Positive vs Negative Cashflow - 2 of 10

Cashflow is a term that is used repeatedly in discussing real estate investing. Cashflow is also used to described streams of income from other sources, but primarily the term is used in real estate. Cashflow is simply the amount of gross revenue that the property or asset is producing for you. If you own a rental property and the renters pay $800 a month then that properties cashflow is....yep you guessed it $800 a month.

To break it down a bit more cashflow, again, while discussing real estate investing, is either termed as positive cashflow or negative cashflow. You can probably figure out what these two terms mean also. They are referring to the net income of a property or asset. So using the same example if you are receiving $800 a month in rent but your total mortgage plus taxes plus insurance plus maintenance payment is $1,000, then this property provides negative cashflow. Negative cashflow 99% of the time is a negative thing if your strategy is to buy and hold. On the other hand if your total payment is $600 a month then you have positive cashflow. Positive cashflow is the key to having a successful real estate investment.

I recently over heard a conversation about real estate investing. One man said to the other, "I don't know why but when it comes to real estate it is good to have negative cashflow." This person was obviously confused and me knowing the one real estate investment property this person has I know he was probably fed this line by the person who sold him the investment property. Don't let anyone ever tell you different. If you are planning on buying a property and holding it for a couple years than you absolutely positively do not want to be losing money every month.

This story goes to show how confusing real estate investing can be for some people. This otherwise prudent and inteligent man was duped into believing that it is good to lose money month after month after month. The only time this really pays off is when you have an incredibly high appreciation rate year after year but that possibility is a risky one to say the least.

The moral of the story is to always focus on positive cashflow. There are too many properties out there, especially now, that if bought correctly will have positive cashflow that you should never buy a property that has negative cashflow. It is as simple as that.

8 comments:

Big Game said...

Come on everyone I know you have at least one though about this topic. Is anyone out there? J/K. I know you are there. Don't be shy.

Bcarter said...

One thing to remember to remember is companies don't go out of business due to lack of sales, they go out of business due to lack of cash.

I had a prof in college who's favorite quote was "Happiness is a positive cash flow". How true this is.

Rick Vaughn said...

This is such a simple subject yet people continue to speculate on homes. Good post I hope everyone will use this strategy.

Indonesia Travel Guides said...

yes i agree, its about asset and liability. look simple...:D but its actually a bit hard, i always get negative cashflow.

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