Equity vs. Positive Cash Flow

[N/A N/A]

With all of the media on the housing market today, it is tough for real estate investors to know what to do. If you live in one of the markets that is suffering from a sharp price correction, you might think that the entire housing industry is imploding. The reality is that there are many markets across the country that are experiencing double-digit annual appreciation. Reference the OFHEO.gov Housing Price Index report http://www.ofheo.gov/HPI.asp. Wenatchee, WA appreciated 25.6% over the last year. Provo and Salt Lake City appreciated over 19%. Grand Junction, Ogden, Gulfport, Biloxi, Myrtle Beach, and Boise appreciated around 15% or better. So there is plenty of buy-and-hold investing still going on in this country, you just need to know where to look.

One of the trends in real estate investing that has resurfaced in the last year or two is the idea of buying properties that have positive cash flow. This is where the rental income exceeds monthly expenses. While it is certainly beneficial when an investment property provides revenue, it is important to realize why an investment might be doing this.

For example, you can pretty much make any property cash flow positive if you provide a large enough down payment. The problem with large down payments is that you end up diluting your ROI. One of the greatest benefits with real estate is leverage, and utilizing large down payments is counter to that advantage.

Positive cash flow is not a panacea. Blindly looking for positive cash flow without considering all the other angles of an investment opportunity is just as wrong as looking for rapidly appreciating markets without regard to any other element. What you need to do is analyze all of the different aspects of an investment opportunity before moving forward with it.In doing so, it is critical that you determine where you are going to get your return. It might be cash flow, it might be future appreciation, it might be the equity you get when you buy right, or it might be a combination of the three.

Cash flow is basically a return you get every month. It will be considered income that you will need to report on your annual taxes. You and your accountant will need to address the tax issue, either by writing off losses against it (such as depreciation or related expenses), or you