When looking for real estate properties, real estate investors commonly debate whether to chase cash flow or appreciation. Let us first define these terms. In real estate, cash flow is the net difference between money coming in and money going out from a rental property. Positive cash flow is what you are going for. In contrast, an appreciating property is one that is typically in a desirable area and whose value may increase over time. Both have obvious benefits, but it really comes down to what your goals are. Let us take a closer look.
- Positive cash flow provides passive income; when the market is down, you can still earn income from renters.
- Positive cash allows you to hedge against future issues with the property.
- You can invest the positive cash flow to further broaden investment goals.
- You will be able to pay down your mortgage with a positive cash flow.
- Positive cash flow is more predictable and therefore less risky than appreciation.
- Allows you to build potential wealth for the future.
- Your focus is on a larger sale payout that you can cash out or reinvest.
- Compound interest: Not touching your principal and allowing it to gain in value.
The investment model best suited for you really depends on why you are in real estate investing and for how long you plan to keep the property. If your goal is to buy a property in a desired area and sell the property down the road once prices have risen, real estate appreciation may be for you. If your goal in real estate investing is for extra monthly income, cash flow investing might be a wise choice for you.