A really cool fellow named Jonas sent me an e-mail yesterday with some questions about the market and how to protect oneself when it acts against you. As I was answering his e-mail I realized he hit the core of my philosophy within real estate investing so I figured Id share it with all of you. Listen carefully.
My nr. 1 rule for success and risk elimination when in real estate is focusing on cash flow. Always make sure that whatever you own is of value for others. That way it’s easy to find customers willing to lease it from you and the rents is what pays your costs and makes your initial money.
As we buy places for cash flow and that cash flow makes us money almost all risks are eliminated from the get go. Judging from our experince (the last few hundred years) the real estate market will keep going up quicker than the inflation. This means that we will most likely be able to sell our properties with profits in the future. However, the market is a bit twitchy. That means there can be temporary downturns that makes our real estate worth less than what we paid for it (very unlikely and rare). But who gives a damn? This is where we find the real beauty of cash flow. Since we have people leasing our properties we are making money no matter what the market is up to, we just wait. Sit down, relax and cash in on rents. Sell when the market wants to buy instead. We are making money anyway.
To be even safer there is a few more things to have in mind. The costs of owning real estate can go both up and down. Try to keep some margins for changes in interest, the price of electricity, taxation rules and stuff like that. Theese things don’t usually change that dramatically but can consume some of your profits.
Jonas also asked about the upcoming election and potential change in governments (Sweden). There are two major blocks. One block more socialistic than the other. The ones in power at the moment (little bit more right wing) have done a truly great job keeping Sweden alive and healthy during the economic crises we have seen since 2008. They are a lot better for Sweden as a whole and for the country’s well being I really wish for them to stay in position. Sadly the more socialistic block looks to be ahead and that sucks.
For me personally and as a real estate investor it doesn’t matter much. The more right wing parties make for a more honest and easy ride, but the more socialistic parties usually make even better economy in what we are doing. If you were to play according to the socialistic bloc’s rules they would ruin you by over regulating and excessive taxes. Luckily the over regulation they happened to be so fond of is our way ahead. Thanks to their wish to control everything with rules and laws they end up creating massive loopholes where we can play. By taking snarecuts and being creative we avoid all their rules and get out of it without any real harm.
The sad thing about the socialistic politic is that it makes hard working people pay for the lazy ones while us capitalists gets a free ride to financial freedom. You see the socialist bloc loves giving allowance to all people experiencing troubles. I like that in moderate amounts. With the socialist bloc in Sweden the amounts are not moderate. They are insane. And to pay for all this they need more tax. Since they try taxating the rich so bad that the over regulation made for too many loopholes and it doesn’t work they start taxating the people working for others instead. When working for a salary the government takes their taxes before giving it to the worker. That’s not the story for entrepreneurs and investors.
I can go on forever about this but now is not the time. Long story short. I’m a liberalist at hart. To me a governemt should act after Thomas Jeffersons ideas. He said something like: “A good governemt is one that prevents people from hurting each other but for the rest leaves them alone to diligently improve their living conditions”.