The Three Stages of Real Estate Investing
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The Three Stages of Real Estate Investing

There are three stages
of real estate investing. That’s what we’re going to
talk about in today’s video. Let’s dive in. Hey there, everyone. I’m Clayton Morris. Welcome back for another video
on real estate investing. We’re devoted on this channel
to talking about buy and hold real estate for the purposes
of creating passive income. That’s what we’re all about. Not talking about
flipping houses, we’re not talking
about other strategies, creating passive income. I’m the president and
founder of Morris Invest. We’re a turnkey rental company. So I’ve done, rehabbed,
hundreds and hundreds of homes. And I’m a longtime
real estate investor, and I own many, many dozens
of properties myself. Today, we’re going to talk about
the three stages of real estate investing. This really is the guiding
principle for everything that I do in my
personal portfolio. If there are no other videos
that perhaps you pay attention to on my channel,
I really want you to take this video to heart
perhaps as the most important video that you ever watch
on real estate investing. Why? Because it really reframes,
I think, our approach to buying rental properties. Most people, when they get
started in rental investing, they think, I want
the cash flow. I want the immediate cash flow. Right? That’s why we do it. Well, if you are
in your 70s, maybe. But if you’re in your
30s or 40s or 50s, there’s a different way to
look at real estate investing. So cash flow, of course,
is ultimately the goal. We want passive income from
tenants living in our property, so cash coming into us monthly
with us having to do no work. That’s the dream, right? Our properties are producing
cash flow every month. But there are a few
steps ahead of that that are more important. And rich people know this. People who are clawing
their way up the ladder typically don’t understand this. And that’s what today’s
video is all about, the three stages of
real estate investing. So, stage one is not cash flow. Stage one is buy. So I’m gonna walk
through the three. Buy, own, and cash flow. Stage one is buy real estate. Now, we’re buying off market. We’re buying
discounted properties. We’re buying in order to
increase our net worth. This is what the rich understand
about real estate investing, is that when you buy a $40,000
home but it’s worth 55, you’ve now added $55,000
to your net worth. Build a spreadsheet and add
up what are all of your assets that you own– cash on hand,
real estate that you own– and then what are
your liabilities. The car that you just
paid for, which we all know the value of a car, right. Liabilities, right,
the boat that you have, the debt that you have. What is your net worth? Is your net worth higher
than your liability column? And the goal is to increase this
and decrease this over time. Adding that $55,000 valued
house to your net worth, now you bought that
property, you’ve increased your net worth. We’re not worried about
the cash flow just yet. When you’re young, we want
to buy properties first. So, I like to think
of it this way. And it really comes
from the Gary Keller model, the millionaire
real estate investor model. His model is buy a million, own
a million, cash flow a million. So, our goal is to, in the
first few stages, buy a million, or buy as many rental
properties as we can using leverage, using
cash-out refinances, using a home equity line
of credit, whatever it is. As long as we’re buying
properties and adding to our net worth, we’re not
worried about the cash flow just yet. Buy a million. Buy as many pieces
of real estate as you can in order to
grow your net worth. Then, once we own them–
sorry, now we pay them off. So, we’ve got leverage
on those properties. We’re using private money. We’re using some other form
factor to buy that property. Great. Once those are paid off,
then we own the properties. Now we own them. Maybe it takes you
a few years to get to the owning piece,
where you fully own them and you don’t have mortgages
on these properties anymore. Now we get to enjoy the
benefits of the cash flow. So, buy a million, own a
million, once it’s paid down, and then cash flow a million. Now, I want to break this
apart a little bit further, because you might
be saying, great, well, if I buy a million,
will the rent cover that? Because I can’t afford that. How am I going to do all this? Great. So, his theory, and
I’ve talked about this in some other videos where we
talk about return on investment and we talk about how to
buy a rental property, but I’ll give you
it in broad strokes, that you want to make sure, when
you’re buying your properties, that all of your expenses
are being met and covered by the cash flow
of that property. So, if your expenses on buying
this particular property amount to $500 a month, that
includes taxes, insurance, and you’re building
in your safety net for repairs and
expenses and vacancies, and that comes to
$500 a month, you want to make sure
that your rent exceeds that number by, according
to Gary Keller, one dollar. So you owe $500 a month
on this one property that you acquired,
everything being considered– expenses, vacancies, all
of that– in that one– and the mortgage note, $500. Well, you’d better be make sure
that you’re cash flowing $501. Yes, you’re only
making a dollar, but your net worth is
now increased by 55,000, because you bought this
house and the tenant is paying down that property. So, you’re increasing
your overall net worth with every monthly payment. You follow me? So, I like to be
a little bit more of a cushion than one dollar. So if you owe $500 a
month in this property, wouldn’t it be nice that
the rent coming in is $700, so that all that you’re getting
$200 above that, or even $100 above when you consider
everything– vacancy, repairs, expenses, and your mortgage
note and all of those things. Everything. Be super conservative
in that number. Just make sure that the
cash flow exceeds that. Now imagine that’s
just one property. What if you had 30
properties just like that, where, yes, you’re cash flowing
a little bit above what you owe, but you’ve increased
your net worth by hundreds of thousands of dollars. So now, let’s go back
to that spreadsheet, and let’s think about
that– your net worth column being exploded, and your
liabilities, you know, will go up because you
have a bit of a mortgage, but it’s going to be far higher
than your liabilities column. Now, on paper, you’re
worth this amount. If you reach that
million dollars, you’re worth this amount. And then over time, it’s
going to doo-doo-doo-doo-doo, when your liabilities
are going to drop down. So, we want to buy $1
million worth of properties, and then we want to own. Now, once those are paid
down, now we fully own it. Hala, we got it. Now, we cash flow. So, it’s hard to sometimes think
about these in reverse order, but that’s the beauty
of this methodology is that the cash flow
is there all along, but now, at the
end of it, we get to fully enjoy that cash flow
towards the end of the process. And then we can
rinse and repeat. We can pull that money back out,
we can go buy more properties, and we increase our
overall net worth. So, those are the three stages
of real estate investing, the buy, own, and cash flow. And just remember that
smart real estate investors buy properties until they die. Why? Because now if we’re over here
with all of that cash flow coming in, and no more
purchasing of real estate, this is all income now, right? And we have to then go
to the tax man, the IRS, and we have to pay
this as tax money. This is income now. All of that cash flow, without
us buying more properties to offset this, now we’re
paying a lot more in taxes, because this is all income. So, that’s why smart
real estate investors will continue to buy
properties, always adding to their net worth. And their cash
flow is coming in, it’s being offset
by the purchase of those additional properties. Buy, own, and cash flow, the
three stages of real estate investing. If you have any
questions or if this was confusing in
any kind of way, please leave some
comments below this video. I’m happy to answer
them for you. I love the feedback. So, thank you for all
of your great questions. And we have tons of great
videos here on the channel. So, explore. Go through and learn about
real estate investing, all of the strategies and
tactics that we use every day. You can watch that
on the channel. And please, don’t
forget to subscribe. Just click the little
button right here, the little Subscribe bubble. And we publish videos
multiple times a week, so we would love to
be a part of your life and publish great real
estate investing strategies and tactics to make you
a real estate investor. I’m Clayton Morris. We’ll see you back here
next time, everyone. Have a great one.


  • Joshua Parker

    I love your videos and your podcast! Your podcast has inspired my real estate investing career as a 24 year old college grad. I will continue to watch and spread your content, thank you!

  • Johnny Aliensy

    Hey; Clayton I enjoyed this video a lot; you open my eyes on the three stages of real estate investing and how I should go head on building my empire on my rental properties. In addition, your teaching and your frame of mind on rental properties is awesome. You are my coach in the entire process of real estate investing. Thank you!!!

  • Mariano Gomez

    Hi Morris, you state that cash flowing a $1 or a $100 is worth it but shouldn't the 1% rule always be applied from the other video you put up?

  • Chris Barreira

    @morris invest very simply put. I bought a two story home private for 255k (first time home buyer). zoning laws and everything else allows me to add a second unit to the basement so I am with side entrance. in the process now of renovating. SO what do I do when im done renovating? should I live in the basement unit and rent out the upstairs. I can get 1700/month for upstairs, and 700-800/month for basement (very conservative numbers). also house will be worth 370k once complete (again very conservative). I will need somewhere to live…I was thinking live in the basement, rent upstairs and then re finance, pull my money out and use all that equity PLUS the renters upstairs money as my income to help me buy another place and do it all over again. or should i rent out top and bottom, re fi, use the rental income as my income and buy something else and live in the next place i buy. i figured it would be cheapest for me to live in the basement unit. also, my mortgage right now is $615/month, I had to put 105k downpayment on 255k house (my income isnt high, and apprasial came in as "house needs lots of work" and I used A lender so had a hard time). what would you do in my scenario? thanks for the help. oh and the flip is going to cost me 45k so I will have 150k of my own money into the friggen place . too much locked up in once spot

  • Ian Swagerty

    Great stuff Mr. Morris. I love the idea of $200/month positive cash flow – a great way to be conservative in your estimates and hedge against risk.

  • Living Life

    I don't get the big deal on increasing your net worth unless the big deal is taking a loan from the bank because on paper you worth $1m & also can you make a vid on the last part about keep buying property & the high taxes? Thanks 👍

  • Issac Cab

    Hi Clayton, I currently own a single family house in the Boston area and would like to buy an investment property. I only have 30k to invest in a property. Would you recommend me to go for a single family house or a 2 family house to start off?

  • Prowler

    Great video, very informative, and I can easily follow every words you say. Thank you. As an investor I have a question for you. I'm married and currently own a home. I'm also in the process of building my new residential home. I have investment homes but I've never actually sold my own house. Once I'm able to move into my new home, should I sell the house I currently own? No capital gains up to $500k married. Or should I rent it out with a cash flow of $1,000 a month (going rent for $2,000). The house is worth around $280-300k, if I sell it, I should get roughly a $150-180k. Yes cash is king and I'm thinking more towards selling to buy more investment properties. What do you think?

  • ricros8

    Why not take the 40k and buy three cheap houses outright that are livable, within an llc, and immediately cash flow with seller financing. Some of the cash flow can be contributed to a Roth, hsa, or life insurance policy for a 4% minimum return and written off for tax purposes. Why not cash flow now, retire from the job ASAP and then focus on net worth?

  • Sulaiman Shah

    I dont think you should hold onto a property for too long. Maybe 10 years at most. If you bought it for 40k and it was worth 55k, after 10 years the condition of the home could decline due to tenants. Which will probably offset the 15k. Also 6% realtor fees is a killer.

  • Tomas Nunez

    Great video once again. Working in coming up with the funds so u will be hearing from me. Does this snowball subsequent effect of acquiring more properties after the first one is done by heloc or cash out refinincing that 1st property, and then rinsing and repeating the process with the second property and so on? Thank you.

  • Jameel Ja

    Should you count the entire amount of a property as part of your net worth, if you have a mortgage on it. Or do you count just the equity as part of the net worth?
    For example, if you buy a rental townhouse for $300K, you put $60K down, do you count the entire $300K as part of your net worth or just the $60K?

  • Peter S

    this seems nonsensical to me. whats the point of continuously collecting properties with no cash to keep? so you could say you own a million houses?! I would like to invest so that I could live the life I always wanted to….

  • Ray Fatemi

    What he means by NETWORTH is ASSETS. NETWORTH is only equal assets when there no liability. As soon as he talks about liability, then it is assts. because your NETWORTH is equal your assets minus your liability. Or in another word, what you own minus what you owe.
    Another concept that is discussed by R. Kiosoki that is not quite correct, and he repeats here is that your car is liability. Well, if you have paid your car off and you own it outright, then it is not a liability, it is an asset. But it is a declining asset. So it is not a good asset but nevertheless it is an asset, why? Because you can take it to a dealer and get cash for it. If it were a liability, you would take a to dealer and you have to pay the dealer to take it off your hand. That is a car with loan that exceeds the value of the car.

  • Ray Fatemi

    The concept of buy a million, own a million and cash flow a million needs some clarification.
    To buy a million if you have income to qualify is not that difficult. You can get ten loans from banks as it stands today. So if you buy ten properties at an average of $100k each and put down $10k for each, then with $100,000 down payment you have bought a million. With 30 year financing, it may take you at least 15 to 20 year to clear the debts to own a million. Now that million you own will generate a cash flow of $70000 to $100000 out of which you still have to pay expenses. So to cash flow a million, depending how aggressive you are or how good you are may take another 15 to 25 years to achieve. So while the concept is good, it is not easily achieve. It does take a lot of discipline to achieve.

  • MrCantrell14

    Clayton, If I buy a house for around 55,000 but I cannot pay it off right away, but I'll put down 10k -15k. Should I focus on paying that house off with tenants living in the property and do the same strategy with another investment right away? Or should I wait until my first investment property is paid off and restart the process over again?

  • fredy dominguez

    How would you see if a multi family is a good choice to start out in I kinda want to rent hack a multi family home in the Chicago land area ? And do you think illinois in general is a good place to start ??

  • The Art of Tracking

    Great ! Question:
    If we set up the LLC structure of a holding LLC that then owns individual LLC properties do these then go to your networth or the networth of the holding LLC ?

  • wkjeom

    Houses do wear out. A 1925 house needs tons of repairs and will eventually fall down. So there is selling and buying new or even scraping and building new.

  • Daniel Rocha

    Hey Clayton, great video. Just one question, wouldnt it be better, if I have a high tolerance for debt, to once you have a nice equity on your house (i.e. payed out your mortgage), then apply for a HELOC so that i can use this money and buy more properties? and thus exponentiate my net worth, otherwise i just feel that i have this money sitting there doing nothing for me. Yes, the cashflow is much bigger once the house is payed out, but it cant be compared to another cashflowing property.

    I'd love to hear your opinion about this.

  • Jhoanne Mamalayan

    Hi Clayton! Im from Manila, PH and learning a lot from you. I know youre into houses but is your strategy still applicable for condos? In my country, houses are cheaper in the suburbs and provinces but transportation is difficult & rental cost is less, unlike condos where rental cost is more and are more accessible.

  • Brandon Pike

    I love your videos and the knowledge you share. I'm getting into the world of real estate investing but I know nothing about taxes. What resources would you recommend to people like me?

  • Tom Chase

    Who wants to wait 30 years to rinse and repeat, especially if you are just starting out in your 50's, like me?? What ever happened to the idea of "quitting the man"? This video seems to contradict most of your other videos. At this point, I'm BUY, CASHFLOW, then OWN. 30 yr notes on everything to increase/maximize cashflow now, not when i'm dead. lol

  • Jack Aubrey

    I hear people talk about exit strategies. Ill hear that the depreciation cycle "ends" so its time to sell. I'm thinking "buy and hold". A unit should be held as long as it remains profitable, I would think. I would think a property, like a machine, can be made to work ( maintain its profitability)indefinitely if properly maintained. Is this not so?


    thank you Morris
    after watching your videos I sold my 300k home so i could buy and own 6 rental properties instead. I am now living in a cardboard box at the moment under a bridge. But at least i have that sweet sweet cash flow!

  • B Lin

    The banks will love you! Loading up debt. Asset is not net worth. Asset without debt is. People who buy this don't understand the simple accounting concepts.

  • Oliver Nanetti

    The real trick is finding the right tenants. QUESTION fo you recomend learning about plumbing, electrical and other stuff?

  • Chris House

    If I buy a house for $55,000, but I take out a mortgage to do it, how has my net worth increased by $55,000? Don't you subtract your debt (i.e. mortgage) from the $55,000 in figuring your net worth?

  • zibtihaj

    if the houses u buy r like 50-60k than yes , but if your average houses price is like 250-300, than it will take a long tine to pay off the mtg…. this will not work would it ?

  • T. J. Rosa

    I just started watching your videos, and I want to thank you for them! I live in MA, and honestly the real estate here is stupid expensive. I can’t afford anything here. I always had my eyes in some cheap properties in on there states. I once watched a video on a 1.1-1.2% and I did some research in MA and there’s no way that can be met. I do worry about managing properties on another state. What can you tell me about having spread out properties? Thank you

  • Gale Rainwater

    Love the videos the solid content and advice. Please be careful to say you only increased your net worth by 15K if you bought for 40k and it is worth 55k.

  • Justin

    It does make a lot of sense to spread out at first and buy as many properties as you can, then fully own them, then profit. The more properties you own, the faster you could pay down an individual property at a time. And I can see how the BRRRR strategy could come into play here. Thank you!

  • jdjewellpa

    5:48 This is extremely dangerous advice especially for newbie investors. That 1 dollar scenario doesn't account for the nightmare tenants. You know the people that you did a background check on, they seemed really nice and it all looked good…… But then they moved in, and this was wrong that was wrong, the rent comes in later and later, The BF/GF/ mother etc gets hooked on drugs etc etc. You can no longer take it and finally give them notice….. NOW the real pain starts, now you are their mortal enemy, the most hated person on this earth and guess what they refuse to leave, fight the eviction…… 9 months later and several thousands of dollars you finally get them to move out only to discover that your home has been stripped clean of all the appliances and they did you the extra favor of destroying everything in sight. YES, I am speaking from experience, if you been in this business long enough, it happens to us all no matter how careful we are. If you only have1 dollar over expenses on a rental deal and its one of your first deals, you are playing a dangerous game. Word of caution to the new comers.

  • Mark Pijanowski


    Really enjoying your videos. They are motivating and educational!

    How does this strategy measure up to velocity banking in order to increase cash flow?

    I’m an active duty servicemember, and I have unique benefits that I think I could benefit from while on Active Duty. Such as the 4% APR for credit cards via the SCRA. The dilema I’m in is using some inherited capital to pay down my second investment property or picking up another unit. My second property cashflows about $180 / month.

  • hsin-kuang Chen

    When you use your LLC to buy anther property , the money you spend on buying could be business expense as well?

  • Jon Clare

    I saw Dave Ramsey advise against this. He said banks can pull out on you whenever they wish. Is this true sir? If so have you experienced it?

  • waldensaudio

    If you have 100k cash. Two properties with cash flow $500 each after Mortgage payments. One at 38k another at 57k. How many properties should you have under Mortgages if you want to full cash flow? Or continue purchasing with cash out Loans ? Save the $100k?

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