One question investors have faced over the years is does one invest for the equity or cash flow? And, the answer is yes.
To play it safe, you will want to have a real estate investment model that allows for ample cash flow. This cash flow (proceeds left over after the principal, interest, taxes and insurance) of a property are paid and can go into the pocket of the investor. The wise investor will set aside some of this additional cash flow to allow for vacancy of the rental property and for repairs and updates.
The more risky real estate investment scenario is to invest for equity alone. Here an investor’s expenses (principal, interest, taxes and insurance) are equal to or less than his or her income from the rent. They either break even or have to “feed” their investment (i.e. it costs them money out of their own pocket to hold the investment). The hope of the primarily equity investor is that in 6 months, 1 year or 5 years the value of the property goes up in value and they end up selling the property for the significantly more than they purchased the property. The danger in such an investment comes in a market like the one we have been experiencing for the last five years where property values plummet and there is not enough cash flow to cover the mortgage. In these cases, many investor have lost big time because they did not have the security of cash flow.
It all depends on your risk tolerance. Perhaps the best way is to take a balanced approach that allows for good cash flow so that even if the market tanks and property values fall one is able to keep the property and not face a foreclosure on their property. In this scenario, you invest for cash flow and any equity becomes the icing on the cake.