist and use your residential real estate investment to cover those expenses and build equity. For example, if your child is going away to college, let him or her live in an investment house and rent out the other rooms to pay down the mortgage.

Leverage your current properties

You can capitalize on your current investments to fund new ones, by using any of these methods:

  • Tap your equity — As you pay down your mortgage, you may be able pull out money by refinancing, or you can establish an equity line of credit.
  • Repurpose existing property — If your lot has enough space, you can turn your single-family home into a duplex or build up to add more living space — such as an apartment or rooms you can rent out. If you have a large lot, consider subdividing it into several smaller lots to sell to developers or build on yourself.
  • Trade up with a 1031 exchange — A 1031 exchange allows an investor to sell a property and exchange it for a like property without paying federal income tax. 1031 exchanges have strict rules, so consult with your CPA if you’re considering this option.

The fundamentals of building wealth using the HOLD approach include setting your income goals, analyzing the properties to buy those with the best cash flow, sticking to your plan, and building wealth by growing your portfolio and staying alert to new opportunities. Using this sound system, and REIP to make analyzing and tracking your investments easier, will set your clients on the path to realizing their investment goals.

Email or call us at 951-924-4315 to learn more about how Management One Property Management can help your real estate clients fully manage their property investments.
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