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Successful real estate empires are not built in a day, but instead by starting out slowly and allowing the momentum of each success pile up and fuel the next investment.
Growth is one of the most important things to focus on early in your investing career as you work towards the dream of financial freedom. So, it is important to understand how you can create opportunities for growth through the snowball effect.
This snowball effect is the basis of building investments that are going to stand the test of time quickly and efficiently – but how exactly does it work?
Well, before we explore the full impact of the snowball effect, we want to offer you a tool that keeps getting better – a free strategy call with us at LendCity. Click the link below to experience a positive snowball effect of returns on smart financing today with our professional guidance.
What is The Snowball Effect?
The snowball effect is the simple principle of using the investments you have already made to grow your portfolio at a faster rate the same way a snowball rolling down a hill will begin to grow faster as it collects more snow and increases its size. As your investments grow and your portfolio expands, you gain new sources of income that will allow you to pursue new avenues for investment much more easily.
Understanding the Snowball Effect in Real Estate
Obviously unlike a snowball rolling down a hill, there is much more direct action required to grow your real estate portfolio, but the basic concept of the snowball effect remains the same. It is much easier to grow your portfolio once you already have a profitable property under your belt than it is to get started with nothing.
To help demonstrate how this process works and how you can take advantage of this phenomenon, let’s take a walk through the basic steps.
Start with One Property
People will often say that your first property is the hardest, and for good reason. This first property can easily become the key to kicking off your entire investment career if you are wise with your purchase. This is where the snowball effect begins.
Ideally, you want a property that turns a profit and generates a meaningful cash flow. This way you can comfortably prepare for the next step of this process. Frequently this is done through buying single-family rentals that have enough room to earn at least $200-$300 per month in cash flow. While this is not enough to become financially free just yet, it will help you build momentum.
Save Your Earnings
As you earn money from your rental property, do not start spending it right away. Instead, fight the urge to spend your profits and set them aside somewhere they can potentially gain interest as you develop enough savings for another down payment.
On top of the savings you build through setting your cash flow aside and allowing it to build interest, your property will also being building it’s own savings in the form of equity being accrued each time a payment is made towards the mortgage. On top of that, as improvements are made to the property and the market grows the property will continue to gain additional equity. This equity can be taken out in variety of ways in order to leverage your first property for further investments.
Reinvest and Scale Your Portfolio
This is where the snowball effect fully takes hold.
Once you have sufficient funds set aside from your first property, it is time to reinvest and scale your portfolio. The exact methods you use to reinvest are up to you as your craft an investment strategy that works to help you achieve your personal goals as an investor.
However, in order to help you get a clearer picture of what you are capable of, here are a few options that you can consider at various stages on your investment journey.
Buying New Rental Properties
This is a great option for investors at any stage in their career. Since each property provides the opportunity for you to earn cash flow and build equity even faster, it is an excellent option to help build momentum.
However, it is important that you are smart about where and what you buy because if you buy too many similar properties in a certain area, you are leaving yourself much more vulnerable to the impacts of an economic downturn in the region.
Investing in REITs (Real Estate Investing Trusts)
REITs or Real Estate Investing Trusts are similar to stocks in the sense that investors can buy stake in these companies on the assumption that they are going to take those funds and make money. Then, on a schedule determined by the trust, dividends will be paid out to the investors based on the amount of equity they own in the trust and how much the trust succeeded with their investments during the period.
These are great because it offers more flexibility towards how much you need to spend in order to buy-in, but it also limits the number of ways you can profit from your investment.
Upgrading Existing Investments & Building ADUs (Additional Dwelling Units)
Finally, you can take the money you have pulled from your investments and put it right back into the properties you own. This can be through renovations, upgrades or by building ADUs (additional dwelling units) on the property to increase the number of tenants you can rent to from a single property.
This can provide you with the opportunity to potentially charge higher rents, build equity and gain new sources of cash flow thus increasing your ability to grow much more quickly.
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Get The Best Mortgage Every Step of the Way
As you are expanding your portfolio and taking on new mortgages, the best financing options are going to become harder to find on your own, and it is possible that the options you pursue can limit your abilities later if you are not careful.
So, what you need is to connect with a mortgage broker who can strategically set up your mortgages to give you the best deal every single time. At LendCity, we call it our Investors Roadmap.
To get started on the road to investment success, give us a call at 519-960-0370 or you can visit us at LendCity.ca to apply online today. Alternatively, click the link below to book a free strategy call today.