The big money in real estate does not come from cash flow.
But as sophisticated real estate investors, we're taught to only look for properties that produce positive cash flow.
That properties that produce negative cash flow are bad.
If the rental revenues don't cover the expenses and debt service - it's not good.
Hide from those.
And that's 100% correct.
We are big fans of cash flowing properties.
Here's the problem...
Most people, and especially beginner investors, believe that successful investing is all about cash flow.
And that there's really nothing else that matters.
That's bad ... wrong ... and dangerous.
The real big money in real estate does not come from cash flow.
We repeat - the BIG money in real estate does NOT come from cash flow.
Positive cash flow is the bare minimum required to have a successful income property.
It's the price of admission.
It's taken for granted.
But, the real winnings in real estate come from having a LONG TERM VIEW.
The real big money comes from thinking LONG TERM.
Here's what we mean...
Many beginner investors find a great little property.
Maybe a condo in downtown Vancouver or a little semi-detached duplex in Kitchener or a nice rental in Winnipeg.
They're all excited that the tenants are covering the expenses and there's even a little cash flow left over every month.
Do the happy dance.
Success is theirs!
And then it happens...
The "unexpected expense".
The furnace blows.
The tenant decides they want to move across the street.
There's a leak in the basement.
The hot water tank leaks gallons of water all over the finished basement.
The roof leaks.
The shower breaks....the toilet cracks...the front steps fall apart...there's a 50-year oil tank found in the backyard garden.
....and on and on and on.
At this point, if you don't have a LONG TERM VIEW of your investing, you end up wanting to sell.
Trust us on this, we see it all the time.
Someone spends years trying to time the market, years reading books, then they spend six months finding that perfect property, another month finding the ideal tenant ...
...they set up their bank accounts, they run spreadsheets showing their annualized profits, they start telling their friends that they should invest in income properties too.
Life is good.
But as soon as that unexpected hassle happens they want to bail.
Like ... immediately.
They want that friggin' For Sale sign up as fast as a cherry pop tart hopping out of a burning toaster.
Their emotions have taken over.
They want out of the game.
Their cash flow spreadsheet didn't have a column for "stress levels".
And they didn't plan for it.
And here's what they didn't know...
They were so sold on the idea of "cash flowing real estate" that no one bothered to tell them that the real money in real estate comes from surviving these unexpected events.
The real money in real estate comes from "time-in" the market.
Although the cash flow is nice ... the real big money ... the real wealth ... the lifestyle changing money ... comes from surviving in the game for the long term.
Each year the mortgage gets paid down a little.
Each year a little appreciation kicks in.
Maybe some years there's no appreciation, maybe even negative appreciation (can you imagine?) and then other years there's a lot of appreciation.
The positive cash flow helps you survive these unexpected events but it's your emotional control that will allow you to survive the game.
The positive cash flow pays the bills ... your emotional control and long-term approach make the big money.
Don't believe us?
The same strategy works in EVERY business, in EVERY industry.
Ask Jeff Bezos of Amazon.com what he thinks of a long-term view.
Do you think Steve Jobs was playing for short-term winnings?
By dealing with the hassles of the unexpected vacancy or unexpected repair expense you are investing for the long term.
And it's the long term that makes you money.
Sorry...no get rich quick stuff over here.
For the first few years, you have very little equity.
But with each passing year, your little equity snowball builds a little momentum.
Until one day you look around and that little property that had no equity and then it has $25K for you, then $50K and then $100K and then $175K.
One day a couple years back, Nick and were literally in shock when we looked back on one of our properties to realized it had over $150K in equity in it. Another had $300K.
It was a happy day.
We were so busy managing and working and dealing with sewage backups that we literally forgot about it...and then it was there.
We had "forgotten" about the equity for a few years and then all of a sudden there it was.
And trust us...on the days that you're ripping out an old toilet to replace it with a new one...you're never thinking long term - you are literally thinking...this @#$%% stinks!! (ask us how we know!)
So you manage for "cash flow".
You analyze for cash flow.
But the big money comes from the equity you build.
Handling the stress of real estate is your personal competitive advantage over the marketplace.
Stress is to be expected.
It's how you make money in this real estate game.
So let's all update our spreadsheets to add the "Anticipated Stress Level" column...that way we can plan for it...expect it...and even, maybe...welcome it.
Until next time...Your Life! Your Terms!
Another great article guys! Something that everyone in this game needs to know.
Good advice fellas!!
Question? What can you do with equity?
That is great and correct advice .
Great article putting things in perspective for us when we feel discouraged with unexpected expenses.
Thanks for posting this I needed to read this and be encouraged, we are in it for the long haul.
My first property was paid in full cash, mu second with zero downpayment so all the income from both services the two loans for the second property, so not much left after property taxes, repairs, insurance and paying down the loans.
But I am watching the equity grow every year about 5-6%. I don't plan to sell until I have had them for about 10 years or so.
How true! Every time I have to get a new tenant, I think of selling. Then you have to think long term and take action to fix the place and advertise for new tenant.
A perfect day for this article guys! I'm dealing with a flood in one of my units (from an above unit) and my tenant just moved in last week. Oh boy - what a welcome! Second flood in one of my units in the last two months - but zero stress because of the systems in place and the long term view. Cheers for another great article!
[…] From the Rock Star Inner Circle Article: Cash Flow is NOT How You Make The Big Money in Real Estate […]
Let's be real though, equity is cool and everything, but you've gotta have cash flow too...
100% agree, you need the cash flow to survive the market. We know that from personal, first hand experience. - Tom.
Love your article! Started in 2014 with a 6-plex in Windsor... By 2016 we were ready to throw in the towel, after spending $30,000+ renovating and fixing @#$%%^ ... I convinced my wife to stick it out one more year.. by 2017 we pulled out $70,000 in equity after a refinance and now we have 24 units making solid cash flow and looking at the LONG TERM 🙂
Nice work Jimmy!!