Real Estate Investing Goals: Cash Flow or Equity

You’re looking for a real estate investment. Congratulations!

You’ve heard that you should have a financial strategy, and that it should align with your investment goals. But, how do you know what will serve you best? Should your real estate investing goals be cash flow or equity growth? Is it possible to achieve both?

Let’s talk a little bit about some investing basics so you can start thinking about your own financial goals.

Cash flow is the money that comes in and out of a company over a specific period of time. One of the basic premises of real estate investing is cash flow. Cash flow isn’t specific to real estate, but we will keep it in the real estate context. Often with real estate, cash flow is thought of on a monthly basis since rent and expenses are usually paid monthly. Rental income is one of the main sources of cash flow coming in.

Gross rental income is the total amount of rent collected before expenses are paid. These expenses include (but aren’t limited to) things like mortgage, insurance and maintenance. Net income is what’s left over after your expenses get paid out.

The goal is fairly simple:

Net income > Expenses

That’s it.

You want the money you’re taking away every month to be greater than the cost of the expenses of your rental. If it is, you’re in the black (which is where you want to be)!

Equity is the amount of value a property has and tends to be the other focus when it comes to real estate investing. The amount of home equity you have is the value of the home that you own.

Think about this:

I bought a house for $350,000.

Grand Junction continues to go up in value around 5% per year ($17,500 per year).

In 5 years, when I go to sell my house, the total amount of equity increase is $87,500.

The new theoretical market value based on home equity increases is $437,500.

Keep in mind that home equity can also decrease. In a market that is losing value, that home equity number can go down.

There’s no right or wrong answer when it comes to setting goals or pivoting if your needs change. How you invest is a personal decision for everyone.

Here’s a few questions to get you moving towards your real estate investing goals:

1. How long would you like to own the investment? If you are planning to hold it over the long term, equity will hopefully increase over time.
2. Is it important to have little maintenance on the property or will you be putting in a lot of sweat equity? If you’re looking for a property that needs a little love, you might be able to increase your equity with some cosmetic rehab.
3. How much per month would you like to net in rental income? If cash flow is the primary focus, you’ll want to tailor your property search to maximize net monthly rental income.
4. Do you have a grander plan for your rental income? Are you going to be using it for living expenses, paying down the mortgage, using it to buy the next rental property, or going on vacation? FYI, if you’re going to put an investment property inside a company, the company will need its own bank account and financial autonomy. Read my post about protecting your investments.
5. Do you have an exit plan? If things don’t turn out how you planned, the market takes a turn, your financial situation changes, or life generally gets in the way, what will be the plan to unwind and profit from your investment?

What happens when cash flow and equity get out of balance?

In my opinion, it’s easy to focus on cash flow. After all, having money coming in every month is a major perk for owning investment properties. But, if cash flow and equity get out of balance, it can really affect your strategy (and how much sleep you get at night).

Not too long ago, my husband and I had a portfolio of residential homes that we thought would be a good, consistent source of cash flow. We bought these properties specifically because they had a TON of deferred maintenance. Our intention was to fix them up to rental grade. We’d have a property manager find some tenants, and we would be in a steady stream of passively-generated “mailbox money” (Side note, I don’t think any income is truly passive. You always work for it in some way).

Our plan actually worked for a while… until the market changed.

Our “passive income” rental properties were taking a serious beating from several market hardships. Compounded with all the deferred maintenance, we were left wondering (desperately) what path forward was best.

The properties had increased in value FIVE FOLD.

They also had ZERO cash flow because of maintenance costs and tenant turnover.

(*cue sleepless nights)

We now had the unpleasant decision of continuing to hemorrhage money into the properties, or pivot our strategy and try to regain some cash flow.

Cash flow and equity were way out of balance, and with a new type of market on our hands, we needed to pivot. We did decide to keep several properties as rentals, but instead of trying to continue to find reliable tenants, we remodeled many of the homes to sell to primary home owners. It was a move we had never intended to make, but the pivot helped us continue to take advantage of the changing market, and re-balance our cash flow: home equity ratio in the portfolio.

I tell you this personal experience story not to scare you away from real estate investing, but to give you some insight into a couple of key concepts.

If you want cash flow (and let’s be honest, who doesn’t?), let that guide your decisions, but keep home equity balance in mind.
If the market changes or you need to make adjustments in your own life, it’s important to be able to pivot on your investments to meet your needs.

Curious about how cash flow and equity can help you meet your financial goals?

Do you have 15 minutes for a no-pressure, string-free conversation?

(I LOVE talking investing strategy, so I will really try to keep it to 15 minutes)

Text or call so we can set aside time for a quick chat.

Let’s get you on your journey to meeting your goals.

To your success,

Alanna

Alanna Spees, REALTOR®
Text/Call: (408) 497-3774
The best way to reach me is to text directly!

Send me an email
Connect with me on LinkedIn
Learn more about me and my services

Not quite ready to talk? No problem.
Check out my other articles on buying a home.

condemned sign on the fence in front of a property

One of our portfolio houses when we bought it. Why weren’t we alarmed by the “Condemned” sign? Ok, maybe there are danger signs when it comes to real estate investing, and we just didn’t pay attention.

You never know what you’re going to find. Feral cat in one of the portfolio houses. She was the angriest hunk of fur I’ve ever met. My daughter generously named her Rainbow Pretty Heart.