When it comes to investing, Canadians like rock solid investment solutions. When investing in rental properties then, what people ideally want to see is as immediate as possible returns on such investments. But what is the best way to actually accomplish such returns? Either by investing in cash-flowing rental properties? Or by investing in equity properties (flips for example) alone in the hope that property prices will appreciate timely enough in order to generate similarly as worth while returns?
Many people will say that there isn’t as simple answer to this question. In truth though, there is. No one should ever invest on the basis that property prices are going to continually appreciate. This isn’t after all, investing, this is speculating. Moreover, when people invest in cash flow from rental properties, they are actually investing in equity also.
When investing in cash-flowing properties for example, buying properties below market value puts investors in a position to easily add a significant profit margin to rents on properties in order for them to cover mortgage and maintenance costs. In this case, property owners are able to put cash aside each month in the form of savings. The result? Cash savings and increased equity should a property appreciate in value in the long term.
The best part though, is that if properties do appreciate in value, built up equity can be used to finance other rental property purchases. Meanwhile, positive cash flow and profit each month on rents means that investors can insulate themselves against vacant periods, not to mention full blown market crashes (highly unlikely in this market), which may necessitate property owners having to offer more competitive rents to tenants.
Compare cash-flowing investment strategies then, to equity investment strategies where property owners stand to make significant losses every time the housing market falters, and cash flow wins every time. Even better, positive cash flow investments equate to money in the bank, which people can access whenever they need to. Equity on the other hand, is static and locked into properties until property owners actually choose to sell a property.
Of course, investing in equity has its advantages also. In the long run, most properties do appreciate in value. Moreover, managing tenanted rental properties can be time consuming unless one employs a third party agency to manage properties on their behalf. The only question either way is, do you actually have a well thought out investment strategy?
Not sure? Still weighing the pros and cons of both options?
Being a licensed mortgage agent, I have a wealth of personal and professional experience helping people just like you get to grips with the Canadian housing market. In this case, if you are thinking about investing, feel free to contact me in order to arrange a pro-bono consultation to discuss your options. My name is Amina Mohamed and you can contact me directly by clicking here.
FAQs
Even better, positive cash flow investments equate to money in the bank, which people can access whenever they need to. Equity on the other hand, is static and locked into properties until property owners actually choose to sell a property. Of course, investing in equity has its advantages also.
Is it better to have equity or cash? ›
As a general rule, buyers prefer to pay with equity when they think their shares are overvalued. And sellers prefer to receive equity when they're confident that the asset in question will create value for the buyer, since the seller will have a stake in the buyer after the sale.
Is positive cash flow better than capital growth? ›
A property that generates positive cash flow may be more stable in the short term, but it may also have limited potential for growth. On the other hand, a property that has the potential for capital growth may be more volatile in the short term, but it may also provide a greater return on investment over time.
What is the cash flow investment strategy? ›
Cash flow investing is a strategy that focuses on investing in assets that generate consistent income, such as dividend stocks, real estate, and high-yield savings accounts.
Is cash flow more important than savings? ›
No, you pay your ongoing expenses out of your cash flow. And you save and invest money out of your cash flow. This is why cash flow is more important than net worth.
What is more important cash flow or equity? ›
Cash is liquid money and is absolutely essential when you finance real estate. Cash is much easier to use if something goes wrong, whereas equity is completely useless. You'd have to sell your asset if you ever need the money quickly, and that is not always the choice that someone needs to make if an event occurs.
Is equity the best investment? ›
Investing in equities allows you to earn a high return rate that can potentially beat the inflation rate by a large margin. This is how equities facilitate wealth creation in the long term.
Can you live off cash flow? ›
Cash flow can be generated in any number of ways: a paycheck from your job, a business you own or a passive-income source. Regardless of where it comes from, cash flow is like water – you simply cannot survive without it. (To see some strategies for increasing cash flow in retirement, check out my Cash Flow Guide.)
What is the disadvantage of positive cash flow? ›
The main disadvantage of generating a positive cash flow is that because you're receiving extra income, you'll have to pay more tax.
Why is cash flow better? ›
Positive cash flow indicates that a company's liquid assets are increasing. This enables it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges.
The most successful investors invest in stocks because you can make better returns than with any other investment type. Warren Buffett became a successful investor by buying shares of stocks, and you can too.
What are the best assets for cash flow? ›
Investors who prioritize cash flow, often referred to as income investors, make deliberate choices to include assets such as dividend-yielding stocks, bonds, and real estate. These selections are characterized by their ability to generate recurring cash, crucial for a stable investment approach.
What type of investment generates constant income? ›
“To achieve that steady stream of income, investors will build a portfolio with securities and assets like bonds, dividend-paying stocks, and real estate.
How can you be cash flow positive but not profitable? ›
If a company sells an asset or a portion of the company to raise capital, the proceeds from the sale would be an addition to cash for the period. As a result, a company could have a net loss while recording positive cash flow from the sale of the asset if the asset's value exceeded the loss for the period.
How much cash flow should I keep? ›
The owner might decide to set aside $90,000 to $180,000 to cover three to six months' worth of expenses. But cash-flow can vary from month to month, so it's typically best to use a three- or six-month average for a more realistic view of how the business has been managing its cash.
Can cash flow be higher than profit? ›
Simultaneous: It's possible for a business to be profitable and have a negative cash flow at the same time. It's also possible for a business to have positive cash flow and no profits.
Is having equity good or bad? ›
Home equity—the current value of your home minus your mortgage balance—matters because it helps you build wealth. When you have equity in your home, it's a resource you can borrow against to improve your property or pay down other high-interest debts.
Is equity really worth it? ›
Maximizing your equity can lead to a much higher payout, but it also runs a great risk of not being worth anything. Before making the trade-off, you should be confident you could cover all your ongoing expenses with the salary you're offered.
Is it always better to have equity than to have debt? ›
Equity financing may be less risky than debt financing because you don't have a loan to repay or collateral at stake. Debt also requires regular repayments, which can hurt your company's cash flow and its ability to grow.
Is using equity a good idea? ›
While you can use home equity loan funds for anything, that doesn't mean you should. A home equity loan could be a good idea if you use the funds to make home improvements or consolidate debt with a lower interest rate. However, it is a bad idea if it will overburden your finances or only serve to shift debt around.
