An investment property is said to be cash flow positive when the rental income generated by the property covers all expenses incurred by the property and puts some money in your pocket. It is this simple principle when not followed leads to bad investments.
The beauty of a positive cash flow property is that it does not matter if the price of the property goes up or down. You can hold on to the property as long as you want, because rent takes care of all expenses and then puts some money in your pocket. So, it is a safe and smart way to invest for the long term. Over the long term, property values rise due to inflation. Eventually, when you decide to sell, you would have enjoyed all the cash flow and because you were able to hold on to the property for a longer duration, you would also be rewarded with equity growth. In addition to equity growth, rents also rise over time. So, your positive cash flow situation would have gotten even better with time. Additionally, in good times and bad times, there is always demand for good rental properties. When the economy is good, home prices go up, so more folks will be looking to rent and as a result rents rise. When the economy goes bad, people are cautious with home purchase and look to rent and as a result rents rise. You get the picture. By now, I hope you are convinced that buying positive cash flow properties is the way to go.
So, the next question is, how to tell if a property has potential for positive cash flow? It is actually quite simple : You estimate the rent and add up all the expenses to see if the rent covers everything and some. Expenses include items like property taxes, insurance, maintenance, property management fees, HOA fees, debt service etc.
Do you have any questions regarding positive cash flow? I’ve seen your post on this topic multiple times, and no one will argue with you against cash flow. Most of us would be happy to have a discussion with you if your post sought dialogue.
I think you are preaching to the choir here
Agree with the other guys (Jonah & Steve)! Cash flow first, then appreciation, and any tax benefits.
I don’t think it’s a cut and dry answer about the importance of cash flow over appreciation.
Earlier in my investing career I prioritized cash to the detriment of appreciation sometimes which I think hurt me looking back.
For example, I invested in some rougher areas where higher cash flow was possible, but properties didn’t tent to appreciate as well as other areas.
If I had sacrificed a bit of cash flow and invested in a nicer area with higher appreciation, I would have done better overall on my investment.
I think it depends on your investment goals and I think people should consider how much they value cash flow vs. appreciation.
The age old question of cashflow vs appreciation. Both strategies have worked successfully for investors, so it’s tough to decide which one is ‘the best’. But if you know your current situation and goals, that can help determine which is a better fit. If you’re investing in a place like the Bay Area, CA - they saw HUGEEE appreciation over the past 2 decades. And lots of investors made bank. If you’re investing in a place like Nebraska, appreciation is tougher to find but cashflow might be easier. All depends on what your end goal is! Do you want to retire in 30 years? Do you want to retire in 3 years? Do you want to be a millionaire? Do you want to have enough cashflow to cover your monthly expenses so that you can reach Level 1 of Financial Independence?
Knowing answers to those questions will help in choosing a market and a strategy. Both work!
a good article, I would like to share this article on some forums
That’s so true. I couldn’t agree more.