For the first twelve years Kim and I invested in real estate, it was all about equity. Every time we did a deal, our net worth increased by about $25,000. Boy, did we ever think we were something!
Then, in July of 2006, the real estate bubble popped with a loud, bloody BANG!
Within months, properties that were worth $150,000 were only worth $115,000. Worse still, the ones worth $500,000 sunk to $250,000. It became a chorus of, “Equity? We don’t have no stinkin’ equity!”
I quickly figured out that the true definition of equity is: The difference between what you owe on a property and the amount you wish – in your wildest, most optimistic dreams – it would sell for.
Said another way: Equity is a number that you sell to your banker and brag about to your friends – and it’s almost always grossly over-guestimated!
I’m a slow learner. It’s taken me years to realize that, for most real estate investors, it’s all about cash flow, not equity!
Here’s an example of cash flow: You own a solid, well-maintained, three-bedroom, two-bath rental home. Even in a down market, the property easily rents for about $850 per month. Your monthly mortgage payment (principal, interest, taxes and insurance) is $500 per month. This gives you a monthly cash flow of $350 per month.
Which would you rather have – an investment property with $25,000 equity or one that pays you $350 per month? Let’s say you have ten similar properties. Which would you rather have – $250,000 in equity or $3,500 in monthly mailbox money?
I know, it depends on your situation. Some folks don’t want or need the cash flow. But, brother, let me tell you something that is gospel – Kim and I, and most real estate investors we know, need cash flow!
I’m reminded of an old saying: Equity won’t put food on the table, gas in the car, or pay the bills. That’s why it’s all about the cash flow, dummy!
As you structure your real estate investing deals, it’s critical to keep your eyes focused on the deal’s cash flow. Don’t do a deal just to do a deal. Do a deal because it’s a good, sound deal that meets your parameters!
These days, we’re seeing way too many of our real estate investing friends going down the tube. Most are losing their properties for one simple reason: What they pay out each month is more than what they’re bringing in.
Paying out more than you bring in will put anyone out of business. So back to the key – to stay in business, you gotta have cash flow. You’ve got to bring in more than you pay out.
Hope you profit from today’s lesson – which took me, ol’ Dunderhead Bill – almost fifteen years to learn!
Do you seek real-world real estate investing information? Go to BillandKimCook.com. It’s packed with free creative deal structuring techniques and strategies. Bill and Kim Cook have been investing in real estate since 1995. Their portfolio consists of single-family rentals, a small mobile home park, plus notes and options. If you have questions, give Bill a call at 770-815-8727.
