What is Cash Flow in Real Estate investment?
Cash flow is the money you have left over from the rent you’ve collected after all expenses have been paid. Most real estate has expenses such as a mortgage, property taxes, insurance, maintenance, and property management fees. When you buy a property that pulls in more rent each month than the expenses you carry to own it, your cash flow is positive.
In the majority of investments (stocks, art, jewelry, bitcoin, etc.), you are hoping to buy something that will appreciate in value, then sell it later for a profit. In some forms of investing (buying a poorly run business, for example), you may be buying something that produces income and hoping to improve that asset's performance in order to increase its value. For most, this involves too much work and is undesirable. What we are left with is the subconscious understanding that to “invest” is to buy something you believe will be worth more later. If this is based on sound principles, it can work. If it’s not, it’s really more like gambling.
Those who bought properties solely because prices were climbing, and for no other reason, have one exit strategy: sell later. They also only have one way to be successful: hope the property continues to appreciate. Any outcome, other than these two, is virtually guaranteed to lose money. During the crisis, when the music stopped and the market quit climbing, many of these so called “investors” lost their shirts. Real estate in general took a black eye, but was it real estate’s fault?
Wise investors don’t bet on appreciation. They purchase properties on a sound judgement that the property will generate more income than it costs to own. For these folks, who “cash flow” positively, they don’t care what the market does. If prices drop, they are safe. If prices rise, they have more options.
Hope this gives you something to think about when it comes to investments.