Warren Buffett is one of the most successful investors in the world, with a current net worth of nearly 80 billion USD. When people ask him the secret to his success, he always says the same thing: start investing early and stick with your investments. In his own words, “all there is to investing is picking good stocks at good times and staying with them as they remain good companies.”
This investment strategy is what’s called the “snowball” effect.
Picture a snowball rolling down a hill. The snowball starts small at the top of the hill. But as it rolls down the hill, it starts to pick up more and more snow, growing bigger and bigger, until it reaches the bottom of the hill as big as a boulder.
The same concept applies to investment. Warren Buffett — and other successful investors like him — make smart investments and then allow their investments to snowball, growing larger and larger as time passes (known in the investment world as a snowball investment). And if you want to be a successful real estate investor, you need to do the same.
Let’s take a look at exactly how the snowball effect works — and how you can use it as a tool for building wealth through real estate.
The Snowball Concept and Real Estate
As a real estate investor, you need to know how to build a profitable portfolio. How do you do that? With a property investment strategy that will build your wealth steadily over time. And the best rental property investment strategy for long-term wealth?
That’s right. The snowball effect.
So how do you apply the snowball concept to real estate? You take the cash flow from your investments and use them to either a) pay off your properties in full, or b) invest in more properties.
If you use your cash flow to pay down the mortgages on your existing properties, you’ll own the rental properties in full faster, which will dramatically increase their profitability — and build your wealth in the process. This is the more stable approach, but it’s not necessarily the strategy that will build the most wealth.
Instead, if you want to build wealth, you need to look at the snowball concept as the solution to how to accumulate more rental properties — and increase your wealth at the same time.
By taking your cash flow from your existing properties and using it to secure additional rental properties, you’re able to quickly grow your portfolio and generate more income, which will compound over time.
The more properties you own, the more income you’ll generate — and the more wealth you’ll build.
But Keep in Mind — Buying Snowball Rentals Isn’t Always the Answer
Taking the snowball rental approach is one of the most effective strategies for building wealth as a real estate investor. But it’s not for everyone.
This investment strategy is a long-term solution for building wealth, but it presents some short-term issues. When you use the snowball effect to continually reinvest your cash flow into new properties, you’ll end up with little — or no — cash on hand. And if you rely on the income generated from your properties to survive, that’s just not going to work.
The snowball effect is a strategy that works best for investors who have additional sources of income to manage their day-to-day expenses and have the means to support themselves while their investments appreciate in value.
How to Make the Snowball Effect Work for You and Your Real Estate Investments
Now, the snowball effect is a sound investment strategy that can lead to significantly increased wealth over time (just ask Warren Buffett). But it only works if you know how to work it.
For the snowball strategy to work, you need the willpower to invest your cash flow and not use it for personal use.
That can be really challenging for some investors, and again — if you’re reliant on your investment income to survive, this won't work for you; doing so would be a big real estate investment mistake. Only leverage the snowball effect if it makes sense for where you are financially.
If you need to figure out whether you can make the snowball effect work for you, you’ll need to take a good, hard look at your finances. Can you afford to live off of your other income streams (like from a 9-to-5 job) without touching your investment income? If so, create a budget, stick to it, and reinvest 100% of the cash flow of your properties into either paying off your mortgages or investing in more properties. The more you strategically invest, the more wealth you stand to build.
How a Good Property Manager Can Help
Your property manager can be a great partner in using the snowball effect to build your wealth — and your portfolio. Since property managers run the day-to-day operations on your property, they’re the people most likely to notice opportunities to lower your expenses and increase your cash flow — and you can use that increase to reinvest using the snowball strategy. Property managers also have a great handle on the market and can keep you in the loop on great properties in the area you might want to invest in.
Real estate investment is a long game. And with this property investment strategy, you can watch your wealth snowball over time. Who knows? Maybe you’ll be the next Warren Buffett!