An article came out this week speaking to home prices rising nationally across the country. Invariably the question has been placed to MACK, “Is that a good thing for your business?” … and the answer is Of Course!
At MACK we have a two mantras that we run our business off of. If you’ve been to our office, listened to our radio interviews and webinars or attended a presentation, you’ve heard them both – over and over again! The first is that “Brick and mortar never made a mistake”. The second, and one we’re going to focus on today, is –Wealth in real estate is made through equity, not through cash flow.
We ALWAYS have to clarify that cash flow, specifically positive cash flow, is a vital component to the overall success of the investment –positive cash flow not only produces an income stream, but allows you to reinvest in future properties, build reserves for upkeep of the properties, and pay down debt. Cash flow is necessary, but shouldn’t be the focus. Equity, and how much of it you can create, is your focus.
The easiest way to display it is this – if you’re an investor and you own 12 leveraged properties that are all cash flowing positively at $500 per month – you’re generating a little more than $70,000 per year of cash flow. While that’s a great number, and your yield is through the roof, no one associates “wealth” with $500 per month and $70,000 per year.
Fast forward 20 years – those same properties have appreciated, and the mortgages are paid off. You now own a $2M+ real estate portfolio that, because there is no debt on it, produces over $150k in income per year. Now we’re starting to work with numbers associated with wealth!
(Isn’t real estate an incredible asset class? Produces income, appreciates, you can leverage your way into it AND someone else will pay the debt off for you. Amazing.)
So, enjoy the article. More transactions, more consumer confidence, and ultimately higher real estate prices leads to more equity being created in our portfolio and the portfolios of our investors. Which to us, is right on the mark. Have a fantastic holiday weekend!
- Eric Workman (Vice President of Sales & Marketing)