We all know that the current real estate market is highly competitive and as a real estate investor it is getting harder and harder to find deals that cash flow.
With some of the deals I have done recently my cash flow has been solid, but not like it used to be. So one of the calculations I did this year and it was the first time I did it in the almost twenty years of investing in real estate. I looked at how much my debt was paid down last year on all of my properties.
Who pays down the debt? Someone else.
Hey, look. Some people may be saying…
“I have always calculated this, Brian, you are stupid for not.”
Well, I am a buy and hold guy. When I underwrite the deal on the front end. I have always been looking at does it cash flow. Period. And I usually wanted double in rent of whatever my payment was. If my mortgage was $400, I wanted to be able to get $800 in rent.
Once this condition was met. I really never looked at debt pay down, because I am going to hold on to the property for the rest of my life. I am not worried about the debt. I know it is covered. I am smart enough to know how much equity I have in my real estate, but again, I never calculated how much my debt was being paid down on yearly basis.
And in this tight market, I would highly encourage people to look and calculate this into their underwriting. If you do this, a deal that looks so so, can start looking really good.
And if you buy a property in a great location, then you will really win. Because between debt pay down and appreciation of the property you will be capitalizing off the two greatest things in real estate investing.
Before all of the real estate investors lose their minds on me. Let me first say this.
Look for cash flowing deals first and foremost. This is a given. If they don’t cash flow, you most likely shouldn’t buy.
Here is “the but”, “the however”, though…
If you can lock up great properties with some cash flow and get someone else to pay the debt down for you. You have to consider this in some of these deals.
In this current market, capital preservation is just as important as capital growth.
Here is the breakdown on one of my properties last year.
$1679 a month is my payment. $1679 x 12 payments = $20,148
$10,169 went to interest on that loan.
$20,148 (total paid) -$10,169 (interest paid) = $9,979 in debt pay down.
So if you look at almost $10K in debt pay down on top of 10% appreciation of the property. I grew my net worth significantly last year on this deal.
As I said before, some people may have always calculated this. But if you started buying when I did, it was pretty easy to find cash flowing deals. But the market has now changed significantly and finding cash flowing deals is harder and harder.
Cash is still king, and I want to make sure I emphasize this. However, don’t underestimate or overlook the debt pay down on deals either.
To your success and your future.
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