Military Cash Flow
To cash flow or to appreciate? This is the million-dollar question of rental property investing. And one that has been examined, debated, and studied six ways to Sunday. These two different schools of thought on how to earn money on rental properties have often been argued as a matter of preference. At Mission First Capital, however, we’ve got our own reasons why one is better than the other, and we’re here to tell you about them.
First off, though, here’s a quick introduction to each of these money-making options:
If you’re entering the rental property market, you’re in it to make money, right ?! Well, let’s hope so.
One of the most popular ways to do that is by collecting monthly rent from tenants that exceeds the property’s monthly costs. This remaining profit is called cash flow. Though cash flow on a single property average a couple hundred per month, most investors have more than one rental property they’re cashing in on. If you’re making $200 every month on 10 properties, that’s $24,000 of net income through cash flow per year! This profit took a while to accumulate, but it came with little risk.
Another way to generate money using a rental property is through appreciation of that property. This is when a property sees an increase in value, and it can include high profits if the value increases rapidly. For instance, if the real estate market in a particular place is booming, property values could theoretically increase from $200,000 one year to $300,000 the next. Sounds great, right ?! Well, this approach to real estate investing is also incredibly risky.
No property is guaranteed to increase in value quickly, or at all, and as everyone saw in the recession of 2008 properties can decrease in value considerably in hard times. When this happens, investors continue to lose money each month on these stagnant properties. At best you can find a renter to pay the mortgage amount and break-even, at worst, you lose money each month, despite having a renter in place.
So, which one is better?
Honestly, we think cash flow is the best choice when it comes to rental property investing. Even though appreciation can set you up for financial success in one go– if it’s a big one– it can not be accurately predicted. Its potential is high rewards, but it can also come with big losses. By picking the cash flow approach, however, you have the ability to guarantee money every month. Appreciation is a gamble on the potential of the future– Cash Flow is guaranteed monthly income, with the additional opportunity for appreciation as well.
As you consider the best course of action for your rental property game, here are some things to think about:
What is your financial freedom number?
Here at Mission First Capital, we talk a lot about your financial freedom number. This is the amount of money it would take for you to reach your financial goals– getting out of debt, early retirement, having a diverse investment portfolio, and living the yacht life. Whatever goals you have for your life, how much money is it going to take to get you there? From a real estate perspective, the formula to calculate this number is rather simple: what are your expenses and how many properties will it take for you to not only cover them but profit and reach your goals.
Is investing for appreciation like investing in the stock market?
Yes, yes it is. The stock market’s saying: high rewards come with high risk. Sound familiar? If not, scroll up to “Appreciation” for a quick review. With the stock market, a down cycle means profits are lost, and with an upcycle, profits are raised– sometimes dramatically. Though the risk is worth it to many stock investors, even the best in the business have a hard time predicting which way the market will turn. This is precisely the same concept of appreciation. With cash flow, however, rental properties are going to keep netting every month regardless of any bad market dips.
How finding good cash flowing investments can help you overcome market corrections
Market corrections mean loss of money, and it’s a tricky thing to avoid if you’re serious about your investing game. Weathering these corrections depends on your ability to find good cash-flowing investment options. When it comes to rental properties, it’s not that hard to come by, but it will definitely take some research to ensure you’re investing wisely. MashVisor has a great article that talks about the best strategies for finding cash flow investments. A few highlights include:
- Conduct a real estate market analysis to choose the best city
- Consider multi-family homes
- Join a real estate partnership
- Take advantage of rental property tax reductions
In the words of Grant Cardone, “Cash Flow Is King.” Coming from this multi-million dollar investor, I ‘d say that’s a pretty telling statement on which way to lean in the cash flow vs. appreciation argument. You already knew that real estate investing was the best way to build your wealth and produce passive income, and now you know the most effective way to do that is through cash flow.
With Mission First Capital, you can start your investment journey alongside other military members and veterans! If you have questions or would like to talk about potential partnerships or investment opportunities, don’t hesitate to reach out. Give us a call at +1 (844) 632-3863 or visit our website MissionFirstCapital.com to learn more and let’s invest today!