The Secret the Rich Understand About Building Wealth (And No, It’s Not All About Cash Flow)

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If you’ve been on BiggerPockets for any significant period of time, you’ve no doubt heard the virtues of cash flow being espoused from every angle possible. We have calculators to help us determine it. We have rules of thumb to help us find it. We have arguments in the forums that can seem like real estate aficionado death matches over the preferred method to figure it out. The cash flow struggle is real.

People want it.

They want it for several reasons. The most common reason is likely the purpose of replacing their J-O-B income with real estate income. I’ll admit, cash flow can be nice in that way. It can provide freedom, flexibility, and financial help. Isn’t that what we all want? In my circle, we have so many names for it. Mailbox money. Horizontal income. Passive income. Cash flow. Everyone is chasing this cash flow. From what I’ve seen, it’s valued far and away greater than any other benefit of real estate.

I’m here to say we might be a little too focused on cash flow.

Wait! Before you rush for your pitchforks and start rounding up a posse to hunt me down, give me a minute to explain myself. I’m not against cash flow, I promise. I just think we may benefit from viewing it in its property perspective. Allow me a moment to present a theory on how we got here based on real estate’s recent history.

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The Recent History of Real Estate

I’m 33 years old. I can’t tell you what was going on with real estate 20 years ago. I don’t remember. Like most people, I didn’t start paying attention to real estate until I decided I wanted to buy a house. For me, that was at about 22 years old.

When I was 22, real estate prices in my hometown of Manteca, CA were increasing 26 cents per minute. It was 2005. We were smack dab in the middle of one of the craziest real estate markets anyone had ever seen. Loans were being given way with no due diligence and then sold to mortgage backed securities as fast as they could be. Everyone — and I do mean almost everyone — was of the mindset prices were going to just keep climbing and climbing. No one was talking prudence. No one was saying, “Let’s wait for prices to drop.” It was just a feeding frenzy.

Many people were making good money at this time (a large part of them were real estate agents, loan officers, etc.) and wanted to “invest” their money. The problem was, they believed they understood real estate and how it worked because they made their living from it. Prices were going up so fast and so consistently that people believed that “investing” meant buying a house with no money down, then selling it for large gains a few years later. I’m not kidding. This is what people were doing.

If you bought a house for $400,000, then sold it next year for $500,000, you felt like the smartest person in the world. People felt comfortable doing this because they were making so much money at work. Their own home values were also going up, causing them to feel wealthier than they really were. ALL people were talking about was how much they were going to sell the place for. No one was looking into city development plans. No one was looking into rental rates. No one was considering value add strategies. It was buy, wait, sell, repeat.

In a surprise to no one with common sense, the market crashed when loans couldn’t be refinanced. Home prices dropped, and people lost their “investments” and their residences alike. This inspired others to just walk away from their properties even if they weren’t in distress because it didn’t make sense to keep paying a mortgage on something worth half of what you owed. The whole financial world came to a grinding halt, and the government started quantitative easing to help keep the economy afloat.

Fast forward a few years, and we’re in the middle of a terrible recession where homes are ridiculously cheap. Deals were abundant, but people were afraid to buy them because we were all waiting around for the bottom to drop out again. We had become a nation of shell shocked investors who weren’t sure if it was safe to come out and play again.

Related: Why Cash Flow Beats Out Appreciation in Real Estate Any Day of the Week

The Fallout of the Great Recession

Now, it is from this environment that much of the real estate advice, literature, and theories we’ve all been reading was born. In order to help reassure people they wouldn’t lose their homes, authors began pointing out the virtues of cash flow. What it is, why it’s important, and how to make sure you have it.

It made total sense.

People could have helped keep their homes if only the rent had covered the mortgage. People could have avoided catastrophe if only they had understood even the basic fundamentals of what they were doing. People weren’t investing. They were speculating. And many got burned.

I 100 percent agree that for the majority of people, you should not buy a home unless it cash flows. Let me make that clear.

However, I disagree with the fact that for the majority of people, cash flow is all that matters. Cash flow is cool, but nobody is really building great wealth off cash flow. This is true, and if you ask the big dogs, most of them will agree. The people who made great money in real estate didn’t do it by buying a butt load of cash flowing properties and saving up all that was left over.

They did it by improving a properties value while the loan was being paid down. This can happen many ways (buying a run down property for cheap and fixing it up, adding to the ROI of a multifamily building, buying in an area where prices later rise, etc.). What is important to note is that if you want to build wealth, it’s increasing your equity that’s going to do it.

The Secret the Wealthy Understand

Now, with that being said, it’s my opinion cash flow is mainly good for two things:

  1. Income in retirement (or when you are no longer working)
  2. As a defense to make sure you have enough money coming in that you will not lose your investment

These are two pretty important things. I’m not against cash flow. Everything I have ever bought has cash flowed positive, and I’ll disclose that now. But let me present you with a secret that wealthy people understand — something that a lot of people who are trying to get to the top may not have learned yet. The people who already know this aren’t usually spending much time sharing it with people they don’t know. You aren’t going to hear them say it unless you know them.

The secret the wealthy understand is that cash flow doesn’t build wealth. Equity does.

To some of you, this is a familiar concept. To others, this may be your first time hearing this. Let me explain in a little more depth how equity works to build wealth (and eventually to create stronger cash flow).

Real estate can make you (or cost you) money in several ways. The two biggest are cash flow and equity. Equity is defined as the difference between what you owe on a property and what it is worth. As your property rises in value, you gain equity. As you pay down your loan, you gain equity. When you can get both working together in harmony, you gain lots of equity.

Rental property can also make you money through rent collected. When you collect more rent than it costs to own the property, you make money. Pretty simple so far.

Now, if you’re looking to not lose money, cash flow is king. Cash flow keeps you safe. If you lose your job, have unexpected expenses, etc., cash flow will keep you afloat. That’s what it’s meant for. It is not good, however, at building you wealth.

Real, compelling wealth is created by owning properties that are worth significantly more than what you invested to buy them. There are so many ways you can increase equity. The only real way to increase cash flow is to raise rents or somehow reduce expenses. If you are buying single family properties, there is realistically only so much you can do to reduce expenses.

The nasty truth no one tells you about single family residential (SFR) investing is just how much of a chunk repairs and maintenance take out of your bottom line. You can easily take half of the money you think will be yours as cash flow and watch it disappear as it goes to pay the plumber, HVAC tech, termite guy, landscaper, pool boy, etc. Even if you don’t run into problems like this, it’s going to take a LONG time before that $300 a month you’re making turns into anything worthwhile.

Allow me present you with a different concept.


Related: Not All Cash Flow is Created Equal: The Simple Truth a Conversation With My Son Taught Me

Cash Flow vs. Equity

You buy a property from a wholesaler that needs too much work for the seller to afford. The home needs a brand new kitchen and some other issues and won’t be eligible for buyer financing. The seller agrees to sell the property for $55,000 (the balance of their note). The wholesaler takes $5,000 for their trouble, and you purchase this property for $60,000 (not unreasonable numbers at all for a large part of the country).

Once you close, you go in and put a brand new sparkly kitchen in. You also rebuild the bathrooms, put in new flooring and paint, and clean up the ugly yard. Lets say this costs you $20,000.

You are now all in for $80,000. You have the property appraised, and it comes back at a handsome value of $125,000. In addition to having lots of options (refinance to recover your money, sell the house as a flip, use a lease option strategy, etc.), you also now have $45,000 in equity. Again, that’s $45,000!

If You Keep It as a Rental

Let’s say you get $1,000 a month in rent, and after expenses, you keep $300 for cash flow. The cash flow is nice, but the $45,000 you just added to your net worth is much nicer. Let’s also assume you were looking in this area originally because you know a lot of people are planning to move here. This is a suburb to a big city where lots of jobs are moving, and you know increased demand will increase the future prices. If the property goes up in value an average of 5% a year over a period of 5 years, it would be worth roughly $160,000.

So to recap, you were all in for $80,000 on a property that is now worth almost $160,000. Your equity is now $80,000. If rents increased $25 a year, you would now be collecting $425 a month in cash flow (assuming all other expenses remained the same).

Now, $425 a month is nothing to shake a stick at. But if you could take that same $80,000 in equity and earn a 15% return on it, that would be $1,000 a month. That’s starting to look a lot nicer.

In this example, we anticipated a 5% value appreciation a year. That’s likely higher than average, but it’s much lower than what to expect in a situation where prices really take off. Every single property I’ve bought so far has increased in value at a rate greater than that.

What if you repeated this exact same process twice a year over a period of 10 years? You would have $8,500 a month in cash flow. Not too shabby. Might even be enough to allow you to retire and not have to work anymore. That $8,500 a month is very healthy, but I’m not sure you would consider this a number that is a real game changer.

What is my point? My point is that while this cash flow is nice, it pales in comparison to the value of the equity you have built. In the same example I just gave, you could expect to have 1.6 million in equity. One point freakin’ six millllllion dollars (insert Dr. Evil laugh here).

Why Does This Matter?

Now, you may be asking me why this matters. Cash flow is money in the bank. Equity is numbers on a page. And you know what? You’re right. Equity in itself doesn’t have any inherent value. But think about the options it gives you.

  • Imagine what you could do flipping homes with 1.5 million dollars.
  • Imagine how many more houses you could go buy with that.
  • Imagine what types of loans you could get with that.
  • Imagine the opportunity it would provide you if you wanted to go spend it.
  • Imagine what kinds of investments you would now be eligible to partake in as an accredited investor per SEC (Securities Exchange Commission) standards.

Not excited yet? OK. Let’s go back to our cash flow example. If you were to take that equity and re-invest it at 15%, we would now be looking at return of $20,000 a month.


Don’t Just Think About Cash Flow

What am I getting at? If you’re looking to build cash flow, don’t just think about cash flow. Think about how to build equity and then convert that into cash flow later. In real estate investing, we don’t have a lot of control over what rents will be. We take what the market gives us. We don’t have a lot of control over what expenses will be. We take what the tenants do to the property. We don’t have a lot of control over reducing carrying costs. We pay whatever the taxes, insurance, and mortgage will be.

What we DO have control over is what we pay (buying right), what we spend money on to upgrade (managing contractors), where we buy (finding places demand is reasonably expected to grow), and when we sell (timing the market).

All these factors we control make building equity something that is within our grasp.

Now, nothing is guaranteed. We can’t predict the future. But we can play the cards we are dealt. And sometimes we can give ourselves an advantage into how many of those cards we get. What we have a much harder time controlling is what our repairs will be and what market rents will be. Recurring expenses and market rents are the two things that have the most to do with cash flow.

Buying at a good price, carefully managing the rehab budget, and selling when the time is right are the things that have to do most with building equity.

What makes more sense — to focus on what you can control, or what you cant?

I always tell people, “If the market goes South, I don’t care.” My properties cash flow, and they will be paid for. That’s what cash flow is for! I don’t fear a market downturn. You shouldn’t either.

Related: 3 Impressive Ways that Buy-and-Hold Investors Gain Equity

BUT, if the market goes “North” and increases in value, my equity will grow quickly (much quicker than my cash flow will grow). If I manage this equity carefully, sell when the market is right, and go buy more properties with built in equity, my wealth will start to grow at a supercharged rate.

This is how the wealthy built their empires through real estate. This is how you can, too. If you think about growing your wealth like you are climbing a mountain, your cash flow is your belay (that thing you stick into the rock face with the rope attached to you so if you fall it catches you). It keeps you safe. It prevents you from falling all the way to the bottom and losing all the height you’ve gained up that point. It prevents foreclosure or having to sell at a bad time.

Your equity is the gains you make upwards towards the top of the mountain. Sometimes the market gets hot and carries you quickly upwards. Be glad for those moments! Sometimes the market just steadily climbs and you make slow progress. That’s awesome, too.

The point is, if all you focus on is cash flow, you will miss out on opportunities to really build life changing wealth. Don’t spend your time staring at your belay in the rock face. Keep your eyes focused upwards, towards the mountain summit, and have a plan in place for what you will do if you find yourself climbing much more rapidly than you originally thought possible.

And know that the power of equity is in the options it gives you, and one of those options is higher cash flow.

[Editor’s Note: We are republishing to help out our newer members.]

Investors: What’s your opinion? Do you invest for the cash flow, equity, or a combination of the two?

Let me know your thoughts with a comment!

About Author

David Greene

David Greene is a former police officer with over nine years of experience investing in real estate that includes single family, multifamily, and house flipping. David has bought, rehabbed, and managed over 35 single family rental properties, owns shares in three large apartment complexes, and flips houses. He also owns notes and shares in note funds. A nationally recognized authority on real estate, David has been featured on CNN, Forbes, and HGTV. Now the co-host of the BiggerPockets Real Estate Podcast, David has a passion for teaching and helping others grow wealth through real estate. In 2016, David started the "David Greene Team" and became the CEO of the top producing Keller Williams East County team as well as the top producing real estate agent. The author of Long Distance Real Estate Investing and Buy, Rehab, Rent, Refinance, Repeat, David has won several awards including second place for real estate book of the year awarded by the National Association of Real Estate Editors (Long Distance Real Estate Investing).


  1. Scott Trench

    One of my favorite articles in a long time here. Yes! Cash flow is my DEFENSE. My rental properties here in Denver don’t provide a material amount of cash flow upfront, but they DO provide enough to cover the maintenance, mortgage, sock away some money for Capex, and take a little bit out at the end of the month. The real money comes in the equity that I’ve build – AND, don’t forget that with a market heading north, rents head north too, so a few years in, my first duplex is now definitely cash flowing.

    Failing to play the game is the worst bet. Markets don’t always go up, but they usually do, and at least keep pace with inflation over the long run. A failure to enter the game is a much bigger risk.

    • David Greene

      Thank you very much Scott. I agree completely.

      many don’t realize a property can “cash flow” and you can still loose it if an expected expense occurs. Cash flow is not a magic spell that prevents foreclosure, it just helps.

      If you make sure your properties cash flow (which we both do) it should prevent you from losing them. It’s not very likely to make you wealthy though.

    • David Greene

      Thank you very much Scott. I agree completely.

      many don’t realize a property can “cash flow” and you can still lose it if an expected expense occurs. Cash flow is not a magic spell that prevents foreclosure, it just helps.

      If you make sure your properties cash flow (which we both do) it should prevent you from losing them. It’s not very likely to make you wealthy though.

      • Deanna Opgenort

        Monthly cash flow is what you have at the end of the year divided by 12, not what goes into your bank every month. There also needs to be a set-aside for the bigger stuff (hot water heater, roof, appliances that go “pffft”, etc.)

  2. Equity is worthless unless you turn it into cash. That is very expensive, cost of sale, taxes etc. 1.6M is a nice number but fairly meaningless in the real word. Can’t spend it, can’t eat it, you can look at the number and it makes you feel good. The post is interesting but from a forty year investment life I can tell you that nothing matters more than cash flow. Yes I have a ton of equity as it is hard not too after investing for a few decades. I enjoy adding it all up after the first of each year, but equity unless unleashed does not pay for my life style. If I have a bunch of leveraged property and equity up the gazoo who cares. Would you rather have 5M in equity on paper or 25K a month in passive income? Lots of ways to be wealthy (what ever that means) in real estate but the safest and easiest way is buy and hold and have lots of cash flow, and yes equity. It is fascinating for me to hear people talking again about building up wealth by accumulating equity. I think I heard a lot of that talk in 2005. I will continue to concentrate on cash flow and let the equity take car of itself.

    • Steven Archer

      Very good underlying point Edward. The last time I remember reading about it (quite awhile ago), for every $1.00 in actual, factual asset-backed currency, there was something like $30.00 represented in “equity” and other faith-based measures of value who’s sole purpose is to keep interest payments coming in for bankers and investors. In a nutshell, equity is there for cash flow. And cash flow is what keeps food on the table, not IOUs.

    • David Greene

      It’s true in 2005 many people didn’t buy for cash flow, and I mentioned that was a mistake in the article.

      If I had bought in the midwest instead of California when 2010 hit, I could have got $100 a month more in cash flow for my money, and would have missed out on about $150,000 in value, or, equity.

      As for your question, I would rather have 5M in equity on paper and convert that into $50,000 or so in cash flow, double the $25,000 you mentioned.

      I think your comment is pointing out my point very well. If you’re looking to build your wealth, the rich understand you do so by building equity and then converting that into cash flow later. If you target cash flow in the beginning (and only cash flow, nothing else) it will take much longer to reach the net worth you will need to get the cash flow you need for retirement.

      The wealthy target undervalued assets (be it real estate, businesses, etc) rehab them so they are performing better, and sell them for top dollar. This is a faster way to build wealth than trying to buy enough cash flow to get you where you need to be.

      I don’t think we should ask “cash flow or equity?” I think we should ask “How do I build equity to convert to cash flow?”

    • Scott M.

      Edward, you NAILED it. Spot on. Most who’ve been involved in RE post 2005 and never first hand experienced a cycle which we are in now ( esp in commercial ) have unrealistic expectations which have not been checked into place yet. It will happen. Equity is great, but only if it’s realized equity….not what your spreadsheet says.

    • dane joyce

      Edward, I do see your point that equity is pointless unless you make use of it. Looking into “equity stripping” is a good idea to make use of the equity in properties. You still have control of the property, and then have control of the cash. Once you pull out the cash you can invest in more properties (cash flow and equity). As you probably know, by stripping equity from homes to purchase other properties you won’t pay any taxes on that money. That is information for any of the readers. Great response!

    • Deanna Opgenort

      He’s presuming a market that continues to blissfully rise uninterrupted for the next 10 years. That’s a pretty unrealistic scenario, though in the SF Bay area where he’s at it’s not likely to crash the same way as in the rest of the country. SF is a completely different world. $22.50 an hour might get you basic manual labor, while the trades are $45 & up. Renting a bedroom in a house in Silicon Valley runs $1500/mos, while a 400 sq ft studio in SF in a sketchy part of town can easily run $2k.

  3. Joe C.

    Great article David. As a newbie most of what I read caters to cash flow investing. And that is what I do. Increased equity is just the icing on the cake. And I totally agree with that. But how do you take your equity, invest it and get a return of 15%?

    • David Greene

      Well that is up to the individual investor, but I average 12-15% on many of the properties I buy, and that is before rent is raised in time.

      On many of the properties I buy, I get much better returns than that.

      There are funds that provide returns like this that don’t require any work from you other than your due diligence when deciding if you should invest in them. I invest with another guest on a BP podcast who routinely gets me much better results than this.

      The 15% was just an example of what you can do with the equity. The real number is going to depend on what opportunities are available to you and how hard you’re willing to work to find them.

      Hope that helps Joe

  4. Albert Bui

    Cashflow is equity and equity is derived from cash flow in the commercial world, but yes in the residential context people don’t usually put the two together or they think of it as separate entities.

    In residential value is a function of comparable sales and comparable sales and not linked to income so one can reason why rental income and home price or equity are not correlated.

    Equity can’t buy a sandwich or pay bills unless you sell like one other responder mentioned along with many expenses of doing so. You can however obtain a line of credit up to 70-80% of this equity to access it with out selling the property but there will almost invariably be “some,” Equity that will be trapped and not able to be utilized (in this case 20-30% of equity value). So while selling is great closing can cost around 6-10% of the sales price anyway so you net around 90-94% of the value after a sale.

    So if you consider the selling costs of real estate you’re not really netting that much more than you can access with leverage against the property (leaving 10-15% of unused equity on the table instead of 20-30% after closing costs and concessions of selling).

    • David Greene

      I take advantage of this routinely Albert. Many of my properties have significant equity which I tap to earn more monty. I can borrow at 4% and earn at 15-20%, all because of my equity.

      Meanwhile this doesn’t affect the original cash flow the property is still providing.

      This isn’t something you can do without equity, and it supercharges your results. Turn key providers and others who espouse the virtues of cash flow can’t provide opportunities like that.

        • Harrison Liu

          David thanks for a great article. I just finished reading the millionaire next door. I think an article about how to realize equity and convert to cashflow is badly needed for a lot of west coast investors myself included. Like a lot people said, equity is like stock gains it looks and feels rich on paper, but if you can not touch it what good does it do for you? In the millionaire next door it poses the same dilemma, most millionaires are frugal, live well below their means at the same time they have millions9 they can not touch because uncle sam is watching the pot as well. It’s as if you spend entire life of sacrifice to accumulate wealth but at the end that wealth really doesn’t belong to you because you can not spend it!

      • Larisa G.

        Great stuff, David. But I have a question- if you are taking out your equity (line of credit I suppose), then you are paying interest rate on this new debt, which should affect your original cash flow from this property, shouldn’t it? Or am I missing something?

        • Ryan D.

          Larisa – when you access that equity through a line of credit, yes you do have to pay interest on that money. The interest should be paid by whatever you then invest the money in. Ex – you borrow $100k from a HELOC on one of your properties (call it Property A), and then take that $100k & use it as a downpayment to purchase a new property (Property B) giving you a 12% CCR. The cash flow from Property B pays for ALL its expenses, plus the interest on the HELOC loan against Property A – thus it does not effect the cash flow from Property A.
          You thus add to your portfolio without taking a dime of extra capital out of your pocket – you have just re-arranged your equity to perform more efficiently.

  5. Tim Silvers

    One must define two types of equity: market appreciation and developer or value-added appreciation. Market appreciation is not a guarantee and should never be a priority when purchasing a property. It should always be looked at as a bonus or icing on the cake. You cannot control it. Ever. This applies mostly to residential real estate. Thus, those who buy SFRs with appreciation in mind as a priority are speculating, not investing, and those of us who are still here that survived the last 10 years know the meaning of speculation via market appreciation all too well. Value-added appreciation, however, is within the control of the investor, not a market, thus, zero speculation. This mainly applies to commercial property. In commercial property, it is the NOI (net operating income) that determines the market value, not volatile external market forces.

    In either case, cash flow should be the #1 priority when buying to hold. As Robert Kiyosaki says, invest for cash flow, not capital gains. Equity means nothing unless it is converted to cash. Cap gains can be wiped out tomorrow.

    • David Greene

      Cash flow can be wiped out just as easily by expenses and repairs. That was one of my main points.

      Cash flow isn’t as dependable as we tend to hear about. It varies, just like equity does. Adding one roof, flood damage, HVAC unit, or pool pump can wipe out cash flow for years.

      I also mentioned that every property I buy cash flows. Cash flow is what defends your wealth, it helps prevent calamity. But not many built wealth by focusing solely on cash flow. Equity is what grows your wealth, and when managed correctly, increases your cash flow in time.

      • You can always recover quickly from cash flow issues as it’s within your control whereas market appreciation is pure speculation from which you have zero control and sometimes never recover from. It’s best to have both but I still would never depend on solely on appreciation as a wealth builder since the value can fluctuate up and down whereas I can always depend on some type of income. That’s why I’d never own stocks.

      • Also – very important & forgot to mention – it’s always better to have multiple door leases, so that if cash flow is wiped out due to a serious issue (i.e. fire), you have other sources of income to compensate. So, I agree that cash flow is risky if you only have one property that you’re renting out. From a cash flow standpoint, it’s always better to have multi family property as opposed to single-family. Just my two cents.

  6. Jerry W.

    Excellent article. About 3 years ago I decided that since there was little appreciation in my local market I would try to add a lot of properties and get as many properties as possible building equity through mortgage pay down. Appreciation has been very weak. I added quite a few properties including some mid-west properties to test out cash flow. I used 15 year notes so there was very little cash flow, but rapid equity buildup. Since then the market went very flat from the drop in oil prices and resulting local layoffs I have decided to upgrade several properties by replacing most worn out roofs and minor interior upgrades. The only purchases I am looking for are some that give me a bit of equity as a hedge against possible future price drops. I decided since appreciation was going to be low I would double down on the total number as the next best alternative. If I payoff $500K in loans over the next 15 years I will have gained $500K in equity, If I pay off 1 million dollars in loans I will gain 1 million dollars in equity. Does that make sense?

    • David Greene

      Yes it does. It also highlights a very specific argument that is rarely ever made on BP. Equity can be built in many ways, not just appreciation.

      In reading a lot of these comments I see two glaring facts.
      1. People assume equity is only built through appreciation, and therefore give arguments against “speculating”
      2. People think I am saying cash flow is bad.

      As I mentioned in the article, cash flow is good. But it’s purpose is to PREVENT wealth loss. Not to grow wealth.

      As you mentioned Jerry, equity can be built in several ways and I love your method. I recently refinanced 6 units into 15 year notes to do the very same as you.

      A dear friend once passed on a maxim his blue collar father taught him and your situation reminded me of it:

      “If you want to be a millionaire, borrow a million dollars and have someone pay it off for you”

      Might be the title of my next article 😉

    • Albert Bui

      That strategy can definitely work Jerry.

      I think the main downside to it is it takes “time,” and the trade off for 10-15 years to be free and clear may be worth it for some but for others, not. This is especially true if we’re looking at other valuable factors such as your opportunity cost of your age/time, lifestyle, and your money if it could be in other areas.

      The one excellent point I would add would be that someone else is paying your debt down and it’s better than paying down your debt yourself of course but if we’re going to be somewhat ambitious why not be overly ambitious =).

  7. Robert Steele

    I agree. Don’t focus on cash flow to the exclusion of everything else.

    It is more important to acquire the right investment for FUTURE earnings and value. I hate to bring up Buffet but did he buy companies because they were paying a dividend? No, he bought under valued companies and then turned them into valuable companies. You can do that too with RE. By buying distressed properties, fixing them up (adding value) and renting them out. But it’s more important that you buy the right investment and that usually means cash flow needing to take a back seat. Consider the following two examples.

    Investor A bought SFH rentals in a old lower income neighborhood because he could get $200/month cash flow there. Unfortunately over the past 10 years rents haven’t gone up that much and neither have the values. It’s just not a desirable neighborhood and probably never will be.

    Investor B bought SFH rentals in a new upper middle class neighborhood even though they were break even cash flow. Thankfully over the past 10 years rents have gone up steadily and so have the values. It’s a nice neighborhood with great schools and people want to move there.

    Who do you think made the better investment in the long run?

    • David Greene

      Robert, THANK YOU. You seem to have got the point many of the commentators have missed. Cash flow is not bad. It’ s just not going to build you wealth very quickly. It’s purpose is to prevent loss, not build wealth.

      There is an argument to be made against cash flow completely that I didn’t bother making as I didn’t want to stir the boat too much, but, for someone in my situation (single, no bills, no family, plenty of disposable income) there is something to be said for buying into negative cash flow (either through a 10 year note or just an expensive property in a GREAT area) and just letting time do it’s thing.

      Cash flow helps prevent you losing your property. But if you have plenty of reserves and plenty of disposable income, that’s not really a concern is it?

      My point in this article was to challenge the accepted way of thinking and force people to ask themselves if the method they are investing in is really best for them. I hope it did that.

    • Joe Scaparra

      Not so fast my friends! If Robert is allowed to give a hypothetical to prove his point let me take his example and give it a small adjustment to make my point that Yes INDEED Cash Flow is KING and it Leads to Building Equity.

      Investor A is just like you depicted but instead of a SFH it is a duplex in the same neighborhood! But instead of over the last 10 years of no growth, he bought in a community that started to take off economically. Like maybe East Austin. Yeah East Austin 10 years ago was the worst part of Austin. The WORST PART OF AUSTIN. HOME were not taken care of and CHEAP! School were and still are the WORST IN AUSTIN. Since the Housing Crisis caused the developers to quit building, the low income sector was ignored. Now the builders are coming back but can’t make any money with the low income housing so they are developing 500k and above for the most part. So this duplex rental market exploded. Rents have over double and still going up! Since rents have gone up, equity followed! His rents are $1100 aside, $2200 mostly total. 150 people a day net inflow to Austin with no place to live!

      Investor B bought the SFH and broke even if you count the tax breaks he got. But now 10 years later his home is selling for twice what he paid for it. It is now cash flowing positive but the real estate market is at a ALL TIME HIGH. His rent is now $2400/month. Great increase in equity but if he sells whats he going to replace it with. Or is he going to just do a cash out and buy another property that doesn’t put CASH FLOW top priority with prices at ALL TIME HIGH!

      Both investors done good, right….Right! But now the down turn comes and investor A rents go up during the down turn because there are more renters in the market looking for cheap rents which his duplex provides. His target tenant is a manager at McDonalds that doesn’t even know a stock market exist. Job secure. Cash Flow strong!!!!

      Investor B has to lower rents as his renter $2400 month can’t hack the payment due to job change etc. But investor B took a cash out and his payment is now higher and the additional property he bought is cash flowing NEGATIVELY due to the down turn. Trouble all the way around.

      You make your money on the buy no doubt. I specialize in small multi-family. Distressed is best, and look for property that is under-rented. Low Income, Cash flowing properties build EQUITY everyday in every market up or down! At least here in Austin Texas and the surrounding areas.

      I get what you are saying David. At times you might want to take some cash out to buy more properties…….But David……not to buy negative cash flow properties…..That is a NO NO. If you take a Cash OUT, put it back in CASH FLOW properties. Remember CASH FLOW IS KING!!!! I have been investing in low income multi family in Texas for the last 15 years. Yes it takes about 8 to 10 years to pay off the 1st property but now it takes only 3 years to pay off any I buy today. I also don’t need to get a conventional loan anymore, cash flow is too good and I can always cash out, but only to buy POSITIVE CASH FLOW properties! BTW my scenario is real world her in Austin, TX.

      • David Greene

        I really think you’re missing the entire premise of the post.

        All my properties cash flow. But that cash flow isn’t making me wealthy. It’s purpose is to make sure I maintain the properties while they appreciate and the loan is paid down.

        No one said cash flow is bad. I’m saying wealthy people understand it doesn’t make them rich.

        No one ever said wages were bad either, but if you’re expecting the wages you earn at work to create massive wealth you are probably going to be disappointed.

  8. Artie Mayhew

    David, you are in a special market, which reminds me of the tech bubble we enjoyed in the stock market in 1999 when we made 101% return that year. Unfortunately what goes up will likely come down. Extraordinarily few people make 15% returns on any sustainable basis although some can have a good run for a few years when the market is right. If I were you I’d be converting some of those gains to cash or diversify a portion of your holdings. Remember the basic maxim ..Buy Low, Sell High. Real Estate is a fabulous wealth builder but it is not liquid and the slippage in transaction costs is a big number as another colleague pointed out. That’s why most wealthy people own things besides real estate. Point 2, I loved your article and in fact this is exactly what I’m doing, but it’s with 10% of my net worth. Nobody can predict what a real estate market will look like when you personally need to or decide to sell. I had 2 fantastic homes in NY that had great equity but circumstances forced me to sell at a time when the market was flat and I didn’t make a dime after selling expenses, The day ISIS drops a bomb in CA you will see your values drop significantly for at least a few years. Or when one of your Governors decides to tweak the system of payments to illegal aliens – in either direction there will be unhappy citizens who may impact values where you own . If oil prices normalize you will see housing prices flatten as people must divert their incomes to rising gas, heating and plastics costs. I look at cash flows the same way I look st stock dividends – it’s a partial payout of the total investment during the time of my ownership and thus protects me from the vagaries of Mr. Market at my selling date in the future. An investment should be looked at in totality , equity plus cash flows. I think you also were making that point. Warren Buffett hasn’t paid dividends in decades and let’s his equity values run but you will notice the price of BRK has flattened out in recent years and I would say at least in part people are not driving up the stock price because they prefer the comfort of receiving part of their returns now in the form of predictable cash flows. Because the future is unpredictable.

    • David Greene


      Thank you for your insight. I do have a large amount I keep in reserves (my mentor Jeff Brown says “take what you think you need, and double it”). And I agree that a market can turn at any minute.

      Markets turnings what leads to great wealth being built! We should all be ready for that.

      I also thank you of not misunderstanding me and thinking I’m saying cash flow is bad. As I stated in the article, everything I own cash flows.

      It’s just that I’m not expecting that cash flow to lead to wealth. I’m expecting it to PREVENT loss.

      One thing I wasn’t quite sure of that you mentioned:

      Regarding the market being down when you need to or decide to sell-if a property cash flows, what would make you need to sell? I personally don’t even count on cash flow, I make sure I’m earning enough that I could pay my mortgages for years if for some reason all my tenants joined forces and left me.

      If you don’t over extend, it’s tough seeing a position where you would need to sell when you didn’t want to.

      Also, this is another great argument for why equity is so important. If you buy your properties with equity already in them (like I espouse in this article) you have a built in cushion for when prices drop.

      If prices drop below the amount you put in, you have rent to cover your expenses.

      When done correctly, real estate really has so many fail-safes to prevent catastrophe.

      It is a get rich slow game. My goal is to keep all my properties in good condition and afloat for as long as I can. If I do this, it’s highly likely that they are going to appreciate in time, have the loans paid down in time, and see rents increase in time.

    • David Greene

      If Isis drops a bomb, or a meteor hits the pacific northwest, or unicorns eat all the crops, or whatever could happen happens, THAT is when cash flow is useful. To keep your properties alive and stop you from losing them if they lose value.

      It is NOT useful, in most cases, for building massive wealth.

      $300 a month is not going to make you wealthy. Adding equity to your properties though buying low and rehabbing wisely, buying in growing areas, and paying down debt ARE ways to make yourself wealthy.

      I never said cash flow was bad. It’s good. But it’s good as a defensive tool to prevent calamity, not as an offensive tool to build wealth.

  9. Sean Cupertino

    You make me feel good about selling my house rather than renting it, which was the reason I joined this website. I had gotten this job, reloated to FL, and having lived in this short-sale house ($420k) for less than 2 years, my employer forced me to relocate up north. For having the house 22 months, I made about $27k more than I bought it for, with my employer paying all closing costs when I bought it and when I sold it. I had considered renting it out instead, and that’s what brought me to this site. However, I was probably going to net, at best, $400 / month, minus repairs, plus when I did sell it later on, company wouldn’t be paying closing costs. I miss that house dearly, but as you indicated in the article, probably the right thing to do to free up the equity. Unfortunately, haven’t invested the money yet in the 3 months since I sold the house, since the market seems too high.

  10. Joseph Plaugher

    As Robert Kiyosaki explains, wealth is the difference between the cash flow your assets produce and your living expenses. A it is measured in time not dollars. As many have mentioned, the purpose of wealth (or equity) is to build cash flow and the amount of cash flow you have is the true measure of wealth. Just ask yourself, “if I stopped working today, how long would it take me to run out of money?”

    • Albert Bui

      I relate with this view of cash flow as well since 1 year at your current age is always worth more than a prior or earlier year of your time since we all don’t live forever.

      With cash flow you free up your most important asset which is your time (assuming we do something valuable with it) =).

    • Phillip Minor

      Exactly Joseph he won’t respond to that because he doesn’t understand Roberts philosophies and strategies and the fact he owns like 3000 properties.The truly wealthy have multiple streams of income are not employees paying 38% percent tax to the government they understand tax law and as said the amount of cash flow is the true measure of wealth and you keep shooting that down so obviously your not there yet your looking for security from your job. Im new to Real Estate but your right using equity to increase cash flow is a great idea its not the only one

  11. Ryan Hawkins

    Great article. I have been investing part time on and off for 10 years and have always looked at a balanced approach of cash flow, equity build up through loan paydown and appreciation, and tax benefits. Cash flow is important, but the overall picture is what i look at.

  12. John L.


    It’s been a while since I’ve read a great real estate article that truly clicked with me. I believe in order to make abnormal returns you have to provide abnormal value. Simply buying and collecting cash flow properties might store wealth over time but probably won’t make you very rich quickly.

    In my experience in Texas, I have bought retail properties that cash flow about $300/month. However, in the long run I see that as just breaking even due to all the expected and unexpected maintenance/capital expenses.

    I’ve also done the buy distressed, rehab and refinance and lease out strategy. There is definite potential for wealth acceleration there, but with that comes more risk! I’ve had very successful ones but also a few duds that ended up with negative returns.

  13. I remember well being young and aggressive once myself. Like you, I was 33 when I had made my first million in CA real estate. Then this guy named Reagan was elected president, rates went through the roof to the point that there were no loans. I lost it all in less than a year. That was 1981. In 1989, the Russians surrendered and our economy took it in the neck again. That was the days of the RTC. Google that one. All the savings and loans went under government control. You could buy a brand new, empty 20 story building in Houston for pennies and nobody wanted them. Then we had the YTK in 2000 and the big mess in 2008.
    What you have missed is that a home purchased in Phoenix in 2004 is just now back to that value, 12 years later. Not a lot of people held on during the past 12 years nor could many of them afford to hold on when their own jobs were lost.
    What you failed to address is the fact that the state of CA becomes your partner in any property that moves into a profit zone. Are you aware that the exit costs of a profitable property, with long term capital gains treatment in CA is now at 42% of the price. If you 1031 out of state, CA now requires you to file an annual statement of disposition of that new property. They want their share, no matter where you go.
    I don’t mean to rain on your excitement or optimism, I just want you to realize that in a life of investing, “shit happens.”
    I would like to ask Hernan Fernandez above how he calculates the right time to buy or sell. I have never quite made it correctly.

      • David Greene

        Of course timing the market perfectly is really hard, but if you were watching what was happening in 2005 and couldn’t tell a major problem was on the way, you weren’t watching too close. At least where I lived.

        One simple metric to gauge if a market is too high to by in-if you can’t find cash flowing properties, don’t buy.

        One simple metric to determine if a market is in a down turn-if you can finance 100% of the cost of purchase and still cash flow, and people really want to live there, buy.

      • David Greene

        Of course timing the market perfectly is really hard, but if you were watching what was happening in 2005 and couldn’t tell a major problem was on the way, you weren’t watching too close. At least where I lived.

        One simple metric to gauge if a market is too high to buy in-if you can’t find cash flowing properties, don’t buy.

        One simple metric to determine if a market is in a down turn-if you can finance 100% of the cost of purchase and still cash flow, and people really want to live there, buy.

    • David Greene


      I’m sorry to hear about those losses. That must have been incredibly frustrating.

      My guess is the properties you bought didn’t cash flow or some other unexpected event caught you off guard causing you to lose the properties.

      If someone makes enough money, or has enough in reserves, cash flow isn’t as important. But if they don’t cash flow is very important.

      But it’s important for the purpose of preventing loss (like in the situations you described), not for preventing wealth.

      If you had sold those properties when your net worth reached a million because you recognized they didn’t cash flow, I bet you would feel a lot different about real estate right now. It makes sense what you’re saying.

      I don’t want people to think I am against cash flow. I’m certainly not. I want people to understand that the wealthy don’t depend on cash flow to build their wealth. They create equity through smart purchases, wise management, and well thought out exit strategies.

      If you want to build real wealth, that’s the way to approach this. If you want to just stay afloat, think no further than cash flow.

      • I think I did not get my thoughts across the way I wanted to, David. What I was trying to convey is that a lot of times, things outside of your control or even your vision come into play. All you can do at that time is react as best you know how. I have purchased apartments in the 80’s, 90’s and in 2000 that were vacant and in foreclosure. The tenants dried up due to economic factors beyond the owners control. I bought several 8-10 unit buildings in Long Beach, CA from HUD in 2001. These buildings were vacant at the time! Cash flow was great until the tenants left town. One man’s loss was my chance to gain. I have been on both sides of the coin.
        In 2010 in Phoenix, 100 and 200 unit buildings that were less than 10 years old were going into foreclosure. Their value had dropped because the tenant left town looking for work. The owners lost 10’s of millions and lost the units to foreclosure. The lenders lost millions also as their original loans were well in excess of the then market value. The market just did not support the rent the units needed to break even at those loan amounts.
        I am sure that the people who built, bought and loaned on these units are far smarter than us and like Mr. Hernandez, thought they had the market timed just right. Stuff happens is all I can say. Sometimes you are the windshield, sometimes you are the bug.
        I have spent the last 10 years learning an exit strategy for seniors that allows them to sell their highly appreciated zero basis property and not have to pay the taxes and commission. It works great, just hard to get the word out.
        As for the future, the next big market move will be when the Fed makes a rate increase and jobs are lost.

        • David Greene

          Thank you for clarifying Steve.

          I hear what you’re saying, but from what I can gather, if vacancies rates come back and everyone flees certain areas, how is investing solely for cash flow going to save you from this scenario?

          If people leave your cash flow is going to disappear anyway.

        • Rex Ashbaugh

          “I have spent the last 10 years learning an exit strategy for seniors that allows them to sell their highly appreciated zero basis property and not have to pay the taxes and commission. It works great, just hard to get the word out.”

          Can you elaborate on this strategy?

  14. I am truly honored to be part of a blog with such great investors. One promises 15% a year on 5M, a pretty respectful sum of $750K yearly, not bad indeed. Another tells us he knows when the market is low and he buys, then he can tell when the market is high so he sells.
    I really wonder how many market corrections these investors have gone through. Telling me you can make 15% in 2016 is impressive, but telling me you made a 15% return in 2007,2008, 2009 and managed to keep your 5M, you now have my undivided attention.
    Please all of you new investors out there (anyone under 40), do not get caught up by monetary success in a climbing market. Even a blind squirrel can occasionally stumble on an acorn.
    Forgive my pessimism but it comes with decades of experience.

    • David Greene

      Thank you for your concern Edward.

      If you read the article again, I think you’ll notice that I stated I believe cash flow is important, it’s just important for the purpose of preventing loss, not for building wealth.

      As far as the concern about not being able to reach 15% returns in a “down” market, I’ll admit I’ve only seen one and that is when I first jumped in.

      However, what I noticed is rents increased during the down market as people lost their homes and needed somewhere to live. This created rental demand.

      I can’t know if this happens every time, but I’ll admit I haven’t heard many examples of rent decreasing any significant amount over down times.

      So, theoretically, if I was making 15% ROI and the market went down, and this caused rents to increase, my ROI would increase from 15%, not go down.

      ROI is pretty much calculated by rents, not by the price of the asset itself. So when I hear people worry about the market “correcting”, I have a hard time understanding why a buy and hold investor with a cash flowing property would need to be overly worried about this. The people who got hurt when the market dropped probably owned properties they shouldn’t have in the first place.

      • Deanna Opgenort

        Rents increased in YOUR area increased during the last bust because at the same time as the real estate bust in the rest of the country the current tech boom was starting to build up steam in the Bay Area – that’s why the “make 15% for 10 years” statement is getting the eye-roll from a lot of the other BP folk.
        The rest of the country was different during the downturn. In some areas rent stayed the same – no one wanted to raise the rent on their good (ie employed) tenants. Some had a slight increase (increased demand due to displaced former home owners), while others fell through the floor (Vegas, Phoenix — economies built on building & disposable income). People also “densified” — moved in with family, friends ,getting roommates, etc. in order to save money .
        What’s interesting is that having talked to friends in their 80’s & ’90s exactly the same thing happened during the ’29 depression.

        • David Greene

          Hey Deanna,

          It’s true that rents increased in my area during the bust, but I wasn’t referring to “my” area when I was talking about 15% returns. I was referring to Arizona.

          I also get much higher returns that that where I am investing in Florida.

          I’m not sure why others would “eye roll” when they read that, unless maybe they are following different investing models than me. I rarely buy a property and just put 25% down and borrow the rest.

          If you want to be a better investor, you have to look for creative ways to solve problems. Ironically, this is also how I build equity, which was the point of the article.

          Buying properties at great prices, fixing them up under budget, and then pulling out your money after having them appraised is a simple and pretty consistent way to get an ROI over 15%.

          If people can’t get the ROI they desire, I would encourage them to email me for ideas on how to improve it.

    • David Greene

      Hey Jim,

      Apartments would be much different because you can add value (and therefore equity) to them in many more ways than SFR.

      As far as looking for signs of likely appreciation, I would start with looking for where the jobs are moving to. If you can find the place where wages are going to increase, it’s likely to be that home prices increase as well.

      That’s what I’ve tried to do so far.

      This is much, much easier said than done.

      Also, don’t get caught up looking to appreciation to be the only source of equity you can find. You can build equity through buying right and making upgrades that increase the value of the house. If you would like more examples of this, look at Brandon’s BRRR method. It basically relies on adding equity to a property so you can pull your initial investment back out.

  15. Brad Glenn

    David, I found your article fascinating and thought-provoking. Thank you.

    Artie, Steve, and Edward, I greatly appreciated your comments from your experience. I know there is ALWAYS another side/perspective to what seems to be amazing opportunity.

    From an outside perspective, people often tell me how amazed or impressed they are at my success in real estate. It always seems to me that success is an incredibly short distance from ruin (“losing it all”), and the only things keeping me on this side of the line are some humility, accountability from others, willingness to take risk, and some good fortune (“luck”). And when my “luck” runs dry for periods of time (hopefully shorter periods than longer), I’m hoping the other things are enough to carry me through.

    I’m most interested, at this point in my career, at partnering or helping or whatever you want to call it, others, in doing deals together with others, learning from one another, drawn to other like-minded individuals. I’m always reading or listening about these incredible stories about people’s successes, wondering, “How in the world did they do that?” I’m getting the most satisfaction right now out of helping others experience the “success” that I have, and trusting that we are all succeeding together.

    Are any of you mentoring other investors, or potential investors, and if so, how?

  16. Thomas Rutkowski

    Totally disagree. Equity is just idle cash trapped in the walls of a house/apartment. It earns about the same ROI as cash sitting under your mattress. It is only a source of cash flow to the extent that you can access it via loans. In another 2007/8, when banks are nervous, a huge chunk of your equity is lost, and your cash flow is reversed, how do you think you are going to turn the equity into cash without selling?

    “The secret to success is to own nothing, but control everything.”
    – Nelson Rockefeller

    • David Greene

      I agree. Equity doesn’t earn you anything until you convert it.

      But, the whole point of the article was to focus on building up equity for the purpose of converting it.

      To state it simply, if you focus on using cash flow to build wealth, it will be slow.

      If you focus on creating equity to build wealth, and then convert said equity to cash flow, it will be faster.

  17. Keith Weigand

    David – great article. I totally agree and understand where you are coming from. From reading the other posts, it seems like many people didn’t understand your point. Cash flow is needed to protect your investment but none of the wealthy got wealthy from collecting rent. They may live well but that’s not wealth. Building true wealth is buying a property for $800k and selling it 2 years later for $1.7 mil. Netting $700k in 24 months is the start of wealth building. No way cash flow could have done that. If other investments didn’t cash flow, then part of the $700k would have been eaten away over the past 24 months, so cash flow IS important. Just not if you want to really be wealthy.

    • David Greene

      Keith-Thank you. I can tell you actually got the point I was trying to make. Thank you for stating that.

      The wealthy don’t look to buy a fully functioning business for top dollar and just collect the income it brings. That is slow and doesn’t involve much ingenuity or talent.

      The wealthy look for struggling, distressed assets, and mastermind the project of bringing it to glory. They would then likely sell that asset for top dollar and take that money to throw into the next struggling asset.

      If people can grasp this concept, they will soon see their net worth increasing much, much faster than simply buying a property at fair market value and letting the cash flow add up.

      Once your net worth is increased, doors open and so do opportunities.

  18. Thoriso Mashego

    Thank you David!

    MIND BLOWN!! I had no idea I had fallen in with the herd. The cashflow herd. I must admit when I started reading your article I was sharpening my pitch fork. “How dare he even touch cashflow!”

    You have just given me a small but fundamental shift in my investment strategy. You have changed my life, saved it really from frustration.

    I had a strategy of acquiring more than 100 apartments and focus on cash flow, buying even in areas that had negative upside for capital gains which would eventually payout BUT your unique point of view will save me from unwittingly slamming the glass ceiling over the growth of my investments.

    Thank you, Thank you.

    I have saved your article, I will read it often. Please do not delete or change it, better yet keep writing more on this if you can. I will follow you.

      • David,

        Enjoyed this article. I caught the main point, cash flow protects your investment and pays the bills but equity build is the faster path to wealth. I can see that in my 14 years of investing in properties. Buy and hold can be a long term good position. But some of my initial purchases lost so much that I am still not back to where I was in 2005. Cash flow allowed me to weather the lower values. But flipping properties with forced appreciation (read sweat equity) allows me to build equity to pay down mortgages and experience more cash flow. Rehab flips enabled this a lot faster for more acquisitions/ paying down mortgages than just letting the renters do it.

  19. Paula Rodriguez


    Excellent article. Thank you!

    @Steve Grace you mentioned learning an exit strategy for seniors that allows them to sell their highly appreciated zero basis property and not have to pay the taxes and commission. Please elaborate.



  20. People beware. When all seems good and profitable, cycles happen.
    During a downturn everything is affected, that includes rent and available tenants.
    This is a cash intensive business: repairs, vacancies, covering lower rents during downturns.
    You must have large cash cushion available or risk losing your property during any downturn or unexpected event.
    Similar to the stock market, this quote:
    “There are old traders, and there are bold traders.
    But there are no old bold traders.”

  21. Joe Armeli

    David – great article. As a relatively new investor, this nicely describes another vantage point to view a property. Oftentimes, I can get buried in running calcs and evaluating cashflow, but it’s not all that needs to be considered. For those of us with a family and, a potentially hesitant spouse, this article can help make your case to begin investing. Thanks for sharing!

    • David Greene

      haha sounds like you’ve got your work cut out for you there Joe. I encourage you to keep fighting. Start small so your wife can see the sky won’t fall as soon as you buy a house and you may convince her yet to let you keep investing.

      I hope you stick with it. It’s worth it!

  22. Brad Lohnes

    David – Thank you for the article. It’s an important point that you raise. Many comments seem to me like they didn’t read the whole article. You clearly stated that cash flow has 2 specific purposes and has value because those are important goals (namely, income as an end game and to protect the investment in the meantime). Those are EXACTLY the reasons that I love cash flow, and only invest in cash flowing properties. But it is very clear to me, based on my experience so far, that the way you benefit greatly (i.e. gain real wealth) is through appreciation.

    Some people seem to be indicating that it’s all some kind of “phantom” money. I don’t disagree that the paper value of a property can and will fluctuate over time, going up especially fast during booms and “giving up” equity at an alarming rate during downturns…but so will any investment. Expecting this behaviour is important because it affects how you structure your financing over time. I’ll say it again, nothing is guaranteed to go up in value, but it would be disingenuous to say that someone who bought a few properties 10 or 20 years ago and still owns them hasn’t gained real wealth.

    Of course, you can cash that in by selling, but you can also refinance to get money out – when rents go up you can get money out and still easily cover finance payments with rental income. And still own the asset.

    It seems silly to me that people would literally only care about cash flow. It’s going to depend on the numbers, and I think over there in the US it sounds like you can get some pretty strong cash flow. Over here, I’d probably need to put up $40k to buy a $200k house and then maybe clear $100/month initially (that should go up over time). But if that is my ONLY goal, then there are MANY better ways to invest $40k – $100/month is a very low bar.

    But if I have that $100/month cash flow, the property goes up in value over time, and the tenants pay down the mortgage for me, then I have a strong investment that has multiple ways of making me money. That’s the power of property.

    (* Note that while tax benefits of property are often touted, over here there are few tax benefits for the buy and hold investor with positive cash flow.)

    • David Greene

      Well said Brad, beautiful articulation.

      Many of the arguments being made are that cash flow is most important because it will save you in times of crisis.

      That’s what I mentioned cash flow is for.

      Also, if there is a legit crisis, your cash flow is likely to disappear just as fast as your equity, so their point kind of collapses on itself there.

      You made some great points. Where are you investing?

  23. Wow, that is a true real estate bible! Great post, Dave! Real estate is a too big chunk for most of the people. Believing that your property will keep appreciating just like that is an assumption only a fool can make. That is why the market crashed and affected all of us.

  24. Matt McCourry

    Great article David! Many many people neglect to even consider what the property will be worth 1-5 or even 10 years down the road, I always make sure I cash flow but I am not a slum lorde either, I want to know that I liquidate any of my SFR assets with reasonable ease when needed. This of course being market cycle dependent…

  25. Anne Stickney

    excellent post! A lot of this discussion of cash flow to the exclusion of all other considerations I hear on BP makes me nervous- are these people prepared for a big local industry to close, several HVACS to need replacing (happened to us this summer), or several other unforseen events to fall on their heads? Too much leverage is not a good thing, IMHO. That’s how people lose their shirts (and their homes) in a downturn. Built in equity can help protect against that. I don’t think it can be emphasized enough- keep a big cash reserve, (and home equity is one form of a reserve) and live beneath your means to do it, even if you control fifteen or more homes.

  26. Casey Murray

    David, I love reading your articles. This title, like many of your other articles, almost seems contrarian to popular belief. Yet again, you deliver such profound information that it really shifts my outlook in REI. Great job!

  27. fred ramos

    Good article but As with anything timing becomes everything.. cash flow pays you TODAY, and equity becomes a big unknown as no one knows where the market is going to turn at any given point.. You “think” you are wealthy when you have equity and then 2006 repeats again and your equity evaporates like it never existed..

  28. Reina Kapica

    This gave me a new perspective on cashflow and equity. I am looking to buy my first investment property within the next 6 months-1 year so I’m trying to do as much research as I can to decide what is best. I have heard so much about cash flow but not too much about equity yet and the differences. I like what you pointed out and will now take look into equity before cash flow rather than cash flow before equity.

  29. Ben Wendt

    You know I was just thinking about what equity is and how to leverage it and this article popped in my inbox. My sincere thanks for presenting the differences between cash flow and equity. It helps firm up the long term business strategy.

  30. Amber turner

    Thanks David for the article! My husband and I live near-by in Turlock, Ca. We own 6 single family homes, two of which are in Idaho. We currently are trying to decide if we hold all the properties or sell some off towards the top of the market and hold the cash to use when the market drops again. We are also looking for flips. We are new to bigger pockets and have enjoyed reading what we have so far and trying to learn how to create more wealth. I enjoy learning from those that have been in our same situation and have been successful. I am always looking for advice from the experts and what the best strategy is going forward.

  31. Whitney Woolstenhulme

    This really was a great article and comes at good timing. My husband and I recently decided to sell our first and only rental property. It was pulling in $300 of cash flow per month but the equity has reached about $55k! We are wanting to re-invest the gains in multiple rental properties in the mid-west.

  32. manuel gonzalez

    Key word here is the rich I think most newbies need to go thru the cash flow stage specially if they need as much cash as needed to invest. I belive investing is like raising kids their is no right or perfect way they are all unique and what works for one don’t work for another. I’m a buy and hold investor and I invest for cash flow. My properties don’t appreciate much but with the snowball effect I should be on my way to owning 50 sfh free and clear thats one of my goals. A lot of people might say that’s wrong why pay off mortgages as fast as you can might as well invest it in another project but like i say we are all different there is no perfect way to invest. The point is to invest and not sit on sidelines watching.If you don’t risk you don’t gain and where There is fear there is money.

  33. Scott Schultz

    when it comes to rentals, you must buy Both Cashflow and Appreciation, my rule is never leverage more than 60% of the ARV, this allows for a 20% market adjustment (like 2008) and still leaves you with 20% equity if you need to refi, I have added $300K to my PFS this year by making smart purchases, thats Net worth add that I dont pay tax on! I really like a 50% discount on properties, that net me at least $200/mo if i financed the entire amount at 5% interest for 10 years, and have 100% value appreciation the minute I take possession. This Article is spot on.

  34. Roger Keyes

    This is a great article. Focusing on equity instead of cash flow, while you still have a day job, is also more productive than focusing on cash-flow. I just can’t jump on the “cash flow above all” bandwagon. I always stick to lower-interest loans with higher payments and shorter terms. My goal is to have exactly zero cash flow because it helps me out on taxes at the end of the year and my loan payments are mostly converted into more equity. I just can’t stand paying a loan that is mostly interest for the first 5-10 years. I would rather search for other expenses to write of such as my home office, car, power tools and even the occasional “business trip” 😉

    • David Greene

      Roger! You don’t know how glad i am to hear this. NOBODY talks about how much money we waste in interest on these 30 year loans to get more “cash flow”. It’s crazy. Thank you for mentioning this.

      I refi’d a good chunk of mine into 15 year loans for this exact purpose.

      • Dmitry Semenov

        Interesting point, David.

        I thought that 15 year mortgage doesn’t make sense, because you can take 30yr and pay the same monthly payment as for 15yr, so you’ll pay it off in the same 15 years (modulo slightly higher rate). But with 30yr you have much less risk, because if something goes wrong, e.g. rents are decreasing – you still can backup to smaller 30yr payment.

        Did I miss something here? Difference in taxes, may be?

  35. Michael Evans

    Here’s the problem with real estate equity: you have to pay someone in order to access it. To use your equity, you either borrow against it and pay interest, or you must sell the property, which has costs associated with it. When it come to cash flow, it’s just the opposite. You can take your cash flow and loan it out (earning interest) or pit it into a liquid investment with none to little costs to access your equity (such as stocks, bonds, options and business investments).

    What good is equity if you can readily access it. Have you heard of the term house rich and cash poor. There’s a reason why they say “Cash Rules Everything Around Me”, CREAM.

    • David Greene

      Hey Michael,

      I would argue that the amount of your cash flow, in the vast majority of every investment, isn’t enough to do much of anything constructive with.

      The equity, though it is true you have to pay to access it in most cases, is significant enough to make some moves.

      The point i’m making is cash flow isn’t bad. It’s good. I always buy for it too. But it’s purpose is to protect your investment, not make you wealthy.

  36. John Conway

    Excellent food for thought. We need an article on “Return on Equity”. As investors move along in their careers the equity builds up. The interesting question to me is: What are you gonna do with the increased equity? Options are of course to sell or refi and re-invest as discussed in the excellent article above. The question is when to tap the equity, what are the risks associated with it – and ultimately – does this make sense for you at this specific moment in your career. If you have a $100,000 house that is paid off, and your income is $10,000/yr, maybe that is enough. If the income on that same house is only $8,000/yr. Maybe that would be a good one to sell and re-invest the proceeds. These values will change over the holding period as the rents and market value of the asset change.

      • John Conway

        Yeah, I searched “Return on Equity” in Bigger Pockets and I believe it returns only one result. We need to talk about this more.

        During your holding period your ROE will fluctuate. Usually the longer the hold, the greater the equity, and the lower the ROE. At a certain point it “makes sense” to sell and reinvest – if you just look at the numbers. But it is an *even more* interesting question when you factor in your risk tolerance and personal / career goals which will certainly influence your decision of whether or not to sell and/or tap equity.

        • Ryan Franklin

          Hi John. I am new to this game so I’m trying to take everything in and pick out the people that seem to have the best knowledge and experience to discuss strategy. You make mention of ROE and that at some point in the future, it likely makes more sense to sell and reinvest a property due to the equity build-up over time. My question is as your equity builds up over time, wouldn’t your cash flow typically increase at a near same rate? I would expect (I do not know) that rental rates of an area increase similar to the the value of the houses in that area. Maybe you mean that it makes sense to sell when the rental market trend line diverges from the property value trend line???

  37. Rob U.

    This is SPECULATION, not investing. No one, and I mean NO ONE, can predict with any degree of reliability who is going to move where, which cities or neighborhoods will grow, which counties to invest in, etc, etc. Thinking we can predict these things is over confidence in our abilities yet humans keep doing it and will never stop doing it, even after thousands of years of evidence that we are complete failures at predicting the future. (if you don’t believe this comment then go read the book “Black Swan”. We certainly can speculate that values will increase by 5% per year, people do it all the time in stocks and real estate. Sure, it’s interesting and inspiring on an Excel spreadsheet but this is not the way to get rich. The way to get rich is to know what you are buying better than others, then increase it’s value right NOW (buy dollar bills for 50 cents). Counting on market appreciation because of this or that reason fool’s gold. Count me out!

  38. Arif Sealey

    What a great article. A couple years ago I sold a property that I’ve owned for 12 years. The reason I sold it was because of the equity I built up. The monthly cash flow was less than $300 but the equity was about 40k. To me the equity was dead just sitting there not being active versus what I could use the cash for. Recently we got back into real estate and it’s solely in flips. That’s where the cash is. I only worry about replacing carpet and fixing toilets once then I get my money. If the market turns I’ll be able to quickly convert it to cash and sit on the sidelines waiting for continued bargains in the market. After the cash gets to a point where I don’t want to deploy all the cash I can then look at commercial real estate to park the cash.

  39. Howard Sklar on

    An interesting read. I still can’t escape my focus / obsession with cash flow….here’s why:

    The property value is determined significantly by the cash it throws. If I come up with a strategy around rent increases that maximizes my NOI via healthy rent increases while simultaneously reducing turnover, then I am also moving in the direction of maximizing the value of the property and therefor my equity.
    Bottom line – if my focus is on NOI (maximizing rents while minimizing expenses) the value and equity will take care of itself!
    Note: I am a buy and hold guy / apt. building operator. I get that SFH investors need to keep their equity working hardest at all times….I get it!….different paradigm!

    • David Greene

      Hello Howard,

      Thank you for making this point and introducing this perspective. I agree with you wholeheartedly, but your argument applies to commercial investments that are valued on NOI.

      Because the majority of the readers of this article are people just getting started and they are almost always getting started in residential, the rules of the game are a little different. Cash flow has virtually no impact on the value of a property in the residential world.

      When it comes to SFR investments, buying low, prudently rehabbing, and choosing your location wisely are the best ways to add equity to your property and benefit from future appreciation.

      When it comes to commercial properties, you’re exactly right. Increasing your NOI is what creates equity.

      However, let me point something out.

      The actual cash flow you gain in the commercial world by increasing rents is peanuts compared to the value you add to that property overall. There is massive wealth to be made in buying a poorly run apartment, fixing it up to increase rents, and then selling it to a yield hungry hedge fund for top dollar.

      Taking those profits and then reinvesting them into other poorly run apartments where you can then repeat the strategy is going to build your wealth much faster than increasing rents and saving an extra $2000 a month ever will.

  40. John Murray

    Great article! I do remember 20 years ago and 30 years ago. Survived Back Monday and other sell downs of the stock market as well as real estate bubbles that burst. People always forget and repeat the get rich quick theme. I’m 59 in great health and retired but work as a real estate investor. My advise to all the younger investors is dollar cost averaging. I have made a bunch of money with this philosophy and it takes the bumps out and freak outs to a minimum. The trick is when do you quit your day job. I hung it up 2 years ago with a defined pension plan and $1.5M in my IRA. Sold my big house for $400K profit and cashed in my deferred comp for $200K. Invested in 8 single family with positive cash flow of $60K per year and leverage another $3M per year at about 8% growth and refinance when I can clear $50K per house Pay next to zero taxes and life is good. I pulled the plug at the right time

  41. Ryan Franklin

    Hi David. Thanks for the interesting article. It reflects my thoughts that it is likely best to build wealth (equity) and income (cash flow) in tandem and stably. However, you unintentionally bring up an issue I have been trying to solve (please excuse my ignorance, as I am a new investor). You mention repeating the same process of investing in a “fixer-upper” $80k twice a year for 10 years…and then you have built $1.6M in equity and $8.5k/month in income. My question is…you’ve just invested your $80k in the first property…unless you already have a significant amount of liquid capital at your disposal, how is this a realistic possibility?

    Another question is related to market downturns. You mention you’re not worried about a market downturn because your properties cash flow, but during a recession, I would expect that a significant percentage of your cash flowing properties would cease to cash flow when renters fail to make payments. Is this not the case? Alternatively, during a recession many people would lose their homes and be forced to rent – increasing the demand for rental properties – so is there some kind of equilibrium that takes place? And how long into a downturn does that equilibrium tend to take place? Basically I’m trying to get at the amount of reserves I should keep for each property to remain safe during an economic downturn.

    • David Greene

      Hey Ryan,

      These are very good questions!

      If I’m understanding you correctly, yes, the hypothetical example I gave was assuming you have 80k to invest. Those examples are given to show a theory, not neccesarily an exact practice to follow. If you don’t have 80k, and can’t save it, there are many other methods like borrowing money, borrowing from your retirement, taking out a HELOC, partnering with someone else, etc.

      Regarding downturns, you’re spot on. I found rents increased during the last downturn as demand increased from people losing their homes. If the entire country went unemployed, we could be in a problem. My guess is that won’t happen, and if it does, the govt would be bailing people out. America tends to operate that way.

  42. roger s.

    Now, if you’re looking to not lose money, cash flow is king. Cash flow keeps you safe.

    Love this statement. I play first to not get hurt in the RE sphere and this is a clear statement of that philosophy. Bullet proof financials cover a hell of a lot of markets. Not so much in HCOL areas but in the areas I deal with, cash flow is king. Your results may vary.

  43. Tony L.

    David, as someone who has managed to build “decent” wealth through buy and hold, cash flow focused real estate investing, I justed wanted to say – I think your article is right on the money! My first property was purchased for $24,000 down and produced $200/month in cash flow. It now produces $4,000/month in cash. My second one produced about $300/month in cash when I bought it and it now makes about $9,000/month. I managed to buy several over the course of many years. However, those were unusual times and I don’t see conditions like that repeating. These are multi-unit properties, located in the SF Bay Area, that were purchased about 20 years ago.

    I agree that someone starting out now is likely to buy SFRs. And while apartment buildings should be valued and purchased for cash flow, SFRs should be bought and sold based on equity appreciation. For one, rents always seem to fall behind the market value of a home since rent payments are usually less than mortgage payments for SFRs. And home prices can be very volatile – it is probably best to cash out when you can.

    I like to think of apartment buildings as bonds and SFRs as stocks.

    • John Murray

      Hi Tony,
      I must have done something extra special. My 8 SFH cash flow about $60K per year in rent profit. I purchased all in the last 2 years and extracted $152K last October and will extract about the same this October. I don’t think the Bay Area is a good investment for real estate but Portland Oregon is. The Bay Area has nice weather and poor real estate prospects.

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