Why You Should Only Focus on Cash Flow (Not Profit) Each Month

Whenever uninformed people speak of the real estate market, they seem to believe that on the first of every month, we’re just rolling around in money. In our dreams! Yes, you can make a lot of money in real estate, but that is not what you should be striving for each month — and that is not what your rental money is for.

If you’re looking to invest in a rental property, your thoughts shouldn’t be on how much you can potentially make in profit. They should be on how to secure regular cash flow to cover your costs. Your cash flow is the amount of money you are collecting from tenants every month. Your free cash flow is what you are left with once you’ve deducted your costs (mortgage, insurance, tax, maintenance, etc.). While a substantial amount of free cashflow is ultimately what every real estate investor is aiming for, the only thing that matters when you start out is maintaining enough cash flow to keep yourself afloat!

Below, I’ll explain how to do this and why it’s vital to your success.

Cash Flow is a MUST

You need cash. Every property costs money, whether it’s simply to cover the mortgage or conduct maintenance, so it’s vital you have cash in your account that can be used for these expenses. In particular, it’s important to bear in mind that you can never predict when a boiler is going to break or a pipe is going to burst, so having some sort of contingency fund is always advisable. In most cases, however, with good tenants in your properties, you’ll be able to cover these costs using the rent from their properties each month. This is the perfect system for when you’re starting out, so you needn’t worry about earning more in your 9-5 to cover such costs.

It is very important for your first investment that you make sure your rent covers your costs! If you are left with an un-rentable or half-empty property, you aren’t going to collect enough monthly cash flow to allow you to cover your mortgage payments. You’ll end up losing money because, regardless of occupancy rates, mortgages still need to be paid, insurance must be kept up-to-date, and maintenance work still needs to be conducted.

Therefore, I recommend you get some advice when it comes to purchasing your first rental property. By asking someone experienced to talk you through your options, the local market, and your cash-flow potential, you’ll be in a better place to make an informed decision about your chosen property. I have preached for years now that investors should be more patient, save better, and only buy with cash and no mortgage. Yes, this is the longer and slower path to building wealth, but it is much safer.

Remember, real estate gives back what you put in. It’s hard work being a landlord, but if you are dedicated, resourceful, savvy, and responsible, you will see consistent cash flow. You need to be a good landlord just as much as you need good tenants in your property. If you don’t have time to dedicate to this aspect of the real estate business, hire a property manager to do it for you or buy through a turnkey company. A reliable, communicative landlord is like gold dust, and tenants know it. If you want to secure long-term renters, let them know you’ll be there for them as much as they (and their money) will be there for you. Without tenants, you won’t have any cash flow, and without cash flow, you’re screwed.

Choose Rentals Over Lump Sum Profits

Rental properties are the best option if you’re looking to produce a high monthly cash flow. Lump sums only gives you a one-time, admittedly large, profit. If you buy a house to sell (flip), you’ll spend time and money improving it to sell it on and then, once it’s sold, you have to start again. It’s a relentless cycle, and while you can make a lot of money doing this, it’s backbreaking work and a task most people aren’t up to. Rentals, however, offer an easier, more consistent way of achieving a monthly cash-flow. And in the long-term, they will turn into equity themselves.

Many choose to invest their money in a real estate rental ahead of their retirement for the purpose of receiving a monthly injection of cash. If you invest wisely, a rental property can provide a comfortable nest egg for your golden years. But remember, the most important thing is to get good, reliable, trustworthy tenants into the property. Being a landlord is hard work and takes up a lot of time. If you don’t mind using some of your cash flow, it may even be worth hiring a property manager, although most people are capable of running one or two rental properties alone. Regardless of how you choose to conduct your real estate business, whether you have one property or 10, the most important aspect is that you are guaranteed a monthly cash flow that covers your costs and hopefully leaves you with plenty of leftover cash.

And remember when I mentioned how a rental property can lead to equity?

Cash Flow Will Lead to Long-Term Gains

It may take some time to see this come to fruition, but it’s true. Once you’ve established yourself and gotten some regular, reliable tenants into your rental property, your cash flow will lead to a profit. To do this, it’s important to invest wisely, as well as have low maintenance costs and a high occupancy rate, but it is possible. So how does cash flow become a long-term gain?

Well, if the rent from your tenants is covering all the costs of the mortgage and building upkeep, every month you’re steadily buying back your property from the bank. Therefore, if the time in the future comes when you do need or want to sell, you’ll be guaranteed a significant sum of money. The key here, however, is to hold onto your property for as long as possible.

Paying off that mortgage monthly thanks to the income from your renters is a sure-fire way to eventually see profit. The longer you hold onto the property, the smaller the mortgage will be at the end, the higher the appreciation of the property itself will be, and the larger cash injection you will receive if and when you finally sell. And if you choose not to sell, you can leave it to your heirs, either with a small mortgage or outright for them to do with as they wish. I suggest you look at paying off the mortgage as soon as possible, leaving you with some serious monthly income.

After a while, with good investments and a number of tenants, you should have some significant passive income leftover each month — your “free cash-flow.” Your monthly collection — once the mortgage, insurance, repairs, and vacancies are removed — should leave you with a decent amount of money if you’ve invested wisely. By conducting regular maintenance checks, you should minimize the frequency of emergency repair work. And if you’ve invested in dressing up the house, you’ll also be able to charge higher rents.

Conclusion

A quote that I made up a while back goes like this: “If cash is king, then cash flow is queen, and financing could be the peasant.” Be very cautious when using leverage. If done incorrectly, you could bleed your portfolio to death and make ZERO passive income. Make sure to only add properties to your portfolio that suit your end goal and where you want to be long-term. Be very patient and choose every property wisely. In my opinion, there is only one end goal that all real estate investors should have — to earn enough passive income to supplement your living expenses and allow you and your loved ones to live the lifestyle that you all desire.

How do you view cash flow? Do you use it as your focus on it over other metrics? Why or why not?

Let me know with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.