The #1 Thing You Need to Know About Investing in Real Estate

"Cash flow determines the value of the real estate" - Grant Cardone

What's the #1 thing you need to know about investing in real estate?

If you're thinking about entering into the real estate investing game, understand this:

                                          "Flipping houses is not investing in real estate."

I don't care what financial guru you have been listening to -- they don't know what they are talking about.

House flippers flip houses so they can eventually move out of that particular game and enter into the multi-family real-estate investing game. People that invest in apartments aren't looking to get into the house flipping business.

As a matter of fact, think of it like this: The house flipping business is a business that you eventually grow out of. Someone who owns and runs a million dollar company doesn't go back several steps and opens up a lemon-aid stand on the corner of his or her neighborhood.

That lemon-aid stand is where a young entrepreneur may get his or her feet wet when it comes to running a business, but if they are already a successful millionaire, it doesn't make sense for them to go back to such an elementary level playing field.

The One Piece of Real Estate Data That Really Matters

With that said, there's only one piece of data that truly determines the value of a piece of real estate. But before we get into what that ONE piece of data is, here is what data it is NOT:

• It’s not the CAP rate
• It’s not the price per unit
• It's not the price per square feet

Understand this: Real estate is a place for you to protect your capital, and the only way to accomplish that protection and security is through cash flow.

Back in the day bankers and other types of financial advisers would tell you that your house was an asset.

The truth of the matter is: They lied to you.

You see, they considered it an asset because it is an income generating source for them, but it is not that way for you. Instead, it is a liability and a huge expense.

That is unless you are turning your house into a source (or stream) that generates income for you, as apposed to the banker. In other words, it becomes a property that increases your monthly cash flow -- another stream of income.

Take a minute to watch the following video by Grant Cardone, and then I will return with my final thoughts.

Knowledge is Powerful, But Strength is Stronger

After watching that video above, here is what you really need to understand about investing in real estate:  You are investing in a business, and a business's life is determine by it's cash flow.

Look, after spending the past eight to ten years going to business school, here is what I've found.  You absolutely need debt.  I don't care what your parents have told you about debt, or what your financial guru or advisor has told you -- you 100% need debt.

With that said, please don't misunderstand me and go and say that William told me to get as much debt as I possibly can. That is not at ALL what I am trying to tell you here.

What I am saying is this: Before you go and get any debt or apply for any kind of loan, what you need to do is increase your financial intelligence.

In other words, increase the knowledge you have about managing money and making big investments. You need to be financially SMART before going into any investment deal, or applying for any kind of line of credit.

And that is exactly what Grant Cardone alluded to when he quoted Warren Buffet who said, "The way to financial security is to increase your knowingness."

Therefore, the first type of "major investment" you need to make before you ever attempt to make any kind of real estate investment deal is to start increasing your financial intelligence.

They say that knowledge is power, and in this case, it's true. However, there is a difference between power and strength. You may become more "powerful" as you increase in knowledge, but strength is greater than power.

You see, think of it like this: Medical doctors and scientist will tell you that our source of our strength is in our blood. It takes blood to keep our heart pumping and our brains functioning properly -- it is our life source.

In other words, the more blood we lose the weaker we get. Without blood our heart would stop pumping and we would eventually die.

You see, in business, it wouldn't matter how much knowledge (power) you had in your brain, if you didn't have enough blood (cash flow, debt, working capital -- strength) flowing to your brain. Without it, the life of your business would come to a life-shattering halt. 

Therefore, the second thing you need to do (but not before increasing your financial intelligence) is to become a good steward of debt by learning how to manage a little. And little by little, increase your credit score.

You see, the reason people get such a bad taste in their mouth when they even say the word debt is because no one has ever taught them how to manage money (debt) properly -- the truth is: they fear their own weakness (lack of knowledge) when it comes to being able to manage money properly.

The stronger you become at managing a little debt (and the stronger your credit score becomes) the more banks and creditors are going to want to lend their finances to you because they know that you have cracked the code -- if you will -- on how to put money to work.

Here is just a little bit of "real estate financial intelligence" you should be able to take away from the video above:

• Any real estate deal you make must have a 10 to 12% cash flow
• Debt determines the cash flow

It doesn't make any sense to invest in any kind of real estate deal that doesn't have a 10 to 12% income ratio. Remember: Cash flow determines the value of the property.

In other words, if a seller is telling you that a piece of property is "valued" at a million dollars but it won't bring you in 10 to 12% (of that million) in income, then it is  not a deal worth investing in.

Now, when we say that "debt determines the cash flow," what we are saying is that the amount of income the real estate property makes us will determine how much the banks (third party lenders) are willing to loan us.

The banks won't want to lend anything if they don't see that there is a "strong" enough cushion available to provide some kind of safety precaution -- we are talking about cash flow, working capital, NOI, etc.).

If there is anything that you get out of this article, let it be this: Cash flow is the life and blood of every business. The more blood (cash flow, working capital) you have, the more strength you have. That is why I say strength (blood) is greater than power (knowledge).

Final Thoughts

In closing, perhaps you have heard of this thing called "Reits." Reits are nothing more than a lazy man's way to try and get into the real estate investing game. They are the real estate markets version of the stock market -- where you have no control. It's nothing more than gambling.

Look, the bottom line is this: To get into real estate you need money. You need to be able to create a surplus of wealth to be able to make strong and powerful investments.  In other words, the only way to increase your cash flow is to increase your ability to make income, and the only way to do that is through selling.

The number one marketable skill set that everyone should develop is their ability to sell. I know that selling has a bad stigma behind it, but it is only the ones that don't know anything about selling or how to sell that want to keep this stigma alive.

Look, you and I both know that there are some so-called "salesmen" out there that try take advantage of people, but the truth is: This isn't selling at all, it's manipulation. True salesmanship comes with ethics and values that are unwavering.

If you are interested in increasing your ability to sell, and eventually move into the real estate investing game with Grant Cardone, I suggest you take him up on the sales deals he's offering HERE.

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William Ballard ​ ​ ​

William Ballard is the author of "The True Writer's Life," which is the book that essentially started it all for William. In conjunction with the coaching he provides for free through his blogs and articles all across the web, he also offers Personal Writing and Business Coaching where he teaches freelance writers and aspiring authors how to start, build and maintain full-time, high-earning writing careers. 

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