The term “Critical Mass” is derived from nuclear physics. However, the term is often used in other fields to describe the point at which the size, number, or amount is large enough to produce a particular result.
When the term is used in the world of real estate, it usually refers to the point that an investment becomes self-sustaining.
You can analyze a business and establish what critical mass is for that business. Every business has a point at which it really begins to make money. Critical mass in this regard is that revenue point in every company after which every dollar earned flows virtually straight to the bottom line.
When an individual decides to become a real estate investor, in essence they are starting a business of accumulating rental property that will generate a monthly income stream and begin building equity. With real estate investments most costs remain stable and rental increases are mostly increased cash flow.
As you are building your real estate portfolio, during your working years, you take a certain amount of risk. You have to use leverage when acquiring and building your investments. Once you have reached your goal, you will want to reduce your risks and lower your exposure to financial mistakes.
So what happens when your real estate holdings reach critical mass? Your investments take on a life of their own: your income will multiply and continue to grow as your investments create their own momentum.
We have many clients that own six or more duplexes, or the equivalent. If their property is worth $6 million and it appreciates at 5% per year, that is a $300,000 increase in equity per year. That is the same as saving $25,000 per month! In addition, when the rents on twelve units are raised by $100 per month each, that adds $1200 per month, or $14,400 per year in increased cash flow.
Critical mass means different things to different people. Critical mass for Donald Trump is probably different than what it is for you. Critical mass for most individuals is the point at which your assets reach a “tipping point” and become self-sustaining entities. For most people obtaining financial independence is the goal; not having to rely on a job to maintain the lifestyle you desire.
Critical mass and growth equal increased income. Let’s put it this way…
You know that you have reached “Critical Mass” when you go to sleep at night and you know that you’re still making money while you sleep.
Critical mass is not earned income. Critical mass is strictly a function of assets you hold creating your personal financial happiness, peace of mind, and serenity.
Eric Ruxton and Larry Aikins are the owners of Terrace Realty Inc. and Terrace Associates Inc., in Redwood City. Terrace has been in business for over 50 years and in addition to being an independent Brokerage Company, also owns and operates rental properties.