Well, as with all good economics questions… IT DEPENDS!
Cash flow is what allows your business to survive, thrive, and grow. And that is what makes it king, but there are other things that real estate brings that need to be looked at as well. I wanted to explain a few of them as I understand them and their need to be included in the consideration of investing.
Tax benefits and depreciation.
Not everyone understands how real estate can be tax free investing, and even pay some of your taxes from other income.
Example from my taxes this year.
Invest 300k in a 1.5 million dollar investment several years ago. The investment is just now starting to break even on cash flow. This has been very disappointing for us, but was out of our control due to tax law changes in our city. However, with it just breaking even cash flow wise this year, our tax returns from this investment shows a net income of -77k in income due to a lot of depreciation on the books. Depending on your tax bracket, this means that while the investment broke even cashwise, it paid for about 20k of my taxes from other income ( the net income flows through and reduces my taxable income by 77k ). This is very close to the same thing as cash return, since I would be out the cash to pay the taxes otherwise. This is a roughly 7% return on my investment just in tax benifits.
I think there is confusion on why people with high income buy property for a “loss”.
As the above example shows, you can easily have “passive loss”, or a negative net income on your taxes, and yet still be making cash flow on a property. If you have no other income for the loss to offset, then it doesn’t help you much other than to sheild your cash flow from the investment itself from taxes.
Appreciation
I have a hard time swallowing the idea that appreciation is nice if it happens, but not something to count on or even consider. Appreciation should not be the deciding factor in my opinion, but history shows that it should always be there as a return to ownership over time if the cash flow is there so that you can maintain the ownership. If you look at most investors that have been in the business a long time, I find that they have lived off cash flow, but gotten wealthy off of appreciation and their ability to hold property as it goes up in value.
Just a few thoughts to think about at tax time.
DB