Have you ever wondered where the term “cash cow” comes from? Not surprisingly, it ties directly back to a dairy cow.
A dairy farmer takes pride in his best cow, which can produce as many as 10 gallons of milk every day. Milking the cash from the cow requires very little work from the farmer: All he has to provide is some good grass for grazing, a few food supplements and a little TLC and the cow will give the farmer milk (or cash) day after day, week after week, for years.
While it isn’t practical for most people today to start a dairy farm, there is a way that almost anyone can reap the benefits of their own cash cow. I call it “mailbox moo-la.” When done right, investing in real estate can produce cash flow every month with minimal work and maintenance by the owner. If you buy enough cash cows and take proper care of them, you can generate more money than you ever dreamed possible.
Getting Started Small
I began to discover the secrets of mailbox moo-la years ago when my family decided to move so I could be closer to my job and shorten my commute. Our first inclination was to sell the house we were living in because; after all, that’s what almost everybody does, right?
But the more I thought about it, the more I came to realize that just selling the house so we’d have more money to put down on a newer, bigger house wasn’t the smartest thing to do after all. Late one night, I was watching an infomercial about buying rental property for no money down. This commercial inspired me. So I crunched some numbers and discovered that we’d only make a $3,000 profit selling the house.
I knew the house would be easy to rent: It was a well-maintained, three-bedroom, two-bath home with a large deck and fenced-in yard on a cul-de-sac, complete with a rocking chair front porch … the picture of Americana. I figured we could rent it for about $1,100 a month and our mortgage was about $800, giving us a positive cash flow of $300 every month. Therefore, we’d make $3,000 in just ten months and everything after that would be gravy.
We ran an ad offering to rent the house in the local newspaper and received a ton of calls. The first couple who showed up had good income, decent credit and were eager to move from an apartment to a house, so we signed a lease. I was shocked that it had been so easy. We kept the house for many years after that and enjoyed some great cash flow during this time. More importantly, I came to understand in a very real and tangible way the money-making power of investment real estate—mailbox moo-la.
With this first rental property, I was off and running as a new (and somewhat green) real estate investor. I soon learned that they aren’t all this easy, but the key was getting started—taking the initial plunge and at least getting my feet wet.
Tips for Success
Since my first real estate investing experience with that little house 17 years ago, I have bought, leased and sold dozens of properties. They eventually began generating enough cash to enable me to retire from my 9-to-5 job and spend my time doing the things I really enjoy, like hanging out with my wife and kids and buying, selling and leasing more investment properties; and now, commercial properties.
I have also learned some valuable lessons. Here are my top 5 tips for real estate investors:
1. Decide whether you are a net worth or a cash flow investor. A net worth investor makes most of his or her money over a long period of time, but makes little on a month to month basis. The key to this investor is building net worth slowly as the property appreciates in value. Most investors who buy single-family homes are net worth investors: They’re counting on the fact that single-family homes have appreciated in value in the past and hope to capitalize on that trend.
In contrast, the cash flow investor looks primarily for properties that will produce extra cash on a monthly basis. Appreciation of the asset is not as important to them. In other words, they may give up some future appreciation for money in their pocket right now. Multiple-family units, like duplexes, quads and apartments, generally fit this bill because they can be bought cheaper than single-family homes due to lower land and development costs per unit.
2. Don’t buy any property that will result in negative cash flow. It still amazes me how many people think it's OK to lose money (in monthly cash flow) when buying investment property. Why would you buy any investment knowing you're going to lose money, even if it’s just in the short term? If you don't have positive cash flow on day one, you're doing something wrong. I've never purchased property and started out with negative cash flow—it makes no sense.
3. Make sure you have the right mentality. Before deciding to invest in real estate, it’s important to understand yourself. To put it bluntly, if you’re a “softy,” it’s going to be a tough job for you. I can guarantee that eventually tenants will take advantage of you if you show weakness. Firmness and understanding are the keys.
4. Consider hiring a professional property manager. One of the biggest objections many people have to becoming a landlord is that they don’t want to “fix toilets.” If you’re not the handyman type, a property management firm can handle the minor repairs for you. They can handle some other tasks as well, like providing up-to-date leases and legal forms you can use with your tenants. Of course, you’ll pay a fee for these services, but it could be money well spent.
5. Offer referral fees to your current tenants who help you find good new tenants. Finding good tenants who will pay the rent on time and keep your property in good condition is the biggest challenge of investing in real estate. That’s why I offer referral fees to my existing tenants who recommend other good tenants. These fees normally range from $100-$250, depending on the price of the unit.
With some effort and proper research, you can create cash cows for yourself. For more information, visit the website: www.MailboxMoo-la.com