Why You Should Buy Cash Flow Real Estate
Cash flow is probably what most people think of when rental real estate comes to mind.
It's the profit left over when you collect rents and pay off your expenses. It's the monthly income that will give you the financial freedom to quit your job and spend your time on your own terms.
You know the saying... cash flow is king.
But you should look at the bigger picture too.
Cash flow is only one of the 4 types of returns you get from real estate. Other factors such as appreciation, debt paydown, and tax benefits can all add up to a much larger return than your calculated monthly cash flow. Especially in a hot market when prices are appreciating faster than rents.
Yet, it's still important to try and buy investment properties that cash flow, and here's why.
1. Cash Flow Reduces Risk
If the market were to crash and prices were to tumble, you might be put in a position where you can't sell without taking a loss.
In this position many people might not want to sell either, considering it might be the bottom of the market cycle.
If your property doesn't cash flow, you'll be on the hook for covering expenses that come up. And putting money into a rental that's worth less than you paid for might make you rethink why you even own the thing.
This is where cash flow saves the day.
If you have a property with strong cash flow and the market tanks, you will still have your cash flow. While other investors have to continue putting money into deals that might be underwater, you can sit back and continue paying down the debt on your property while pocketing the profit you make from rents every money.
The fact that cash flow allows investors to easily endure down markets significantly reduces risk.
Cash flow means not having to stress about whether or not you can afford the next mortgage payment.
2. Debt-to-Income Calculations
If you are an investor with big goals, someone who wants to own multiple investment properties, you will probably need to get a lot of mortgages.
In order to qualify for multiple mortgages, you need to be careful with your debt-to-income ratio.
If you were to buy a few properties that don't cash flow, banks and lenders may disqualify you from getting any more loans due to the fact that you have more debt than income and your DTI isn't within their required range.
Cash flow fixes this though.
If you are smart about buying investment real estate that cash flows, your income will generally be higher than your debt obligations. This leads to a positive debt-to-income ratio and will ensure you can continue qualifying for loans.
In fact, cash flowing real estate property will likely improve your DTI and make it possible for you to qualify for even larger mortgages in the future.
Of the multiple returns real estate gives you, cash flow is the only immediately liquid return.
Appreciation is fantastic but it's an unrealized gain. Debt paydown is similar in that you can't just go to the bank and withdraw your equity from your home. You have to either sell, cash-out refinance, or get a line of credit against your property to access your equity.
And tax benefits don't necessarily give you any new capital, they kind of just make it so you don't have to lose as much to the IRS.
But cash flow... If you want to buy the latest iPhone or make a down payment on a new car, cash flow will put the money in your pocket to do that.
4. Financial Freedom
Most people get into real estate because they acknowledge how powerful of an investment it can be.
If you buy the right deals, it only takes a few of them to make enough cash flow to quit your 9-to-5. But that's the catch, you have to buy the right cash flowing investment properties. And that can be difficult.
If you want financial freedom, a monthly income that allows you to cover your expenses and not have to trade time for money, cash flowing rental property is not a bad strategy.