Positive Cash Flow and Appreciation – the Meeting Points

Dated: July 15 2020

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There are two ways of classifying profits in real estate – Appreciation and Positive Cash Flow. In this article, we will try to demystify these two and help you decide which is more suited for real estate investors.

Positive Cash Flow Explained

If you own a rental property, the monthly profit from the property is the positive cash flow. Cash flow is the same as net income, i.e., what remains after you have settled all the costs associated with the property. Tenants in a rental property pay rent every month. From this rent, you are expected to settle expenses like maintenance, taxes, insurance HOA fees, property management fee, and the mortgage payment, among others. What is left is the cash flow, or positive cash flow if the difference is a positive number.

Real Estate Appreciation Explained

If your rental property increases in value over time, that is appreciation. A real estate property that is bought for $50k and sold for $100k in two-three years has appreciated. Appreciation may be due to a drop in mortgage interest rates, absence of real estate supply, or high demand for real estate. When you buy and hold property, you do so with the hope that it will appreciate over time, even if the property offers little or no cash flow. The appreciated property will eventually deliver a significant ROI to make up for the zero cash flow.

What are the advantages of positive cash flow over appreciation? If you are not sure of which to adopt between cash flow and appreciation, check out the following benefits of the former over the latter. Positive cash flow offers higher returns and passive income. Investors interested in higher ROIs will be better off investing in positive cash flow properties or rental properties that offer positive cash flow. The net income on such properties is usually higher, which translates to a higher ROI. Rental income will always come handy even when the market appears to be fluctuating. The progressive nature of the positive cash flow trend means the ROI will continue to increase over each year.

Real estate appreciation may offer a one-off massive return on investment. However, the seemingly few dollars that come from positive cash flow, when accumulated over the years, will translate into a higher ROI. Plus, such money is always at hand, making it more valuable than a futuristic income. Ambitious investors tend to reinvest their positive cash flow income into real estate to earn even more profit. Positive cash flow pays down the mortgage.

The rent you get from your rental property pays down your mortgage and other added expenses. Here is an example – a monthly cashflow of $3,000 and total monthly expenses of $1500 leaves a profit of $800. Paying your mortgage monthly increases your property's equity. Wand with time, you become more financially stable. Positive cash flow favors multiple investments. Your positive cash flow income can be accumulated to fund a down payment for another investment property. So, if you are ambitious enough and committed to expanding your real estate investment portfolio, positive cash flow will make you an owner of multiple investment properties within a short time, and a successful real estate investor in the long run.

The risk in positive cash flow is minimal. Like most investment options out there, real estate investments come with some gamble. However, the risk in the appreciation-based real estate investment is more significant compared to positive cash flow. It isn't easy to project real estate appreciation, considering the multiple determinants of housing market trend involved. Sometimes, the growth rate is below expectations, which means zero or very little appreciation. The biggest appreciation takes between one and three decades to happen. This is a long time to nurse investment properties. Plus, the investor continues to spend money on maintenance throughout this period.

That is outward cashflow with no inward cashflow.

Conversely, positive cash flow real estate investments come with minimal risks. Experts can predict positive cash flow by relying on reliable metrics and math. Although the ROI is relatively low, the consistency is assured over a long period. You are good to go once you can go past the hassle of finding the right positive cash flow properties that offer ROI almost immediately. If it helps, do a real estate market research and analysis to identify the best locations and the right investments. Is Positive Cash Flow the better of the two? As always, the investor holds the final decision of which to choose between positive cash flow and appreciation.

Interestingly, this decision is usually informed by financial and investment preferences. It is important to note that positive cash flow does not guarantee high ROIs, but the few hundred dollars returns are consistent. If you can play the long game and wait till your property has appreciated, you MAY get a considerable ROI. However, this is not entirely certain. You may be tempted to combine both.

Genius, you say?

It appears to be a nice plan on paper, but it is harder to actualize. You will hardly see positive cash flow rental properties in areas known for high appreciation. Instead, it is more realistic to aim for cash flow as a short-term return and appreciation as long term.

So, you get a consistent source of income while working your way to long-term financial freedom. Whichever you end up choosing, ensure that you work with the right experts to make the processes seamless and successful.

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