If your not building wealth, you might be in the wrong game

Tiny 1399319639 avatar memphisinvest

By Chris Clothier
July 19 2011

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.

The author has permitted the reprinting and redistribution of this article.
See our Terms of Use for more information on reproducing it.