Cash Flow Or Wealth Building?

May 30, 2020

Part of developing your investment real estate strategy is determining how quickly you need to see a return on your investments. Is your goal to promote wealth building or immediate positive cash flow? A positive cash flow is simply when your cash inflow is greater than your cash outflow but wealth building is increasing the value of your holdings and creating a residual income that is self-sustaining and not dependent or affected by one investment.

Of course, positive cash flow is required for wealth building but do not mistake positive cash flow for wealth. A surplus of $10 can be considered a positive cash flow but one lost tenant can turn a positive cash flow negative. When making investments with wealth building in mind, the return on your investments will be greater but it takes time to develop. Therefore as you are planning your strategy, consider your immediate needs while planning for your long-term goals.

If you are investing $100,000 out of your $120,000 personal savings, your immediate goal is probably to create a positive cash flow therefore you may want to consider investing in developed properties with a proven record of producing income; for instance an occupied apartment or small office building.

Occupied multi-unit buildings can generate a quick return on your investments but they may not appreciate quickly and carry additional expenses for upkeep. A well-managed and fully occupied office building can produce a nice income but 18 months of road construction on the main access road can send your tenants packing and leave you wanting.

On the other hand, suppose you and nine partners invest $10,000 to buy an acre of undeveloped land to ground lease for a new drugstore. You will not see a positive cash flow for some time but the value of the land will increase once the store is built and can reasonably be expected to appreciate over time. In this scenario, you will have zero maintenance costs but would continue to receive payments for the term of the lease. This is a common wealth-building strategy, however, if your savings are low and you're trying to create an impromptu college fund for your 17-year-old daughter this may not be the best deal for you.

As your portfolio grows your decisions will adapt and the prudent investor selects mixture of investments to build wealth and maintain cash flow. However at the onset determining your immediate goals and how quickly you need a return on your investments will affect the types of properties you select and terms you should accept.

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