Cash-flow vs Equity by Austin Hendrickson

November 27, 2018

One of the most common debates in real estate investing is whether to pursue cash-flow or
equity. This is an interesting topic and I believe there is really no one size fits all solution. It really
depends on each specific investor’s situation and personal risk appetite. With that being said, let’s dive
into the debate.

The argument for cash-flow:
Cash-flow aficionados will swear that when it comes to long term investments, cash-flow is the only
thing that matters and any appreciation is icing on the cake. I think that this point of view is great when
it comes to buying properties, especially for beginning investors. If you do not have cash-flow you will
not be able to buy too many properties. A healthy cash-flowing portfolio is a strong friend to have when
the next recession rolls around. Cash-flow investors will also bring up the point that cash is king when it
comes to real estate investing and a lot of times equity is stuck in properties and may take time to
leverage out.

The argument for equity:
Equity advocates will argue that focusing on cash-flow is thinking too small and that great real estate
wealth is obtained through smart investments in areas that will have a lot of appreciation. I agree
somewhat with this statement, however the problem is that investors are forced to gamble to a certain
extent whether they think an area will improve or appreciate greatly in the short or long run. I do
believe that buying in the right areas will bring investors great wealth, however I believe all investments
should have a healthy amount of cash-flow, otherwise investors risk losing it all if their luck starts to
turn.

On the flip side there are investors who are not as speculative and still believe in equity even above cash
flow. They take 15 year mortgages as they know they will pay about a third of the amount of total
interest and that they will be better protected against a real estate downturn. I purchased my personal
residence on a 15 year mortgage as I purchased it with a friend and was able to lock in the rate at 3%.

The interest we will be saving is big and the extra equity gives me financial security. However if I had
purchased the house myself I would have went the 30 year route as interest rates were low and I am
now borrowing at higher rates.

When beginning investors ask me what they should focus on when beginning my advice is almost always
to start with a house-hack. Just by not paying rent you can make almost any house-hack deal a win -as
long as the house is reasonably affordable of course. Successful investors have told me that capital is key
for younger investors. Flips, wholesales or another income source are a must for any serious real estate
investor looking to build their portfolio of rental properties. The average investor working a W-2 job will
have to save for years just to save up 20% for a $200k investment property and if they did a flip or two
they could cover the down payment in months.

My end goal is financial freedom through real estate. While I realize that every cash-flowing asset moves
me closer to my goals I also realize that the flips and wholesale deals are what keeps me moving and
liquid, giving me the ability to constantly analyze deals. Flipping profits are what funds my buy and
holds. After an investor reaches financial freedom then perhaps a play towards appreciation could make sense – as long as the investor can afford it if the play does not pan out. As you can see there are many
pros and cons to both approaches and it is up to you to decide which approach suits you best!

Author Bio

Austin is a young motivated investor currently residing in the Twin Cities market of Minnesota. He grew up in a large family in rural MN, and at age 19 obtained his bachelor’s degree in Accounting from St. Cloud State University. Austin is a full time CPA who spent several years in St. Cloud befor See more >>

Austin is a young motivated investor currently residing in the Twin Cities market of Minnesota. He grew up in a large family in rural MN, and at age 19 obtained his bachelor’s degree in Accounting from St. Cloud State University. Austin is a full time CPA who spent several years in St. Cloud before spending the last few years working in downtown Minneapolis for a large professional services firm where he specializes in construction and real estate audit and tax. He has worked with everyone from investors with one or two properties to large commercial investors with millions in real estate. Austin first became interested in real estate after reading the book Rich Dad Poor Dad at age 22 and realized that most of his wealthy clients were in real estate as well. He bought his first house soon after and six months later he started Adjacent Properties LLC, a real estate investing company, which has taken off. Somewhere along the way he also obtained his real estate license and is a licensed realtor in Minnesota. He has experience with flips, buy and holds and wholesale deals in multiple different states. See less >>

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