Cash Flow Makes It Safe
By Steve Gillman - 2010
With cash flow you can hold on until prices rebound in the
future. In other words, real estate investing just isn't that
risky if you never made rising prices a part of your strategy.
Interestingly rents in some areas have been climbing as the
prices of real estate have fallen, but it makes sense. Lenders
are less inclined to lend money, and certainly not so easily
as they did at the top of the bubble, so fewer people are able
to get a mortgage, which means more people renting. This holds
up rental rates or even pushes them higher, even as prices go
An investor who had cash flow to begin with may have even
more, so how is he hurt by the real estate downturn? He may even
get his property taxes decreased based on the lower value now.
Lowering his expenses increase his net income even more. Now
those who bought properties which lose money each month, planning
on rising prices to bail them out someday - they're in serious
Cash Flow Safety
Invest for the long term and with positive cash flow as part
of the original structure of the deal, and price fluctuations
don't have to matter much. It's nice to have prices go up sometime
before you sell, but it may be better if they go down near-term.
And what if they go down and stay down? To see the safety you
get with proper cash flow, let's look at an example of that.
You bought a home for $100,000, with a small down payment,
and rented it out to net about $100 of cash flow monthly. What
happened when the real estate bubble burst and prices fell. Nothing.
But what if after thirty years you're ready to retire and the
house is still only worth $75,000?
Well, as the years went by rental rates almost certainly went
up, so though you started with $1,200 per year net profit you
might be up to $3,600 or more at the end ($300 per month). But
the mortgage payments have all been paid in full by then, out
of the rent coming in, so you would own the house free and clear
at that point.
Consider the whole picture. Your rental house went down 30%
in value over thirty years, but you still made $70,000 selling
it, and collected perhaps another $70,000 in cash flow during
that time (about $194 per month average cash flow over the years).
You turned your small investment into $140,000 in the worst thirty
years in the history of real estate. This example shows how important
it is to have positive cash flow from your real estate investments.
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