We have often heard it stated that “Cash is King.” This is logical thinking in that cash is a resource that allows us to obtain other resources that are essential for life: food, shelter and other needs. Without this liquid resource, we cannot quickly trade for other important life essentials. If all of our wealth is tied to illiquid assets (primary residence, 401k, etc.) we are at great risk of not being able to quickly convert to some cash in order to cover emergencies or any of life’s needs. So yes, cash is critical. But let’s take it one step further.
When it comes to true wealth, there is one thing just as critical, and arguably more important for our focus: Cash Flow. Cash flow comes from when assets we acquire or own produce regular income. In stocks, cash flow can come in the form of quarterly dividends. In real estate, cash flow comes in the form of rental income from residents or commercial tenants.
Cash flow allows working professionals and investors alike to be compensated for the risk of investment. You are essentially being paid to hold the asset. Further, it is a tool that allows investors to weather any storm. When things get difficult in the economy and the market threatens the value of your real estate, earning income and receiving cash flow allows investors to continue to pay debt service, save for reserves and hold the asset through market fluctuations.
Many people learned the importance of cash flow in 2009 after the Great Recession. Many flippers, speculators, and other types of investors who had invested primarily for appreciation (and done well for a while) found themselves in a spot where the market had suddenly changed. Some did not have sufficient cash flow to cover the holding costs of houses they could not sell fast enough and lost it all. Some have used this experience to forever shape a new investing philosophy: that cash flow is king.
As a working professional, you likely have a sizeable retirement plan, equity in your primary residence, or investments in stocks. Step one is to consider the importance of liquidity, and next is to think of options of creating passive income while growing your wealth. Cash flow is one of the great characteristics of real estate among others (see 4 Wealth Builders of Real Estate). For this reason and more, we believe that everyone should have real estate in their investment portfolio.
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Rodney Robinson II