First of all, you have to understand that there are five ways that you’re going to make money in real estate—and not all of them have to do with cash flow.
1. CASH FLOW
The big misconception that a lot of people have is that if your property is not cash flowing, you are not making any money. And if you’re not making any cash flow, you’re losing money. However, you have to understand, cash flow is only one piece of a five-part puzzle.
Next, you have equity capture. That’s when you buy the property for less than what it’s worth. Therefore, when you actually close on it, you’re capturing equity at that point.
You also have depreciation. If you have a job and you’re able to depreciate the property, you were able to get tax advantages for depreciating that asset.
4. DEBT PAYDOWN
There’s the debt pay-down, as well. You have a tenant in that property. That tenant is paying down your debt to zero. If it’s a 30-year mortgage, eventually you will owe nothing on that property, and the tenant will have paid that down.
Last but not least, there’s appreciation. No matter what you do, properties are going to go up in value. Think back 30 years ago. If you could go back in time and buy a property—or 10 properties—where you grew up, you would be thinking a lot differently based on appreciation. You would not even really be concerned about the cash flow.
So when you say that your property is not making money, you want to be very careful. It may not be making you immediate cash flow, but you have a tenant in the property paying down the debt. You are getting the tax advantages and you’re depreciating it. You are getting appreciation, because it’s going up in value. And if you bought it correctly, you are getting some equity capture.
The one thing you may not be getting is cash flow. But as you can see, this is not the end of the world.