Cash Flow Investing - Why Cash Flow Is King
Having worked with real estate investors from dozens of different countries, all coming with different objectives and from different walks of life there is one thing they All have in common. CASH FLOW.
What are your real estate objectives?
• Future retirement: Looking to buy today and sell down the line for a large equity growth • Tax shelter: indeed you get great tax write offs with real estate • Leverage: the ability to invest bigger dollars for bigger returns using financing (OPM) • Savings account: depositing your money in one of the highest returned accounts possible and have it secured by a tangible asset. • Equity Buildup: the ability to have a leveraged asset paid for by a tenant, allowing them to pay down the principal on the mortgage.
There are a number of different objectives that various investors have and a number of investing styles,properties and techniques they utilize to accomplish their objectives.
They all have the same common denominator: Cash flow
Seasoned investors know all too well the importance of insuring their investments all have cash flow. Cash flow is the safety net that provides every single investment strategy its security. Regardless of what you want to invest in, where you want to invest, or what you want to accomplish from your investment the common denominator is always cash flow.
Why cash flow is king:
For me and many investors we tend to invest as a safe and strategic way to provide us long term safe and sustainable returns for our retirement years. Real estate has provided better than 90% of the wealthy people a great deal of financial independence. While it is the future cash flow and the equity buildup that is the primary objective, cashflow day one is paramount to insure a safe and sustainable investment. If the property does not generate positive cash flow day one you risk losing money into the investment should anything go wrong.
Do not be lured by Speculative investments (negative cash flow) today in trade of bigger returns tomorrow.
While the markets get hot many people will fall prey to wanting to get in on the action. They will actually buy property that does not generate any immediate cash flow in hopes that the markets will continue to increase in value. Often they actually decide they can buy a property and (because they currently are making good income) they will add monthly contributions to the property that does not generate cash flow. Their anticipation of bigger cash flow in the future as markets improve have them believing they are making a good investment. This is never a good idea.
Many people throughout the counties were buying property in the early to mid-2000’s. property values and rents were rising rapidly, they believed if they could simply follow the thundering herd and buy a rental property today that in a short amount of time they would be able to make money. Then it happened. The pendulum began to swing in the other direction and property values began to decline.The hopes of increased values and increased rents were replaced with larger and larger negative cash flow. Indeed these buyers were adding more and more money each month to the already negative cash flow. Many eventually lost their properties. If they would have bought with cash flow in place, they would have avoided this speculative investment.
You wish to do buy, fix and flip?
Many make great investments by buying correctly, fixing and then selling for a profit. But what happens if for whatever reason the property does not sell. Perhaps the market adjusted and slowed. Perhaps financing became a problem and people struggle to get a loan. When buying fix and flips you always want to run the numbers and assume you may need to rent the property. If when you run the numbers, can you rent the property for cash flow? If yes, then you have a safe and sustainable investment. One way or another you can invest in the property and make money. If you are unable to rent for positive cash flow you have a very speculative investment and the risks are greater.
Seasoned investors always invest with cash flow as a primary or secondary objective.
Having a clearly defined investment plan is paramount to great investments, whatever your investment objective is, cash flow day one should be a strict criteria. There are so many investments available today that sound appealing, if an investment creates cash flow day one you know you have a much stronger probability that the investment will be safer and more sustainable for the long term investment strategy.