How to Create Passive Income By Purchasing Real Estate?
Real estate has always been highly regarded as one of the avenues to increase wealth. Purchasing apartment buildings has been a great way to increase your cash flow and create tax write-offs. If you’re looking for ways to increase your wealth, here is a step-by-step guide on how to use real estate to your advantage.
Step #1: Create a Model to Determine Cash Flow
First, you will need to create a model to project the cash flow over the life of your property. You will consider the income relative to the expenses that the property incurs. For income, you should consider rental income while accounting for vacancies and delinquencies. Expenses should include property management fees (if applicable), real estate taxes, utilities, insurance, trash, repairs and maintenance reserves, and gardening/landscaping. Keep in mind that different size apartment buildings have different expenses.
Step #2: Calculate the Projected Cash Flow (Per Unit)
Once you have a model in place, you should start gathering data. You can compile data by using online sources such as Loopnet, Crexi, or ApartmentBuildings.com. Also, reviewing lots of offering memorandums will give you a sense of your potential cash flow of similar properties. Make sure that you keep the integrity of your data by finding properties that are similar in location, size, unit mix, and income.
Using the data that you gather, create a model for each apartment building. Then create one model, averaging all the values that you found. This model will tell you how much cash flow to expect from a property or unit.
Step #3: Figure Out How Many Units to Get to Your Income Goal
In order to figure out how to get to your passive income goal, use the following formula:
# Units Needed = Passive Income Goal ($) / Expected Cash Flow of One Unit
To be successful in real estate, potential property owners need to understand their goals and figure out a plan to get there. By determining the number of units you need to meet your passive income goal, you will be able to understand the prices you can afford and the minimum income you need in your new acquisition.
For more information on how I can help you increase your current cash flow, create passive income using real estate, or acquire/sell your apartment building, contact Anie Mayelian with KW Commercial at (818)915-9118. If you like a Free Market Evaluation of your property or just have a simple question about your apartment building, send us an email or give us a call. Also, if you're interested in this topic, read about How to Calculate Your Investment Property's Cash on Equity Return.