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 down.

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 trouble.

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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