Blog | Real Estate

Why Real Estate? Cash Flow!

Don’t miss out on the domino effect that could lead to your financial freedom

The successful husband and wife duo on HGTV’s “Flip or Flop” show keeps viewers on the edge of their seats as they purchase rundown properties for cash, sometimes sight unseen, and then renovate and flip them for resale. And boy, do they make it look effortless, always coming out ahead financially no matter how many obstacles they encounter!

The truth is, real-life flippers may not find the same level of success. So many things can go wrong along the way—from choosing the wrong property and paying too much for it to unexpected and expensive repairs or not finding a buyer fast enough. This is where investing for the purpose of capital gains instead of cash flow becomes risky.

Two types of real estate investments

When it comes to investments, there are primarily two things people invest for: capital gains and cash flow.

Capital Gains are the one-time profit you make on the sale of an investment. The strategy behind capital gains is to buy and sell. In order to realize capital gains, you must sell the asset. As long as market prices go up, capital-gains investors win. But when the markets turn down and prices fall, capital-gains investors lose.

Cash Flow is an ongoing stream of income you receive from an investment. You may receive this money on a monthly, quarterly or annual basis, depending on the investment. The strategy behind cash flow is to buy and hold.

Sure, you might make a killing off flipping one house if all the stars align—but how repeatable is that process? I’d argue that it’s not, because each time you start a new flip project, you’re facing a host of unknown variables to transform the property and then sell it. You might get lucky and flip it for profit. But you could just as easily flop. The risks are just too high.

How cash flow works

Cash flow is realized when you purchase an investment and hold onto it. Then, every month (or quarterly or annually), that investment returns money to you. Cash-flow investors typically don’t want to sell their investments because they want to keep collecting the regular income of cash flow.

For instance, if you purchase a stock that pays a dividend, then as long as you own that stock, it will generate money to you in the form of a dividend — that’s cash flow. In real estate, let’s say you purchase a single-family house and instead of fixing it up and flipping it, you choose to rent it out. Every month, you collect the rent and pay the expenses, including the mortgage. If you bought it at a good price and manage the property well, you will receive a profit (positive cash flow).

The real estate domino effect

One of the best things about cash flow is that you don’t need to acquire hundreds of thousands of dollars in savings in order to reach financial freedom. That’s because cash flow breeds more cash flow.

How?

My first cash-flow investment (in 1989) was a small two-bedroom, one-bath house in Portland. My monthly cash flow averaged a whopping $50. It wasn’t much, but it gave me my start. In fact, that $50 a month was the first building block toward the cash flow I enjoy today.

There comes a point in your investing process where the cash flow from your investments supports not only your living expenses, but also your next investments. Your cash flow breeds new assets, which, in turn, breed more cash flow. Isn’t that spectacular?

I know that diamonds are supposed to be a girl’s best friend, but I’m going to argue that your real BFF is cash flow — once it helps you reach your financial dreams, you can treat yourself to all the diamonds you want.

More cash flow benefits

As you can see, cash flow equates to freedom — once you’re financially independent, you are free to do whatever you want. You can choose to have a life of leisure or pursue a new business venture. You can set your own schedule, travel more and take up more hobbies.

Cash flow is designed to eliminate the fear of running out of money during retirement. As long as you own the asset, your cash will be flowing like clockwork.

It’s also the lowest-taxed type of income (this is not always the case for capital gains taxes, which you’ll get if you flip a house).

And finally, there’s no waiting period — you can start making money as soon as you get a tenant in the property.

Your goal should be to get more cash flow coming in than you spend on living expenses. That is the ultimate in financial freedom — having your assets work for you instead of you working for your assets.

Getting started: Insights from a rich dad student

I understand. It can all seem either a bit overwhelming, or overly simplified. The truth is, increasing your financial education is the only way you’ll feel confident in your real-estate investment endeavors.

Marie (whose name we changed for privacy), shared her insights as a Rich Dad student.

Just a little over a year ago, I was where many of you are now… wondering how to move ahead financially and prepare for retirement in today’s economy. My husband and I don’t have a lot of money or rich relatives, but with the Rich Dad information and support from the right team members, we are now on the right path to a secure, financial future.

Becoming a real-estate investor takes time, effort and a positive attitude, but it’s so exciting to learn new things that can actually change your life! And Kim and Robert Kiyosaki are exactly right. You can study so much, and then you just have to do it… so we are finally on our way.

Our Rich Dad Coach guided us through the process step-by-step, and in a few months, we put our team of attorneys, CPAs, bookkeepers, and real estate agents together and set up our official, real-estate-investing business. It was time to take action on what we’d been studying so we started looking at properties, running the numbers for cash flow and making offers.

It was frustrating at times, but we encouraged each other to keep moving forward. And a few weeks later, our patience and hard work paid off as our offers on two, different properties were accepted. When we attended the closings, and received the house keys, I was elated.

What about you? What’s holding you back from taking action on your financial dreams? Check out Rich Dad’s free, financial education community here for more information.

What are you waiting for? Today could be the first day of the rest of your life.