Why You Should Only Focus on Cash Flow (Not Profit) Each Month

by | BiggerPockets.com

Whenever uninformed people speak of the real estate market, they seem to believe that on the first of every month, we’re just rolling around in money. In our dreams! Yes, you can make a lot of money in real estate, but that is not what you should be striving for each month — and that is not what your rental money is for.

If you’re looking to invest in a rental property, your thoughts shouldn’t be on how much you can potentially make in profit. They should be on how to secure regular cash flow to cover your costs. Your cash flow is the amount of money you are collecting from tenants every month. Your free cash flow is what you are left with once you’ve deducted your costs (mortgage, insurance, tax, maintenance, etc.). While a substantial amount of free cashflow is ultimately what every real estate investor is aiming for, the only thing that matters when you start out is maintaining enough cash flow to keep yourself afloat!

Below, I’ll explain how to do this and why it’s vital to your success.

Cash Flow is a MUST

You need cash. Every property costs money, whether it’s simply to cover the mortgage or conduct maintenance, so it’s vital you have cash in your account that can be used for these expenses. In particular, it’s important to bear in mind that you can never predict when a boiler is going to break or a pipe is going to burst, so having some sort of contingency fund is always advisable. In most cases, however, with good tenants in your properties, you’ll be able to cover these costs using the rent from their properties each month. This is the perfect system for when you’re starting out, so you needn’t worry about earning more in your 9-5 to cover such costs.

It is very important for your first investment that you make sure your rent covers your costs! If you are left with an un-rentable or half-empty property, you aren’t going to collect enough monthly cash flow to allow you to cover your mortgage payments. You’ll end up losing money because, regardless of occupancy rates, mortgages still need to be paid, insurance must be kept up-to-date, and maintenance work still needs to be conducted.

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Related: How to Survive in All Market Phases (It’s About More Than Just Ensuring Cash Flow)

Therefore, I recommend you get some advice when it comes to purchasing your first rental property. By asking someone experienced to talk you through your options, the local market, and your cash-flow potential, you’ll be in a better place to make an informed decision about your chosen property. I have preached for years now that investors should be more patient, save better, and only buy with cash and no mortgage. Yes, this is the longer and slower path to building wealth, but it is much safer.

Remember, real estate gives back what you put in. It’s hard work being a landlord, but if you are dedicated, resourceful, savvy, and responsible, you will see consistent cash flow. You need to be a good landlord just as much as you need good tenants in your property. If you don’t have time to dedicate to this aspect of the real estate business, hire a property manager to do it for you or buy through a turnkey company. A reliable, communicative landlord is like gold dust, and tenants know it. If you want to secure long-term renters, let them know you’ll be there for them as much as they (and their money) will be there for you. Without tenants, you won’t have any cash flow, and without cash flow, you’re screwed.

Choose Rentals Over Lump Sum Profits

Rental properties are the best option if you’re looking to produce a high monthly cash flow. Lump sums only gives you a one-time, admittedly large, profit. If you buy a house to sell (flip), you’ll spend time and money improving it to sell it on and then, once it’s sold, you have to start again. It’s a relentless cycle, and while you can make a lot of money doing this, it’s backbreaking work and a task most people aren’t up to. Rentals, however, offer an easier, more consistent way of achieving a monthly cash-flow. And in the long-term, they will turn into equity themselves.

Many choose to invest their money in a real estate rental ahead of their retirement for the purpose of receiving a monthly injection of cash. If you invest wisely, a rental property can provide a comfortable nest egg for your golden years. But remember, the most important thing is to get good, reliable, trustworthy tenants into the property. Being a landlord is hard work and takes up a lot of time. If you don’t mind using some of your cash flow, it may even be worth hiring a property manager, although most people are capable of running one or two rental properties alone. Regardless of how you choose to conduct your real estate business, whether you have one property or 10, the most important aspect is that you are guaranteed a monthly cash flow that covers your costs and hopefully leaves you with plenty of leftover cash.

And remember when I mentioned how a rental property can lead to equity?

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Cash Flow Will Lead to Long-Term Gains

It may take some time to see this come to fruition, but it’s true. Once you’ve established yourself and gotten some regular, reliable tenants into your rental property, your cash flow will lead to a profit. To do this, it’s important to invest wisely, as well as have low maintenance costs and a high occupancy rate, but it is possible. So how does cash flow become a long-term gain?

Related: Sorry, But Cash Flow Alone Probably Won’t Make You Rich: Here’s Why

Well, if the rent from your tenants is covering all the costs of the mortgage and building upkeep, every month you’re steadily buying back your property from the bank. Therefore, if the time in the future comes when you do need or want to sell, you’ll be guaranteed a significant sum of money. The key here, however, is to hold onto your property for as long as possible.

Paying off that mortgage monthly thanks to the income from your renters is a sure-fire way to eventually see profit. The longer you hold onto the property, the smaller the mortgage will be at the end, the higher the appreciation of the property itself will be, and the larger cash injection you will receive if and when you finally sell. And if you choose not to sell, you can leave it to your heirs, either with a small mortgage or outright for them to do with as they wish. I suggest you look at paying off the mortgage as soon as possible, leaving you with some serious monthly income.

After a while, with good investments and a number of tenants, you should have some significant passive income leftover each month — your “free cash-flow.” Your monthly collection — once the mortgage, insurance, repairs, and vacancies are removed — should leave you with a decent amount of money if you’ve invested wisely. By conducting regular maintenance checks, you should minimize the frequency of emergency repair work. And if you’ve invested in dressing up the house, you’ll also be able to charge higher rents.

Conclusion

A quote that I made up a while back goes like this: “If cash is king, then cash flow is queen, and financing could be the peasant.” Be very cautious when using leverage. If done incorrectly, you could bleed your portfolio to death and make ZERO passive income. Make sure to only add properties to your portfolio that suit your end goal and where you want to be long-term. Be very patient and choose every property wisely. In my opinion, there is only one end goal that all real estate investors should have — to earn enough passive income to supplement your living expenses and allow you and your loved ones to live the lifestyle that you all desire.

How do you view cash flow? Do you use it as your focus on it over other metrics? Why or why not?

Let me know with a comment!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

17 Comments

  1. Audrey Ezeh

    I really appreciate the points you make here. I’m on the cusp of my 1st deal. It’s a small multifamily… great cashflow with rents below market and lots of value add potential. It’s taken a long time to find this deal but i wanted to be patient and do it right. I know it will take a while to find my next one and I’m ok with that…more time to save, less money borrowed!

    • Engelo Rumora

      Thanks for your comment Audrey,

      Well done.

      The biggest mistake I made when first starting is not being patient enough.

      Only buy deals that suit your end goal and always look at the numbers making sure the cashflow makes sense.

      Much success

  2. Claude S.

    So you recommend paying cash for the first rental property. How about subsequent ones? Having no mortgage certainly allows for much higher cash flow.

    Yet, others recommend using leverage with mortgages and increases cash on cash returns.

    Thoughts?

    • Jessie Niu

      Read his second paragraph again. “Cash flow” is not how much profit you make, it’s how much rent you collect from your tenants. You are talking about “free Cashflow” here, which is the profit and nice to have ultimately, but his point is to focus on Cashflow instead when you start out. If the cash flow can cover the mortgage and other expenses, then you can definitely choose to leverage.

    • Engelo Rumora

      Thanks Claude,

      I recommend cash for as long as you can.

      A rule of thumb that I tell investors is if you can buy 4-5 properties with cash, you really have a nice solid foundation built should be cashflowing nicely every month.

      Then you can start looking at leverage to speed up the portfolio growth.

      Thanks again and much success.

  3. If you want to get going and live in a more expensive market (West Coast, Chicago, East Coast) then I definitely recommend financing as long as you have run the numbers and know the Property will be cash flow positive. I am working on my 5th SFH rental in the Chicago area and all cash flow positive with an average free cash flow of 33%. They all have mortgages but are mortgaged responsibly in long term fixed rate debt. If you can pay for your first place in cash though that makes life very easy to expand.

    By a fixer in a dynamite neighborhood with great schools,
    Repair it to result in some forced appreciation,
    Rent it to a qualified tenant,
    Then after the 6 month waiting period the bank will finance the property out at its ARV.
    Take the cash from your new mortgage and by you next fixer…..
    Lather, Rinse, Repeat.

    • Engelo Rumora

      Thanks Eric,

      That sure is a great way to go about it and unfortunately I got caught with my pants down when refinancing back home in Australia.

      I would be very cautions when choosing the refi terms and always work in an extra buffer just in case the market turns South.

      I bet many folks wish they never refinanced that did in 2005 and 2006.

      Buying the first few with cash and just holding them provides for peace of mind and additional monthly cashflow.

      Much success

  4. Adrian Stamer

    Paying all cash for properties has its own downsides. You lose the ability to scale. With the advantage of scale, you are at a larger disadvantage in many ways. Pay more for property management, vacancies can hurt much more as it’s harder to play the odds, amongst other reasons. Also not using leverage to buy properties hurts returns by a lot and you also lose out more on tax advantages like depreciation

    Anyway I also see you are based in Ohio. This market seems to typically revolve around cheaper properties where financing may not be as helpful too

      • Engelo Rumora

        You can’t claim interest as there is no mortgage.

        Investing to save on tax is the wrong way to think about investing.

        I wish I paid $10m in tax meaning I’m probably making $100m in profit right?

        Especially now since Trump is the president hehe

        • Adrian Stamer

          If you are in a higher tax bracket, let’s say mid 30s, you could nearly be paying 50% of your income in taxes. I’d want to defer as much of that as long as possible… it would give that amount to reinvest in real estate or other investments. This can be a very significant amount of money

          You talk about only cash flow is what matters… well paying less money to the government is retaining more cash. Just like the cash flow you are referring too 😉

      • Adrian Stamer

        You still get the depreciation but it makes up a much smaller percentage of your net profits. Owning outright cash let’s say you make $500 a month. With leverage you make $100 a month. But the amount of deprecation stays the same in both cases, deferring more taxes for longer providing you an advantage

        • Engelo Rumora

          All I can say mate is that I wish I was paying $10m in taxes. I have no problems paying uncle Sam hehe

          There are so many tax saving strategies and depreciating an asset is just one.

          ps. I own real estate in the Bahamas so that cashflow really comes in handy for my flights, hotel, car rental, pina coladas…

          Sorry, I don’t mean pina coladas. Just the car rental hehe

    • Engelo Rumora

      Thanks Adrian,

      Buy, fix and flip and hold every 4th or 5th property with cash. That is a great way to scale IMO

      There are many ways to skin the cat and buying with cash is a safe bet.

      It is a much slower way but success comes over a long period of time anyway and not over night.

      I use leverage now but have been pounding the concrete for 4 years.

      Rookie investors jump in, use leverage and get their A$$ handed to them on a plate.

      Slow and steady wins the race…

      As for Ohio, I’ve been telling folks to move here and then they can start making some serious money while seing amazing returns hehe

      Much success

  5. John Teachout

    I do all cash properties and I don’t think there’s a right or wrong way. I think it’s personal preference and risk tolerance. I am debt averse so although it does require slower growth, I feel like I can still accomplish my goals in the set time frame. I intend to have about 10 SFRs each renting for $800 give or take $100 by the time I retire. This should provide adequate income to live on. My other retirement funds are slim pickings so most of my retirement will be funded by real estate. With paid for properties, I estimate 50% is profit available to spend and the other 50% goes to expenses and maintenance. I recently had a property that had a water heater go out and a problem with the well all within one week. (unrelated problems but the same property). Because I have no mortgage, the rent covered those items. Saving hard for the next thing in line…

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