Why Cash Flow is King!

[Nathan Claire]

In the US real estate market, there are continuous cycles and trends that correlate directly to housing values. These values tend to make their way up to the sky and eventually shuffle back down to ground zero. Over and over again. Rinse and repeat. The line graph for housing prices never remains completely straight and it's often difficult to predict where things will turn next. No one knows for sure when a market will flip, in which direction, and for how long it will stay this way. Now, people all over the US buy houses, yet most of these people purchasing homes are not investors. Everyone needs a place to live, and this will never change. Most people buying a home are buying it for their own personal residence. They may have gained some knowledge of where the real estate market is currently from their realtor, but they aren't investors per say. On the other hand, you have the rental market. People decide to rent vs buying for a wide array of reasons. Maybe they can't afford the down payment for a house or don't want to be tied down to a 15 or 30-year mortgage commitment. Whatever the reason, people will always rent homes by necessity. This brings me to my next point. A large portion of investors in the US are known as "buy and hold" investors. These investors purchase properties, and hold them as rentals. Some may decide to do rehabs and make repairs on these properties before placing a tenant, while others purchase them already occupied and leave them as-is (turnkey). So what's to gain by renting out a property? Cash flow. This is defined as the money your property generate for you each month after all expenses are paid. Expenses typically being: principal, interest, taxes, and insurance aka PITI. However, not every investor focuses on buy and hold. Many investors strictly wholesale deals; defined as assigning your interest in a contract to an end buyer for a profit. Other investors purchase homes at a discount, fix them up, and put them on the market to sell for retail value. These are known as "flippers." When a market is at it's peak, and is projected for a downturn, flipping properties (especially large projects) can be very risky. The market may be at one price point when you begin the flip, yet once it's done and ready to be resold, the market could be somewhere else entirely. Your retail flip may turn into a struggle to break even if your spread is not wide enough to cushion this change. On the other hand, when housing values change, rents tend to stay fairly stable. This is especially true when you have long term tenants. These tenants probably have no idea where housing values currently are and just want to keep on paying the rent they can afford and living in the home that they enjoy. This means that in ANY part of the market cycle, your cash flow should be able to continue streaming in. You don't have to worry about supply and demand and whether or not your property is going to sell for the price you anticipated. The reason cash flow is king is because cash flow is money that you are seeing today. It's always present value based off of your expense to income balance. It remains this way today, next month, and the months on and so forth. I've talked to investors who have had the same tenants for over 30 years! Their cash flow continued even in the worst of market recessions. Therefore, if you're looking for a safe way to earn consistent returns, focus on a strong monthly cash flow. You won't be disappointed, and will be able to keep on generating monthly income no matter what stage of the business cycle the market is in.