The Snowball Method in Real Estate Investing
Do you know about the “snowball momentum?” If so, then maybe you have an idea about what we mean by “the snowball method.” You start by making a small snowball, and as you roll it down the snowy field, it increases in both size and speed. You can do the same with your money in real estate investing! Buying, holding, and accumulating the cash flow will be the key to increasing your money in both, size and speed.
We offer you two different ways of using the cash flow in the snowball method: a) you can use it to pay off one mortgage at a time b) or you can use the cash flow to buy more propertiesright away. Take a look at both options in more detail below to better understand how the snowball method works for your advantage.
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Snowball Method A: Use Cash Flow to Buy More Properties
Some of the most successful real estate investors use this strategy. Warren Buffet is just to name one example. The key to this strategy in real estate investing is to use the cash flow you make from your rental properties to purchase more rental properties. As you accumulate more rental properties, the cash flow would constantly keep increasing, making the time to save up for another property shorter and shorter…hence the snowball effect! Your “snowball” (or moneyball, rather) starts getting bigger and gaining more speed.
For example, let’s say that you have a rental property that generates a $500 cash flow every month after expenses. It’s a slow start but you’ll be generating an extra $6,000 a year. And let’s say it takes $25,000 cash for a down-payment on a new property. Then in about four years, you’ll be able to purchase the new property for real estate investing. Now, you’ll be generating $1,000 in cash flow ($500 from each property after expenses). With that, you’ll be able to purchase a new property in two years, rather than four — and so on.
This is a short example with little cash flow, just to show you the possibility of this snowball method in real estate investing. With mortgages and more cash flow, you might be able to generate more cash flow and be able to increase your money in an even shorter amount of time.
Now, the key here is to not use your cash flow. You use it only to save up for another investment as much as possible. This takes lots of willpower and other sources of income. But, it’s almost guaranteed that if you do save the cash flow, it’ll be worth increasing your money!
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Snowball Method 2: Use Cash Flow to Pay Off One Mortgage at a Time
Another way you can use the snowball method is to use the cash flow to pay off one property at a time. That way, you pay off your mortgages pretty quickly. The key is to focus on paying off one property at a time if you already have more than one property. If you buy properties that are under market value, this technique will work even better. And then, once a mortgage is completely paid off, you’ll be making more cash flow because you have one less mortgage to worry about. Once you’ve accumulated multiple properties, you’ll be able to pay off one mortgage a year, then two, and so on.
This technique works better for some — as opposed to buying more properties with the cash flow — because many banks limit the amount of loans you can have. So, this will give the advantage of having fewer mortgages in your name. Consequently, you’ll have an advantage with banks since you’re able to pay off your loans quickly. This technique can also help you pay off your mortgages before the interest rates go up.
When you’re first starting, it’s nice to have other sources of income coming as well because this also requires you to use as little as possible from the cash flow for personal use. Ideally, you’d want to use up all the cash flow to pay off the rental properties. With that, you’ll be better able to make money from real estate investing in the long run. This might take up longer than the first option, but the trade-off is only having one mortgage at a time to worry about.
The Bottom Line…
The snowball method has been the key to success for many real estate investors. It allows you to obtain more real estate investment properties. It’s up for you decide if you’d like to use the cash flow to purchase more investment properties right away or if you’d like to begin by paying off the mortgages. So, assess your assets and know that the snowball method will always work for your advantage in real estate investing!
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Originally published at www.mashvisor.com on October 19, 2016.