Where does cash flow come from?

[Bill Ham]

Where does cash flow come from?

I find that most people have never considered this question. When I ask, “How much money do you need to produce, in passive income a month, to be comfortable?” the average answer is $10,000. Cash flow does not produce cash flow. Equity produces cash flow. If you want $10,000 a month in cash flow, you need $1.5 million in equity producing an 8 percent annual return.

$1,500,000 × 0.08 = $120,000$120,000 / 12 (months) = $10,000 per month

The math is simple. No equity equals no cash flow. If you want cash flow, you need equity in something that is producing cash flow. For every $10,000 you want in cash flow, you need another $1.5 million at work for you in an investment. Something has to go to work—either you or your money. Most likely you will be the one going to work, until the money does.

If you have a financial goal of $10,000 (or more) a month, you really have a goal of producing the equity that produces the cash flow, not the cash flow itself. This is a real estate chicken-and-egg scenario. Which comes first? In this case, the answer is easy. Equity. No equity equals no cash flow.

This formula is not meant to serve as an investment model, nor is it meant to give you financial advice; it is simply to show you a concept that the average real estate investor has not considered. If you do not understand the origination of cash flow, you are not likely to produce any. In my example, I use $10,000 a month because that is the most common cash flow goal, and I use 8 percent as the return-on-investment number because that is a common amount of cash flow to receive from the average real estate investment (in my experience).I fully understand that, at times, real estate can produce more, and certainly less, cash flow than that. This is just a basic formula. Now that you understand where cash flow comes from, you can begin to understand the art of creating it. Build equity in real estate that produces cash flow. That’s it.

Now let’s look at a basic business model that will help you to achieve your financial goals in real estate. Let’s start with the concept that you have an initial goal of creating $1.5 million in equity, in income-producing real estate, that’s providing an 8 percent cash on cash return. Keep in mind that for every $10,000 more you want to make a month, you need another $1.5 million in equity. For example, if your goal is $20,000 a month, then you need $3 million in cash flow producing equity.

[Joe Villeneuve]

Cash flow and equity are not connected directly.  You can have one without the other, but you need both to have a good deal.