The one thing I can't wrap my head around about real estate is all this talk about cash flow and such. Sure, havering a couple hundred bucks a month in positive cash flow is peachy but why does everyone seem to ignore the fact that some one else is paying for the property! So what if I have to put in a few bucks here and there. Eventually the $300,000 house will be paid for and I own it for pennies. Other people paid the lion's share. I now own a property that cost me squat in the grand scheme of things. Leveraging other people's money is the cat's ass here. I never see anyone talking about the fact that other people are substantially paying the property off regardless of cash flow, returns, yadda yadda. Even if I have to pay a couple hundred bucks a month, where can I own a house worth several hundred thousand dollars for a couple hundred bucks a month generally speaking? Am I missing something?
Let me tackle that, and I think you'll understand why cash flow is more important than that.
First reason: Because that won't happen for 30 years. I'm retiring in two.
The principal pay down adds to my returns, sure, but it's not funds I can access without jumping through some hoops or selling the property.
Yes, we do count principal pay down in returns, obviously. But it's not worth a negative cash flow investment for that - then the tenants AREN'T buying the house for you, you are, with your negative cash flow. Focus first on the cash flow, and you'll get the house paid off as well.
Let's look at some numbers. Say, for example, I buy a 100k property, rent it out for 1500/mo. Put 25% down, 5% mortgage.
Gross rent: 1500
Expenses (50% rule for a rough example is good enough): 750
P&I (75k loan, 5%, 30 year): 403
Monthly cash flow: $347.
Cash on cash return (25k down, and assume 5k closing/repairs, for 30k invested total): 13.9%
We're also getting appreciation (at the rate of inflation), most likely. And we have that principal pay down you mention. How much is it? Well, it's about $90 for the first few months.
My cash flow is nearly four times that much. Sure, that principal amount rises due to amortization, but so does my cash flow as rents rise.
Why don't we mention it much? Well, it's just not as important. It sounds impressive "they're buying a house for you!!"
And don't get me wrong, it's nice. But when you look at the reality of the numbers, of course we're going to focus on cash flow when we get that now, not in 30 years, when it shows up in our bank instead of having to refi or sell to access it, and when it's 4x as much as principal pay down is.
So yeah, eventually you own a house. Neat. You also collected 4x as much as that house is worth in rents along the way. That's what makes me more excited. :)
And since the principal paydown will happen either way, might as well focus on getting the cash flow, because (believe it or not), that won't happen either way - some people buy cash flow negative properties. So focus on making sure you get that cash flow, and you'll own the house anyways on top of it.
Does that answer your question? :)