The Mindset You Need for Successful Real Estate Investments

🏢 Real Estate Investing Mindset: Long-Term Strategies & Cash Flow Secrets |

Advise RE Considering your first real estate investment, or wondering how to optimize your existing assets? In this video, Stephen Morris of Advise RE explains the essential mindset every investor needs for success in real estate.

📌 Topics Covered: ✅ Long-Term Mindset: Understand why patience is critical—real estate investing typically takes 5-10+ years to yield significant financial results. ✅ Appreciation vs. Cash Flow: Explore the differences between investing for appreciation (primary markets like LA, SF, NYC) vs. cash flow (secondary markets). ✅ Why Early Years Are Slow: Discover why the first 3-5 years often provide minimal cash flow, despite long-term equity growth. ✅ Mortgage & Equity Growth: Even if cash flow is tight initially, each mortgage payment builds equity and increases your net worth. ✅ 1031 Exchange Benefits: Learn how this tax-deferral strategy can help investors reinvest profits and avoid capital gains taxes. 💡 Key Takeaways: Real estate rewards investors with a long-term outlook—patience pays off dramatically over time. Choosing the right investment strategy depends on your current financial needs and future goals. Understanding the power of debt reduction and equity growth can transform your approach to investing. Whether you’re aiming for steady cash flow or substantial appreciation, real estate can significantly grow your wealth—if you have the right mindset and patience to see it through. 📩 Questions or need advice on your real estate strategy? Contact us at contact@advisere.tax 🔔 Subscribe for more real estate insights! #RealEstateInvesting #LongTermWealth #CashFlow #PropertyInvestments #1031Exchange #AdviseRE www.adviseretax.com

TRANSCRIPT:

Hello everybody, welcome back. Stephen Morris with AdviseRE, and today we’re going to talk about real estate investments and what type of mindset you need to have when you’re considering either making your first purchase or whether you’re considering what to do with your existing assets.

So, if you’re here watching this video, I’m certain that you’re very interested in investing in real estate. You probably have these dreams or visions of owning this successful apartment building that’s throwing off so much money that you can just hang out at the beach while property management does everything and all the cash flow is just flying into your bank accounts, so that you can spend it on cool things. You’ll tell them that we’re at the Beverly Hills Hotel?

I’m here to tell you that that future could be available to you, but it’s going to take quite a bit of time to get there. If you’re not prepared for that type of journey, then I’d recommend probably choosing a different investment class. With that in mind, let’s go over what the typical life cycle is of a real estate investment, and why the first five years of your investment, in particular, may just not be that exciting at all—but if you hold it for a long period of time, you’ll be a very happy investor.

First, let’s talk about how real estate has performed historically over the past century. Generally speaking, with the exception of some markets, real estate has gone up, and gone up in a major way. Why? Number one, they’re not producing more land. Number two, the fact that zoning is generally restricted in major cities means you’re starting to see supply totally being outweighed by demand, and the cost of real estate is just skyrocketing as a result.

That being said, at times you might see the market go super high. We’re thinking about the years between 2004 up till the great recession of ’08, when people said, “The market’s in an itsy-bitsy little gully right now, and the whole housing market is about to collapse.” And then of course, the past decade has been fantastic. Let’s say from 2014 all the way until 2024, you have seen real estate—with a minor little blip—really skyrocket as well. Does that mean that real estate’s always going to perform this way? Not necessarily. It’s going to depend on certain conditions on the ground. But generally speaking, the longer you hold, the happier you’re going to be, and that’s historically proven out to be the case. It’s how I get the big bucks!

With real estate, there are typically two types of strategies that you might engage in. The first one would be an appreciation strategy. Appreciation strategies typically involve buying stabilized assets in primary markets. Los Angeles, San Francisco, New York would be great examples of primary markets. Typically when you’re buying these properties, you’re doing so at a very high price with a very low yield. As a result, you’re typically being quoted cap rates that are—especially in today’s market—at or even below the borrowing cost.

So why would you ever buy something where the borrowing rate is higher than the cap rate, thus achieving something called negative leverage? The reason being is that you’re assuming that supply is not coming down the pipeline, which is going to kind of cut your legs out from under you in terms of valuation of your property. You’d assume that if you’re buying at such a low cap rate, there probably isn’t a lot of supply that’s coming into the market, and you’re guaranteed to find tenants to rent your facilities at a very high rate—and over time, probably a higher and higher rate. So you’ll see your property appreciate over time, even if it’s generally producing no cash flow in its intervening or early years.

This type of strategy is fantastic for long-term thinkers, especially if you have a business or you’re in a profession that generates a lot of cash flow. Let’s say you’re a plastic surgeon pulling down $10 million a year as a celebrity. You probably don’t care about the rental income coming off of your apartment building. It’s a great problem to have. You’re more than happy to buy something with a very low cap rate because you seek stability and appreciation over the long term. This type of real estate strategy, I don’t typically recommend to investors for their first-time properties, unless you have that situation like we talked about here, which is a significant amount of cash flow from an existing operating business.

We typically would go for the second strategy, which is a high cash flow strategy. These types of strategies are typically found in secondary markets. So, you might be looking at the middle of the United States, where perhaps the cap rates are much higher than the borrowing costs, and so you’re immediately able to be cash flow positive right after you acquire the property.

The downside to that—you might be thinking, “Well, how could there ever be a downside? I’m getting cash flow every single month.” The downside is that many years from now, you’re probably going to end up selling your property for a smidgen above what you paid for it. Why is that? Well, there’s probably no restrictions on zoning laws in that particular state or city that you’re looking at. There’s probably tons of supply coming down the line. Cost of labor and cost of materials might be a lot lower over there, and so whenever demand starts to show up, supply immediately follows. Whereas when we’re looking at cities like Los Angeles and San Francisco, when demand shows up, supply is nowhere to be found, thus resulting in much higher rents.

Does that mean that the cash flow strategy is a bad idea? No, of course not, because having cash flow is fantastic and conducive towards you building wealth. We’d strongly recommend a mix of both strategies, but it’s going to depend on your situation. It’s going to depend on how badly you need the cash flow now versus how badly you’d like to have the appreciation later.

As we know, appreciation leads to something else—the ability to borrow again on that property. So let’s use the example of the plastic surgeon that bought an apartment building in Santa Monica at a three and a half percent cap rate. Over time, that property might triple in value, and there would be an opportunity down the road to borrow against that asset to buy another property. That’s fantastic. Whereas the cash flow situation most likely is not going to have that opportunity to do so, because you’re just generally not going to see the appreciation.

Regardless, in either situation, in the first years, you’re not going to see a lot of cash flow. Why is that? Well, as we know, the biggest barrier to entry in real estate is having money. That seems mean. If you don’t have the cash, it doesn’t matter how hard you want it, you can’t buy the property. There are very few loan programs that would give you very, very high leverage. Those are typically reserved for single-family homes. And when you start to move into apartments, retail, other sorts of ventures like that, you’re going to start to see that you need to put down a significant down payment.

So, to that end, you’re incentivized to borrow as much as possible from the bank. However, the bank will typically limit how much they’re going to loan you based on something called a debt service coverage ratio. If we’re using an example of a 1.15 debt service coverage ratio, the bank is basically saying, “Our loan payments have to be exceeded by your net operating income by a factor of 1.15.”

Let’s say that the loan you’re seeking has a $10,000 monthly debt service payment. You would have to generate $11,500 of net operating income from the property in order to achieve a loan with that $10,000 monthly payment.

So what does all that mean? Well, if you have, for example, one vacancy on one unit for just one month, you’re roughly out 8% of your annual income—because you’re talking about one month out of twelve. Add an additional unexpected repair to the mix, and perhaps a couple of other unforeseen expenses, and you might very quickly find yourself with very little or no cash flow for that year.

So why get into this business? Well, we know that over time, the economic outcome for you will improve. Rents will gradually move up, your mortgage payments will stay the same, and if you’re in states like California, your property taxes are generally going to stay the same too—which is a fantastic outcome. Now, it’s true that repair and maintenance costs might rise, but historically, we’re seeing that these increased expenses are outweighed by the growth in rental income.

Over time, you’re going to see that the economics of your particular real estate investment are going to totally shine. After 10, 15, or 20 years, you’re going to look like the biggest genius ever because your cash flow is just so juicy—but it took you a long time to get there. The secret is, you’re not really a genius; you were just patient and had a very long-term mindset. Whereas, in my opinion, most people don’t find this mindset very alluring because they’re looking for quick returns today. They’re thinking, “I bought a stock for a dollar, and it went up to ten. I made 10X my money—why would I ever do something like wait 10 years for a real estate investment play to work out?”

I’ll leave it up to you to decide which one’s better. In my opinion, typically the real estate investment has worked out, whereas most people have found themselves pretty much at a total loss when they’re seeking these types of short-term gains or short-term returns in the stock market.

I would be remiss not to mention one more important thing: although it’s true that in the initial years, after you’ve paid off your debt service and expenses, cash flow tends to be very light, you’re actually gaining significant value in the property month-by-month. Every month when you make that mortgage payment, you’re paying down the debt on the property, which means your equity is steadily increasing. Thus, your financial position and your net worth are actually growing every single month—even though you might not be seeing that cash flow start to hit your bank account in a meaningful way for the first three to five years.

That’s a powerful thing that, I believe, is often overlooked. But again, you have to be comfortable with that situation and ideally have a different cash flow stream or another means of earning income, so that you’re not relying solely on this particular property to supplement your lifestyle or provide all the income that you need each year.

So if you’ve been patient enough and you’ve stuck with this investment for the next 10 to 15 years, you have an opportunity to dispose of it and buy a new property. By using a 1031 exchange—which is unique to real estate—you can defer, and ultimately avoid entirely if you hold until death, the capital gains that you’d otherwise recognize from the sale of your property. This particular area of the law, in my view, is tremendous and is one of the main reasons why we’re such huge proponents of real estate here at AdviseRE.

So, to recap what we’ve talked about here today: first, typically real estate investments are not overly enticing or profitable in the initial few years. It’s usually around year five when you’ll start seeing significant improvements and meaningful economic benefits from your property.

Second, real estate is fundamentally a long-term investing strategy. If you have the mindset and willingness to hold a real estate investment for an extended period, you’ll likely see fantastic economic outcomes.

Third, even if the cash flow isn’t abundant in the initial years, you’re still profitable overall, generally speaking, because every mortgage payment increases your equity and reduces your debt—a fantastic outcome that we really value here.

Lastly, when it’s ultimately time to dispose of the property—whether after 10, 15, or 20 years, or even earlier depending on your situation—you can utilize a tax-deferred exchange, also known as a 1031 exchange, which is unique only to real estate.

I hope this video has helped frame your mindset about real estate investments, and hopefully, it will support you when considering your next purchase. Remember, this is about having the willingness to hold the asset long-term and not relying solely on its cash flow to achieve your financial goals—ideally, to retire wealthy at some point.

Hope this video was helpful, and please feel free to contact us here at this email below if you’d like to learn a bit more about real estate mindset, real estate strategy, or if you’d just generally like to discuss your thoughts with us. Thanks so much for watching!