Snowball Investing

One of the many advantages of real estate investing is an approach known as snowball investing. The concept is simple, use the cash flow from existing properties to help fund the purchase of your next property.

The Concept

To keep things simple, in the following example I will assume:

Calculating what we need for one property:

Assume you purchase one property per year.

Property # Cash to Close Unit Cash Flow Total Cash Flow Out of Pocket
1 50000 0 0 50000
2 50000 2500 5000 45000
3 50000 2500 7500 42500
4 50000 2500 10000 40000
5 50000 2500 12500 37500
6 50000 2500 15000 35000
7 50000 2500 17500 32500
8 50000 2500 20000 30000
9 50000 2500 22500 27500
10 50000 2500 25000 25000
11 50000 2500 27500 22500
12 50000 2500 30000 20000
13 50000 2500 32500 17500
14 50000 2500 35000 15000
15 50000 2500 37500 12500
16 50000 2500 40000 10000
17 50000 2500 42500 7500
18 50000 2500 45000 5000
19 50000 2500 47500 2500
20 50000 2500 50000 0

What if we assume that rents and property prices rise by 5% per year due to inflation? Two things to keep in mind: 1) Debt service, your largest cost is fixed so your return rises with inflation. 2) Incomes historically track inflation, so the last column shows cash out in present value dollars; after correcting for inflation.

Property # Cash to Close Unit Cash Flow Total Cash Flow Out of Pocket Present Value
1 50000 0 0 50000 50000
2 52500 2500 2500 50000 47500
3 55125 2625 5250 49875 44888
4 57881 2756 8269 49613 42171
5 60775 2894 11576 49199 39359
6 63814 3039 15194 48620 36465
7 67005 3191 19144 47861 33502
8 70355 3350 23452 46903 30487
9 73873 3518 28142 45731 27438
10 77566 3694 33243 44324 24378
11 81445 3878 38783 42662 21331
12 85517 4072 44795 40722 18325
13 89793 4276 51310 38483 15393
14 94282 4490 58365 35917 12571
15 98997 4714 65998 32999 9900
16 103946 4950 74247 29699 7425
17 109144 5197 83157 25987 5197
18 114601 5457 92772 21829 3274
19 120331 5730 103141 17190 1719
20 126348 6017 114314 12033 602

Due to the inflation advantaged nature of real estate, even though prices rise, the present value purchase prices remain about the same. We could look at other numbers and such but I hope the concept is clear. Also, once the mortgages are paid off, your cash flow will increase significantly.

Summary

Using cash flow from current properties to purchase additional properties is one of many advantages of real estate. Other advantages include: