Why Cash Flow Beats Out Appreciation in Real Estate Any Day of the Week
There is absolutely no doubt that real estate investing can be risky if it is not taken seriously. However, there is no question that the payoffs can be huge if it is done the right way. Real estate investments are often looked at from two different perspectives — the monthly cash flow and the gradual appreciation. Personally, as you can already tell if you have been keeping up to date with many of my other articles, you can see that I am a cash flow investor. I have absolutely nothing against appreciation, but I prefer to be less reliant on hoping that a property will go up in value and more reliant on a steady stream of cash flow.
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All in all, what I want to do is to make sure that I am earning some cash in hand straightaway on a continuous basis rather than playing my share in a gambling game where I have to wait patiently over a long time with little to no income and absolutely no clue as to whether or not my investment will pay off.
Some people believe that cash flow is a rather foolish way to earn money since you can only receive a few hundred dollars every month — something that they believe pales in comparison to what you can make off appreciation. However, the thing is, while this can be true, investing for cash flow is also a lot less risky, as it is built on more solid and well-known fundamentals. For me, this is great because it will help give you your return in small but sure sums over a longer period of time. Meanwhile, appreciation is a riskier game, as it isn’t guaranteed. So while you might be able to earn back your investment in a nice way, it is balanced out by the fact that you can also make a loss in an equally unfavorable way.
You Can’t Predict the Market With Any Certainty
While the prices might be going up in your area now, there is absolutely nobody who can help you predict what those figures will be doing in the future. Honestly, there are simply too many economic unknowns to be able to accurately determine what the housing market is going to do. For example, interest rates might begin rising, the economy might find itself contracting, and as a consequence, it may completely tank the housing market. Sure, if you buy for cash flow, these factors will affect you a little bit, but at least you are still generating income on a regular basis so they won’t completely pull you down under.
Reliable Returns vs. Taking a Gamble
Lost? Well, perhaps a little scenario will help you understand where I am coming from. If I had to depict cash flow and appreciation as real life situations, then I would most probably relate them to this: cash flow is your workplace, and appreciation is the lotto kiosk. Could you ever imagine yourself completely giving up your job and putting all your hopes into the lotto kiosk to provide for you? I sure hope that your answer is no because while the win might be big, it is not one that is safe to put your bet on.
In addition, there is absolutely nothing worse than investing in something and having to face negative cash flow after paying down the mortgage and allocating for expenses. So if you are investing solely for appreciation, you will find yourself under a lot of financial strain to provide for the upkeep of the house while not earning a single cent in return, something I am pleased to say that people investing for cash flow won’t be facing (if they bought right). After all, positive cash flow means that you are earning more money than you are having to spend on expenses.
So all in all, I hope you can see where I am coming from when I say that cash flow is surely the way to go for a profitable future as a real estate investor. Cash flow is king!
What numbers do you weigh most heavily when choosing investments?
Let me know with a comment!