You Expect Cash Flow?

[Brady Mullen]

Investing in real estate is categorically different than investing in stocks/bonds and other customary financial planning tools.

It is buying a small business. This fundamentally changes how you should think about the debt.

A mortgage on a rental property is not an operating expense. It is an acquisition expense.

It is not the market's responsibility to cash flow your acquisition costs. We were lucky enough to experience this over the past several years when interest rates were ridiculously low. However, the product/service you sell your tenants (shelter) is marked up, like any other business, based on your operating expenses plus a profit margin.

The fact that the bank will lend you 75-80% of the acquisition cost of your small business is AMAZING. Covering that expense with the markup on the shelter you provide your tenants is not required to make that a viable business purchase.

If you expect to invest in properties that cash flow with 20% down, you're going to be looking at rentals in more challenging areas.

More importantly, if you're waiting until the market hands you low priced businesses (rentals) and low interest rates to purchase them, then I suspect you will wait for a very long time, if it even happens in our lifetimes.

Interest rates don't play a factor in determining whether small business is covering its operating expenses plus an acceptable profit margin with the revenue. Interest rates just determine the cost of borrowing the money to purchase that business.

Negative cash flow because you borrowed money to purchase a business is an acceptable way to purchase a business. You're buying a business! Why wouldn't it cost you something? However, if you require cash flow out of the gate, you will simply have to put more money down (borrow less) so your profits cover the acquisition expense of the loan.

The golden age of low interest rates and low asset costs is over. There's no sense in pining for it. It's gone. That doesn't make real estate a bad investment. It's just not falling into your lap anymore.