Having trouble understanding where the profit is

[Richard Hoyte]

Where I lack understanding is at what point do you start making money for example you buy a duplex lets say it was 300k the monthly mortgage is 2,500 each renter pays 1,500 thatd 500 cash flow which is I guess “profit “ but as the landlord you're responsible for major repairs such as but not limited to roofs, plumbing issues, electrical issues that all can be expensive you would have to have money saved so that 500 cash flow is profit but wouldnt it just have to sit in a bank account? 

[Andrew Postell]

@Richard Hoyte you mean you are doubting that "tik toky" video you saw where you just sit back and collect mailbox money?  But it's so easy to do!

What you are speaking to is a great question and I wish that more people would ask it.  What you are referring to is "cashflow".  So, let's ask another way - what if no properties cash flowed?  Would you invest in real estate?  If you say no, then you would be missing out on a lot of other benefits to creating wealth in real estate.

Cashflow is just ONE way that we make money in "buy and hold" real estate - and it's the least important part of gaining wealth.  We also make money from the "principle buydown" of the mortgage and the "increase in value" on the asset as well.  Those two together create equity.

Here's what I want you to understand about “buy and hold” residential real estate:

• Let’s use a single family home with a property value of $300,000
• Let’s use an initial loan amount of $240,000
• Let’s use an interest rate of 7.25%
• And I’m going to give you $150 of cash flow per month
• Use a 5% appreciation amount for your property per year

Let’s see what happens after 5 years:

After 5 years…

• $150 of cash flow per month = $9,000
• Your mortgage has been paid down to $227,000 = $13,000
• Your property is now worth $382,000 = $82,000

So that’s $9,000 of cash flow, $13,000 of principle buy down, and $82,000 of appreciation. We make money in 3 ways with “buy and hold” properties…and cash flow is the smallest piece!

Will you cash flow in this environment currently? No, you will not. At least, I want that to be your expectation. Make your offer a little lower because of it. Also, don’t forget you will increase your rents in year 2, year 3, year 4, etc. So you WILL cashflow eventually but go into the property expecting not to cashflow now. And then you are still going to make $95,000 on a property. Remember Brandon Turner’s article on “How to Make $100,000 per year” – you can read it HERE. Don't forget about it.

I could keep going here but if you have any questions on this feel free to reach out.  Thanks!