Maybe you like to dabble in real estate, or maybe real estate is the main focus of your business. A good way to look at real estate, when you look at buying a property, is whether the property will require more capital for you to achieve your objective, or whether the property is already cash flow positive and will provide you with monthly cash flow through its excess rents from the first day you buy it. This is a continuation of the theme of cash flow that I introduced in last week’s two blog posts.

Flipper

If you are a house flipper, you want to buy a house (or any other property) that is in some state of disrepair, or that just needs updating, develop a plan and complete the required repairs or updates, then put it back on the market and sell it, hopefully for a profit. Your “value added” is that you either bought the property at a better price than others could for whatever reason, or you have special design ideas or talents, or you have some ability to provide “sweat equity” and do some the work yourself, or some combination of all of these. At the macro or strategic level, however, you need to realize that to make money on this project you need to spend additional money through the process before you make your profit at the end by selling the asset. There probably will not be any cash flow through rents or tenants while you are doing the rehab or updating work. Even if you buy a multi-tenant property and decide to update each unit at it turns over, you will not receive rents on the unit being updated, even if you still earn rent for the remaining units. A “flip” property can be a good investment for someone who has the time and ability to put additional money into the project. However, it is probably not the best type of investment for someone looking to buy a property for its current cash flow.

Landlord

If you are looking to be a landlord, however, from an investment perspective, you are looking to invest money into an asset that will generate current income. Hopefully, the income from rents will exceed the amount you need to spend on your loan payment, taxes, maintenance and insurance. If so, then you truly have positive cash flow. Maybe there is a temporary situation that you believe will rectify itself and you will have positive cash flow thereafter. Maybe you might sell the property down the road, but you are more concerned with maximizing rents in the property, and/or with stabilizing your tenant base, so that you maximize your current cash flow. This is the equivalent, in the stock market, of buying a utility or other high-dividend stock: It may go up in the future, but you really want the higher income it provides than does a bond or money market fund.

IMO

My only point is, if you are already a real estate investor or if you are thinking of investing in real estate, you need first to determine what your objectives are. If you like watching HGTV and want to emulate the likes of Chip and Joanna, then you must not need the current cash flow and you must have extra cash that you are willing to invest in the property over and above your initial down payment. If maybe you have some basic handy man talents and you like interacting with tenants and you want to retire and live on the rents you generate from investing in income properties, then you are a different type of investor and you may be looking to buy a different type of property, one that can provide income to you from Day 1 or close to it. Make sure you know what you want before you start looking.