Cash Flow and Equity
If you want cash flow and equity, you have three options for building and attaining them: Lease Option, Buy & Hold, and Buy, Improve, & Hold.
In the game of cash flow and equity, an option that requires little or no money is the Lease Option. By the way, you can Lease Option In, Lease Option Out, or do both. Lease Option In is when you negotiate to lease a property from the seller (usually for two to five years) with the option to buy at the end of the period at a prenegotiated price. You may or may not have to put money down. As a part of your Lease Option con
"I always suggest either a long-term or short-term thought process. There are some properties you don't want to keep long-term. If you see some undervalued property but it doesn't really fit into your long-term holding, you can buy it and flip it and make your money."
Bill O'Kane Millionaire Real Estate Investor Chicago, IL
tract agreement, you've secured the right to lease this property to a lease-to-own buyer, and that's exactly what you do, except that you lease the property to a tenant for more than the original lease. The difference between the rent you collect and the lease payment you make is your cash flow. Any difference between the prenegotiated sales price and the market value at the end of the option period is your equity if you choose to buy the property. This is essentially a Lease Option In wrapped inside your Lease Option. The key is to have a renter lined up before you agree to lease option the property.
Lease Option Out is when you rent a property you own to a tenant (possibly someone who needs a few years to clean up his or her credit) with an option to buy at the end of the lease period. You may gain increased cash flow during the lease period and, depending on the pre-negotiated price, gain equity. As you can see, if you Lease Option In and at the same time enter into a Lease Option Out with your renter, you're doing both at once.
The second way to create cash flow and equity is to Buy & Hold. In this case you simply buy the property and lease it out. In some cases you may purchase a property that already has tenants who have signed lease agreements. This can be less complicated than Lease Option In, but you are now actually the owner of the property, and that brings both risk and reward. Also, you no longer are bound to a predetermined sales price and may choose to sell the property at any time or hold it for cash flow and equity buildup as long as you like.
The last and possibly best way to build cash flow and equity is to Buy, Improve, & Hold. This looks just like Buy & Hold, but because improvements must or can be made, there is an opportunity for an "The first rule is that every property additional upside in terms of has a surprise."
higher rents and better equity buildup. Some improve-
George Meidhof Millionaire Real Estate Investor Reston, VA
ments will be physical, in the sense that you repair the property or add features or amenities. You can also improve it through zoning or use (such as converting residential zoning to commercial or apartments to condos). Because some of your physical improvements may be classified as capital improvements by the IRS, they may effectively reduce the taxes you pay on the cash flow you earn from the property.
In the end the three cash flow and equity-building strategies all work to generate unearned income and increased net worth. Many of the millionaire investors we talked with were very clear about a few things regarding cash, cash flow, and equity buildup. They were very clear that the opportunity in real estate to generate cash is great but that it's also a job. The moment you stop buying and selling, your income goes away. They also believed that building equity and generating cash flow were the ways to create wealth. They also were very clear that each strategy has a formula that cannot be violated. They knew that the dollars are in the details and the profits are in the pennies. They understood that if they didn't manage the process tightly, the big money might escape them. They were right on all counts.
When you take a step back and look at all the ways you can earn cash or build cash flow and equity, the two fundamental ways that stand out above all the others are Buy & Sell and Buy & Hold, especially when they include improvements. They are foundational strategies that, once learned, open the doors to understanding all the other strategies. Let's take a closer look at each one.
Post a comment