This is the first installment of a four part series on what I describe as the three types of cashflow (as it relates to Real-Estate) … feel free to weigh in!
I think, by now, most of our readers no longer subscribe to the “buy property for the tax deductions and future appreciation” scams of the 90’s and 2,000’s that resulted in one of the biggest property busts that the USA has ever seen.
But, I fear a new mantra – not quite as dangerous, but one that can squash your future returns (hence, financial dreams) like a kink in a fireman’s hose [AJC: that’s probably the worst simile that I have ever written] …
… it’s the ‘positive cashflow’ mantra.
You see, there are three types of positive cashflow, when it comes to Real Estate … and, I’m not sure that you will read about this anywhere else, but here it comes:
1. Tax Cashflow
2. Fake Cashflow
3. Real Cashflow
… only one of which we are really looking for, although, any great property purchase will probably exhibit characteristics of all three.
First, though, let’s review the typical property; the one that doesn’t produce any cashflow at all and loses you money … it’s negatively geared!
A property produces rents – hey, even your home produces a ‘rent’ … it’s just that you don’t bother to pay it to yourself, but you should 😉 – and those rents are offset by costs: e.g.
– Mortgage Interest
– Repairs and Maintenance
And, there are many others …
… interestingly, the last two aren’t strictly a ‘cost’ but a lost opportunity to earn rent – it amounts to the same thing: more cash going out than going in.
If the property has more expenses going out than money coming in from rents it is said to be Negatively Geared; this simply means that you are losing money!
So, why do you do this? Well, the promoters of such property – and, there are many such ‘promoters’ (e.g. builders, developers, real-estate agents, etc.) – will say that you do it for the FUTURE APPRECIATION …
… definitely lose a little bit of money today for the chance to make a LOT of money in the future.
There’s a word for that: gambling. I prefer poker; you may prefer lotteries; let others gamble on this kind of real-estate.
In the next installment in this special 4-part series on real-estate, I will cover the first kind of ‘positive cashflow’ real-estate: Tax Cashflow.