Many are familiar with the ‘snowball momentum’. In theory, it starts as a small snowball, and as you roll it down the snowy field, it increases in both size and speed, creating a ball of snow of massive proportions and rolling at a great speed.
The same can be applied to property investment. The concept of buying, holding, and accumulating the cash flow will be the key to increasing your money in both, size and speed.
When it comes to investing in real estate, many people feel disillusioned. It’s easy to feel like you’ve got to be wealthy, or at least have a mountain of cash just sitting around waiting to be used before you can dive in.
But the truth is you don’t need an endless supply of cash in order to get your start in real estate, and you don’t need to rush out and buy an apartment complex as your first property. In fact, most everyday investors start out smaller and work their way up gradually.
Such is the snowball effect, a concept which can be applied to real estate investing as well. At the beginning, you don’t just rush out and buy 20 properties, or even two –you start with one. You then gradually build momentum, collecting the revenue from that one, and using it to finance your second purchase, and so on. As your investments take off, you’ll be able to grow your wealth more quickly.
As an added benefit, this approach also allows you to get started on a smaller level –and learn the ropes, getting familiar with the process, before you own more properties, and there’s a lot more at stake.
With this in mind, let’s break this process down a bit more now, and see how you can start out small and build momentum as you go along.
To lay down the foundation and break the code on the snowball effect in property investment, IQI had a session with Dave Chong as the speaker to share his two cents on the topic.
Driven to achieve, Dave is now decorated with achievements as the IQI Group Vice President as well as the founder of IQI Eliteone Group, despite only starting out as only a part time real estate negotiator.
Dave has gone on to establish a successful career for himself over a short span of eight years. In 2014, Dave went on to becoming one of the Top 10 Achievers in IQI and was promoted to team leader and team manager thereof. To date, Dave has closed over RM1 billion in sales for IQI, laminating his outstanding feat.
Buy 1 Free 1 Strategy
On the subject, Dave opened up by reiterating the ‘buy 1 free 1’ strategy which is already well-known by IQI members. It was previously introduced by speaker Adrian Seow in a former session.
The ‘buy 1 free 1’ strategy can also be seen as a ‘snowball effect’ strategy. For instance, property owners are usually faced with a common dilemma when their property value appreciates, which is the decision to either sell or keep the property.
However, a good investor would take this opportunity to double up his wealth. You would buy two properties, one for selling and the other for keeping. The cash that you earn from selling the property would be enough to cover the loan for the second property.
Effectively, if your property value were to appreciate by 100%, you would be technically getting one property for free by clearing up the loan or keeping the cash to offset the loan. This method would be most ideal for investors who have identified profitable projects, and are able to purchase two or three units from there at the same time.
Combine Trading Business and Property Investment
To familiarise with the snowball effect, investors must first understand how to combine trading business and property investment together. He must also understand the basics of trading business, which the act of buying something at a cheap price and selling it at a higher value.
Dave shares some important terms in trading, namely capital, profit margin, credit term and cash flow.
He explained the crucial understanding of these terms in ensuring a high return of investment (ROI). Imagine if you have a trading business which can generate 10% profit per trade and you can trade up to 5 times in a year. You will be able to get a 61% ROI of a RM500,000 capital and ending the third year of your business trading with RM 2 million. From there, you can take the money to invest in property and then put the property as a collateral to the bank to get a tradeline facility to increase your business working capital, effectively beginning your snowball momentum of generation by leveraging on the extra cashflow from the property itself.
The key to this strategy in real estate and business investing is to use the cash flow you make from your previous trading to create continuous income. As you accumulate more working capital, the cash flow would constantly keep increasing, making the time to save up for another property shorter and shorter, hence the snowball effect.
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 loans 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 loan is completely paid off, you’ll be making more cash flow because you have one less loans to worry about. Once you’ve accumulated multiple properties, combined with cashflow from your business, you’ll be able to pay off one loan a year, then two, and so on. This technique can also help you pay off your loans before the interest rates go up.
Property Capital Appreciation and Rental
On top of the cashflow generated from the business, Dave also touched on the imperative aspect of property capital appreciation and rental. Over the years, both the capital and rental will increase, thus giving more net assets to your company. Eventually, we have the option to keep the property for rental cashflow or sell it to capitalise on the profit.
The bottom line, the snowball method has proven to be the key to success for many
real estate investors. It allows you to obtain more real estate investment properties. Continue to assess your assets and know that the snowball effect will always work for your advantage in real estate investing.
Once you have started to build momentum and have your snowball rolling, it is time to start gaining speed. You’ll know what to look for in a property, what things to avoid, and how to go about managing it for the best returns possible.
In the end, you’ll be able to benefit from both cash flow, as well as asset appreciation on your properties, giving you the best outcome in years to come.