Cash Flow Makes It All Okay

Safe real estate investing rule: If you have cash flow you can hold on until prices rebound. It just isn't that risky if you never made rising prices a part of you profit plan.

In fact, rents in some areas have continued to climb as the prices of real estate have fallen 20% and more. This makes sense if you think about it a bit. The banks are less inclined to lend money, and certainly not so easily as they did at the top of the bubble. Fewer people are able to get a mortgage, which means what? More people renting! That holds up rental rates or even pushes them higher.

So if an investor had cash flow to begin with, he may have even more now. What real estate wipeout? Actually, he may even get his property taxes decreased based on the lower value now, and by lowering his expenses increase his net income even more. Meanwhile, those who bought properties that lose money each month, planning on rising prices top bail them out someday - they're in trouble.

Cash Flow Safety - An Example

As long as you invest for the long term and with positive cash flow as part of the original structure of the deal, prices don't have to matter to you. In fact, although it is nice to have prices go up sometime before you sell, it may be better if they go down for a while you hold the property. What if they go down and stay down? Let's look at an example.

Suppose you buy a home for $100,000, with a small down payment. You rent it out and have about $100 positive cash flow each month. The real estate bubble bursts and prices fall. Now, what happens if thirty years later you are ready to retire and the house is still only worth $70,000? Not a likely scenario, of course, but what if it happened?

As the years went by rental rates almost certainly would go 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) due to rising rents. Meanwhile, the mortgage payment have all been paid in full out of the rent coming in, and you would own the house free and clear.

Look at the whole picture here. The house went down 30% in value over thirty years, but you still made $70,000 selling it at the end. You also collected perhaps another $70,000 in cash flow during that time (which is only about $194 per month). In other words, you turn your small investment into $140,000 in the worst thirty years in real estate history.

Maybe you can see how important it is to have positive cash flow from your real estate investments - from the moment you buy.