Cash Flow vs Increased Equity

When looking at investments, it’s important to know what your goals are for the investment.

For most people, when they invest in something (whether it’s stock, a company, real estate etc) they either are looking for cash flow or increased equity. As an example, if they are looking to purchase stock, if they are interested in cash flow, their big emphasis will be on the dividends being paid out (this is assuming it’s not a quick buy/sell). If they are looking for increased equity they are not as interested in the dividends as they are in the value of the stock increasing over the long run.

In buying a business, if cash flow is the emphasis, they will be interested in taking the profits out of the business while if increased equity is the emphasis, they will more likely reinvest the profits back into the business to increase the value long term.

If buying real estate as an investment, if they are interested in cash flow, the primary interest will be that the incoming rent is greater than the outgoing expenses (mortgage, taxes, insurance, management fees). If increased equity is the greater concern, the intention/hope is that the house will appreciate over time and the incoming payments will simply cover costs in the short term.

There isn’t a “right” or “wrong” as far as cash flow vs increased equity but if you don’t go into an investment knowing what your plans are, that is where the real problems come into play.

Even if you do know your plans, it’s important to make sure they are realistic and instead of looking at the hoped for numbers, take a look at the worst case scenario numbers.

If looking to purchase real estate and you figure the incoming rent will cover the costs while the equity increases, are you also planning for the times when you have vacancies? Are you in a position to cover the costs without the rents coming in? How will you get affected by a real estate bust (as we have been experiencing)?

Too often we look at the “pie in the sky” numbers in investments and not the realistic numbers or the worse case scenario numbers. The result…..look at the economy today!

A smart investor will have some investments emphasizing cash flow (to keep things going) with others for equity (looking more long term). A dumb investor….doesn’t give either a thought!

Have a great day!

Lawrence
PS See what others are saying about the book “11+10=1” such as Thomas Crone “Sometimes, a book comes along at “just that right time”… To read more please go to http://lawrencefine.com/sales.php

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