If Your Not Building Wealth, You Might Be In The Wrong Game

I believe that I have the greatest job in the Real Estate industry! I spend my days talking to investors from around the country and sometimes very far away countries and get their unique perspectives on why they are investing in real estate. The list of reasons is long and varied, but one underlying reason always comes into the conversation. Investors want to build wealth.

An investor told me recently that her personal stance on real estate was that…and I will try to paraphrase correctly here, "no one had ever gotten rich off of cash flow". To me, this sounded like a statement from someone who didn't fully understand the power of monthly positive cash flow and the impact it can have on building wealth. It sounded like a statement from someone still living in the delusional world of "I'm waiting for the market to turn around so I can get rich quick on appreciation".

Getting "rich" could very well be a big part of the problem when it comes to understanding the power of positive cash flow and wealth building. Being rich is often defined as having the ability to purchase whatever you want when you want it. Building true wealth on the other hand, is often defined as being able to purchase whatever you need when you need it AND passing that same ability onto the next generation and the next generation and so on. Being rich is a financial ability that many chase actively expecting to suddenly be able to define their current situation with that moniker. Being wealthy on the other hand, takes time and planning. Building true wealth takes patience and very careful decision-making. When it comes to using real estate as a vehicle to build wealth, positive cash flow is a must.

Building wealth in today’s real estate market requires an investor to look at several factors before deciding to move forward on an investment deal. The single most important to factor to consider before investing in any piece of real estate is will this property cash flow on a monthly basis. Whether investing in single-family homes, multi-units or mobile home parks, it is vital that the investment land on the positive side of the ledger each month.

Weighing factors such as price, location, potential occupancy rates and performance of a property in year three, four, five and so on, are all extremely important. But when speaking with investors I stress that the bottom line at the end of the month is what matters most when it comes to building sustainable long-term wealth. If it is not showing positive cash flow, regardless of what the future holds and the prospects of a rebounding market, it is not a proven formula for building wealth.

Wealth is built with real estate over time. By allowing a piece of investment property to perform. If an investor makes a leveraged purchase and has a note each month, then the monthly collected rent pays down that note and the investor has the opportunity to use the positive cash flow to retire the debt quicker by making extra principal payments.

The quicker you are able to own the property outright, having used the rent a tenant pays each month, the quicker that property provides a stable monthly income. Investors who are using real estate to build wealth develop a portfolio of such properties that will provide that stable income for years to come. That portfolio can be used to supplement retirement, provide college funding and even provide the opportunity to pass onto future generations the opportunity to provide the same.

Real estate investors have been using this technique for decades to acquire property over time and allow their return becomes almost incalculable as it grows. Allowing others to pay down your debt and then pay into your return is the most effective and time-tested method for building true long-term and sustainable wealth. So the next time an experienced investor tells you that cash flow does not matter and appreciation is the path to get rich, let them know you are not interested in getting rich. You are too busy building wealth.

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Comments

  • Latest_posts_thumb_avatar-memphisinvest

    Chris Clothier — almost 3 years ago

    Rusty - I appreciate the comment. Sounds like you and I run up the same hills! But it is very easy to be dazzled by the latest and greatest or slick marketing, when in reality - it always boils down to cash flow.

  • Latest_posts_thumb_avatar-gatehouse

    Chris Snere — almost 3 years ago

    You are = You're... I'd fix that if you can..

  • Latest_posts_thumb_avatar-russt

    Rusty Thompson — almost 3 years ago

    Great article... I find myself explaining this to people, over and over again....

  • Latest_posts_thumb_avatar-free2rhyme214

    Peter Haymond — about 2 years ago

    Right. The end game is always to have passive income exceed expenses to build real wealth.

  • Latest_posts_thumb_avatar-free2rhyme214

    Peter Haymond — about 2 years ago

    Right. The end game is always to have passive income exceed expenses to build real wealth.

  • No_avatar_latest_posts_thumb

    Eileen Murphy — 9 months ago

    When I was looking to invest in a rental property in 2006 a number of agents tried to sell me on the idea that positive cash flow wasn't necessary because the property would appreciate by 5 or 10% per year and I would be able to sell for more than I bought. I would ask this person to put that in writing and agree to purchase the property at the price they were suggesting I could sell at - none of them agreed - go figure :) - needless to say I didn't purchase any of the properties

  • Latest_posts_thumb_1390419191-avatar-edel3154

    Elizabete De Lima — 3 months ago

    Thank you for making such a clear point on cash flow! I completely agree and you have made me a bit more at ease with trying to pull the trigger on investing!

  • Latest_posts_thumb_1393438524-avatar-huynguyen

    Huy Nguyen — 23 days ago

    Chris, definitely the best article that distinct rich and wealth i ever read. Please keep up the good work!

  • No_avatar_latest_posts_thumb

    Rocco L. — 23 days ago

    excellent article on building long term wealth. Often times we overlook this principle and get caught up in the appreciation game but in the end it is cash flow that will sustain you.. not speculating on where prices are headed

  • Latest_posts_thumb_1390759066-avatar-htpinc

    Val Csontos — 9 days ago

    Chris I agree with you but with some caveat: I think If you only focus on the cash flow side and you have no clear exit strategy for cashing in, you will be sorry later on. For example what I see here in the Baltimore area: Many investors in the city find them self In difficult situation as after decades of investing in middle to lower income areas their properties did not appreciate at all or worst, and when is time to slow down they have a tuff time "cashing in" since co-incidentally they have lots of differed maintenance issues, as well.(since the house prices did not go up in years or eve going down, who wants to put new roof on it, just patch it rigt? at lease that is motto of some of those "cash flow investors") whom I seen that here and there, and these guys/ladies usually become the motivated sellers for the newcomers. To me this looks more like a job and not and investment, can't really cash out at least not like with SFRs (that you and I both know will appreciate in B school areas in suburbs with demographics data to back it up with.

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