Summary: As we gear up for the beginning of our popular Zero to Freedom Through Cashflowing Rentals course (if you want to join, click HERE), we wanted to share the reasons why we teach our students how to buy a rental that cashflows and not just any old rental property. The primary reason is based in the expression, “cash is king.”
If you’re new to investing in real estate, you might be feeling overwhelmed by the sheer number of investing strategies out there.
If this is you, maybe I can simplify things for you. To do that, I’m going to reference one of the books Leti and I read when we first got started in real estate investing: Rich Dad, Poor Dad by Robert Kiyosaki. In this book, Kiyosaki teaches you that you want to accumulate assets and shed liabilities. He defines assets as anything that “puts money in your pocket.”
When applied to real estate, this means that you want to buy properties that cashflow. If you buy properties that take money out of your pocket, then according to Kiyosaki’s definition, you have a liability.
And that’s the foundation of cashflowing rentals. You only want to acquire assets, not liabilities.
So why is cashflow so important? Why do cashflowing rentals beat out so many other real estate investing strategies out there?
Only cash pays the bills
Think about your options for investing in real estate. You might buy shares in a development project that promises 20% returns. Or maybe you buy an expensive condo because your agent says it’s going to appreciate like crazy. All of these investments can generate an awesome rate of return. But no matter how great the rate of return, the reality is, you can’t spend a rate of return.
To make it real, what if sh*t hits the fan right now? What if you lose your job, or get sick and can no longer work? It doesn’t matter if your investments are growing at a 20% rate of return or have the potential to return 100%.
A rate of return doesn’t put food on the table. It doesn’t pay medical bills. Cashflowing rentals will help you solve those problems before they happen.
A rate of return is a theory until you actually sell your investments, and turn it into cash. This is why having an investment that puts cash in your pocket each month is better than one that takes money out of your pocket.
This is why they say, cash is king.
Cashflow gives you ultimate flexibility
One of the things we love about cashflow is the ability to either live off of the cashflow, or reinvest it. For example, a few years ago we wanted to take some time off from work and travel as a family while we were young enough to enjoy it. So Leti cut back at work significantly, and we were able to take an entire year off.
What funded part of our year off? The cashflow from our rentals. The flexibility that cashflow gives you is invaluable. This flexibility can also be applied to unexpected issues that inevitably arise when you own rentals. We recently had electrical issues at one of our properties, and the cost to repair it was about $35,000.
Fortunately, our cashflow easily covered this unexpected cost, and we didn’t have to dip into our own pocket to pay for it.
If you don’t need the cashflow and you reinvest it, your wealth grows that much faster. This flexibility is what makes cashflowing rentals so valuable.
Cashflow is only one component of return
We talked about the benefits of cashflow because it pays the bills and gives you ultimate flexibility.
But let’s think about the cashflow in terms of rate of return. Most people assume that when you invest in a cashflowing rental, the cashflow is your only rate of return, or it’s the main component of return.
However, you’d be wrong.
Cashflow is actually one of the smaller contributors to the overall rate of return you get from investing in cashflowing rentals. We cover the other sources of return HERE.
So Why Cashflowing Rentals?
You might be asking yourself, “Why the emphasis on cashflow?” The way we think about it is as follows: cashflow is a necessary component of investing in rentals, but it’s not the reason to invest in rentals. To put it another way, you want an investment vehicle that gives you a great return on investment, but it must also put money in your pocket every month.
If you only go for a great rate of return, you run into problems if you need cash.
If you only focus on cashflow, then your overall return will be relatively low, and you’d be missing out on the opportunity to get a great return.
What you want to do is buy for cashflow and focus on those other elements of return to maximize your overall return. So the next time you evaluate your investing options (and this can be applied to non-real estate investments as well), be sure to look to see that it generates cash first, then look at the overall rate of return.
Now is the time for Zero to Freedom! If you like what you see, sign up for the course here!
