(YAWN!) The difference between asset growth and cash flow

This isn’t the most exciting blog entry – but to my investor friends and agent followers – READ ON FOR WISDOM!

When potential investors tell me they want to purchase real estate, I ask them – tell me what you envision your end to be. Are you looking for a cash flow monthly or are you looking for asset growth?

These two objectives provide different approaches in the beginning of the buying process. For the investor seeking a cash flow, s/he usually has lots of cash and looking for somewhere to park the money and pull down an income each month. That’s different than the investor looking for the asset to grow who may be wanting to leverage their funds with a mortgage so they can count on two things – OPM (other people’s money) paying off the mortgage, and the market growing their asset, thus growing their equity.

Asset growth is how an investor gains a return on investment (ROI) in the double digit percentages consistently. For instance, let’s say you  purchase an investment property with 20% down – say $40,000 on a $200,000 purchase. If that condo grows in value by 5% per year (i.e., $10,000), the investor’s cash growth is actually at 25% ($10,000/$40,000).

Meanwhile, the tenant’s rent is making the mortgage payment each month, thus paying down the mortgage for the investor so  the equity is growing year after year.

For the cash buyer, however, it’s more about – what can s/he take out of the property each month for cash. If the house is purchased for the same amount – and the rent is $1,500 per month, with a $300 condo fee and $150 property tax, then the net cash flow for the year is $12,480 per year. On the initial purchase of $200,000, the cash return is about 6% per year – in cash. It’s like you own a stock paying dividends – on a monthly basis.

When you’re looking to invest – what is your end game? Until next time…

Anthony Carr is the Director of Training for Keller Williams Realty Falls Church, VA. KWFC is in the Top 10 real estate offices in Northern Virginia according in both agent count and sales volume. His real estate career is diverse and he’s a sought out speaker, author, blogger and problem solver. Mr. Carr is the author of “Real Estate Investing Made Simple: A commonsense approach to building wealth”; and he was a contributing writer to “The Best Real Estate Advice I Ever Received,” published by the Donald Trump organization. He holds associate brokers licenses in Virginia, Maryland and Washington DC.