Not too long ago, you couldn’t turn on the television without seeing a show where a couple of guys, a married couple, or whoever were buying a property for a steal, fixing it up, and selling it for huge profits (all in less than an hour). Now stop and think of how many shows there were where the star of the show would walk out of the house to the mailbox, take out the rent checks, and walk back into the house? Not exactly must-see-TV, but if this show was on, you would have a better look into how a successful real estate investor thinks.
Experienced real estate investors such as Robert Kiyosaki has always extolled the virtues of investing for cash flow as opposed to capital gains. If a property happens to appreciate while you own it, great; however, if the sole reason you are purchasing a property is because you hope and pray that the value will go up, then you aren’t a true investor—you’re a gambler.
This is more difficult than it sounds, when buying houses it becomes an emotional process. Beginner investors have this challenge more than experienced since they are not customed to only looking at the numbers. Beginner investors tend to visualize themselves living in the house, seek the best school district, best view…etc. Next thing you know, you are purchasing an overpriced (>$200,000) house in real estate terms that you could see yourself living in, however, tenants may not want to pay more than $2,000 in rent. This breaks the 1% rule of trying to get as close as possible to leasing out the rental at 1% of the purchase price.
A true investor understands that while the thrill of receiving tens of thousands of dollars for a fix-and-flip may sound appealing, by selling the property, they are cashing out an asset that can put money in their pocket for years to come.
Another example of people getting hung up on appreciation versus cash flow. We all know that California has strong appreciation, over 10 years, the house prices double. I have done the math since I have researched in great suburbs to live in such as Irvine CA and Laguna Hills, I did the math on potential rental properties, cash flow. Pretty much zero, yes nada. Leasing it out meant breaking even. Any maintenance, it comes out of your own pocket. Buying an investment property in California is strictly an appreciation gambling game. One thing people forget is that while you believe the value of a property is appreciating and doubling in 10 years, for you to cash out, there needs to be a buyer who wants to pay at that price, and you better pray it’s a seller’s market.
Appreciation is just the frosting but not the cake itself. One can look no farther than the recent crash to see the wisdom in investing for cash flow.
When a property has a positive cash flow, the investor is covered. Regardless of whether the value goes up or down, the positive cash flow is there to cover all the costs and put money in the owner’s pocket. However, if an investment’s entire return hinges on the price going up, what happens when the market goes down?
Just ask the “investors” who lost everything when the real estate bubble burst.