Cash Flow is a Bonus?
"No Tyler, appreciation is a bonus when investing in real estate".
I get this all the time, and that's because most investors, especially beginners, all want to invest for cash flow...
To make money now.
To put money in there pocket NOW!
And if the property doesn't cash flow, or doesn't cash flow enough, they don't invest.
I was as the 1st Annual WinCity Ontario Real Estate Conference (OREC) this past Saturday, March 16th in Windsor, ON, and this one NON-investor, was telling me I should start investing in student rentals, because they make a ton of a cash flow.
Which is true, if done right!
However, with student rentals, comes a lot more work, more turnover, more headaches and hassles, since there are more people under one; a much smaller roof, since most student rentals in my city are just homes with the rooms individually rented.
Anyways, he kept asking me, imagine what you could do with all that extra cash flow if you were investing in a student rental, and what you could do with it.
And sure, I could imagine it, however these are not the types of properties I invest in when investing in real estate...
I like to invest on Autopilot, hands off, with zero headaches, and student rentals are usually anything but.
So, I won't be investing in student rentals, even if the cash flow is amazing!
Which brings me to the point of this article, would I really put that much cash flow in my pocket each month investing in student rentals?
He was saying that this other investor that was at the conference who invests in student rentals makes almost a $1,000 a month cash flow.
$12K a year!!!
In my mind, as he's telling me this though, and if you've read my other articles about the hidden costs when investing in real estate, from vacancies, and repair and maintenance, you know that the $12K in cash flow disappears quickly.
So sure, maybe when reality strikes, its only $6K a year in the pocket from cash flow....
However, I'm sure some years it might even be 0!
And that's fine!
Yes, that's because cash flow is a bonus!
So, don't invest in real estate just for cash flow!
And don't avoid investing in real estate because a property doesn't cash flow!
Invest in real estate because even without cash flow, and even without appreciation, by using leverage, by which I mean, get a mortgage for a percentage of the purchase price, you will still generate a better return then almost all other methods of investing.
For example, I just watched a seminar about investing in a stock that gives a 5% dividend to its investors.
And if the stock goes up in value, investors treat this is a bonus for investing in that stock.
The speaker on the webinar kept talking about how amazing this percentage for dividend was, and that you needed to buy this stock now, because what other stocks offer this type of return.
But investing in the stock market is so much more riskier in my eyes then real estate.
Yet, people go nuts for a 5% dividend, when I can easily take the same funds and invest them in real estate and get a 5% return.
Yup, that's right, and I'll prove it.
As you will see below, this particular property that's on the market, when I run the numbers, and increase the expenses so that it doesn't even cash flow...
And if I calculate 0% appreciation, you'd make a 4.5% ROI.
Even if the property doesn't go up in value AT ALL...
And even if the property doesn't cash flow AT ALL...
It's still generating a return on your investment, a dividend, of almost 5%!
This is why I just can't understand many people's thinking, because as I mentioned, if a stock gives you this kind of return, people eat it up and buy the stock.
But if real estate gives this type of return, they say it's terrible and avoid it like the plague, just because it doesn't cash flow.
Now yes, you're probably thinking, well it's just easier and safer to invest in a stock that produces a 5% dividend vs real estate, because it's guaranteed.
Yes, you're correct.... somewhat.
Companies can change the amount of dividend any time, thus, in my mind this makes investing in stocks risky, as your ROI could go down, or disappear.
Whereas with real estate, your return will still be 5%, using this example, even if you have zero cash flow and zero appreciation.
However, with real estate, it's much easier to achieve cash flow, because, well, you're in control, not a company.
And to do this, all you have to do is increase the rents when an old tenant moves out and increase the rents when you put in a new tenant.
Voila, you've increased your ROI.
The same argument can be made for appreciation.
When investing in stocks, the odds of the stock price going up are difficult to determine, whereas the odds of the price of your property going up, can be much higher if you buy in markets and areas where you project prices to increase.
You have a much better chance of achieving these bonuses, of making a better return on your hard earned money, when investing in real estate vs when investing in a dividend paying stock.
So, I'm going to take my chances and continue to invest in real estate, because I know it's much more likelier I'll be getting a bonus sooner or later...
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