How to “Invent†Cash Flow
“What amount of cash flow do you try and get on a property?†is one of the most frequent questions I get. Of course, get as much as you can, but I know that’s not what people mean. They mean, “what is the minimum amount of cash flow I should get?â€
Typically, I try to get at least $200 in cash flow on a property. This gives me a little wiggle room every month in case I have a repair or if something goes wrong. Plus, after only five houses you’ve already got $1,000 a month in positive cash flow and with 10 houses you’ve got $2,000 a month coming in. Right now you may just be starting out in this business and can’t imagine ever owning 10 houses. But I can tell you from personal experience that I thought the same thing. But in a little more than a year I had picked up 10 houses and had a ton of cash flow coming in. The secret to this is just doing it one house at a time. Picking up 10 houses sounds overwhelming but not if you just pick up one a month, or one every other month. However, I know that not every deal you come across is going to have $200 in cash flow. In fact, most of the deals you come across won’t have any cash flow at all. But remember, this business is a numbers game, so you will pass over a lot of crappy deals until you find that house with $200 in cash flow.
The good new is, that you can “invent†cash flow. What I mean is you can set up an arrangement with a motivated seller where they will pay you. I’ve done this on subject-to’s and call this the “they pay you†subject-to. Here’s how it works: Let’s say that you find a beautiful single family house in a great neighborhood and the seller wants to sell ASAP. But when you run the numbers there is zero cash flow. The seller’s mortgage payment is $1,500 a month, but the market rent is also $1,500 a month. What do you do? Well, since you know you want to get at least $200 a month in cash flow you explain to the seller that “due to company policy†you cannot take over properties without cash flow and that based on your criteria the seller would have to write you a check for $200 a month until the house sells. (If he writes you a $200 check that’s like getting the house for $1,300 and renting it for the $1,500 which is market rent. You’ve just created $200 in cash flow).
Believe it or not, many sellers will agree to this, especially in today’s economy. Only writing a $200 check every month is a heck of a lot better than writing a $1,500 check, right? Plus, the seller also gets rid of all of the hassles of owning the house, so they’ll be more than happy to write that $200 check. If you decide to try this strategy just make sure that it clearly spells out in your contract that the seller will pay you $200 a month until the house sells and that if he fails to write the $200 check you can stop making the payments and let the house go into foreclosure. (This will motivate him to keep paying you.)
So, from now on when you get leads from sellers, try and be creative and do what you can to get $200 a month in cash flow. Before you know it you’ll have $2,000 or more coming in each and every month in positive cash flow.
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