Many people who invest in real estate are in it for cash flow, not appreciation. Appreciation is great; it allows for easier refinancing and helps to buy more properties in the future. However cash flow is usually the main objective for most investors.
You get cash flow when the rent you collect on the property is enough to cover the cost of buying it. It is possible to make over 20% cash on cash returns. The money you collect each month from rent (minus expenses like mortgage, taxes, insurance, repairs, etc.) ives you with a net income that remains fairly steady month to month. Those type of numbers and that kind of stability is difficult to argue with.
Why else should you buy rental property primarily for cash flow? Let’s take a look at some good reasons.
Cash Flow Is Safer Than Hoping for Appreciation
If you enter into buying rental properties with no cash flow, hoping for appreciation, you could be unpleasantly surprised. This is more speculation than investing and can often not turn out in your favor. Buying for cash flow is a safer investment overall.
You want to focus on adding value to the property by repairing and remodeling it. Positive cash flow ensures income generation immediately, which is never frowned upon. If the value of the home or property goes don’t, you are minimally affected since you are making steady money from the property and are not concerned about selling.
Cash Flow is a More Efficient Option Than Appreciation
Expenses are inevitable with any investment property. Repairs and various costs can appear out of nowhere and positive cash flow can help you deal with them. If you are banking on appreciation alone, you will have to cover any expenses out of your own pocket. Cash flow or not, you should always be aware of the expenses and potential costs your property will accrue or you will quickly find yourself losing money on it. “It is always best to error on the side of caution when calculating expenses, especially if you are new to investing.”1
Cash Flow is the Best Way to Make Money with Rental Properties
Cash flow on rental properties typically means steady monthly income for you. Even if the values drop, rents go down or expenses rise, you will still have cash flow that can cover everything. Selling in a buyer’s money quickly is the most common way investors lose money and it can be avoided by not counting on appreciation.
Predicting The Future Is Impossible
Appreciation involves a lot of guesswork, chance and luck. The housing and property markets can fluctuate wildly. Even if prices are rising now, there is no guarantee on how long they will continue to rise or even hold steady. With all of the economic unknowns, banking on appreciation is just too risky in most cases. Any number of things could happen, such as:
- A rise in interest rates
- A failure of the United States economy or the world economy
- A drop in the housing market
Any number of things can affect your bottom line, but if you have cash flow, you won’t hurt too much.
Residential investor Mark Ferguson perhaps said it best. He has been quoted as saying, “One of the biggest mistakes I see investors make is buying rental properties with little or no cash flow in hopes the homes will appreciate in value. This is not investing in my mind, this is speculating that the market will increase in value.”