You hear the saying all the time; “Cash is King”. Well, in the buy and hold real estate world, cash FLOW is actually King. It is really the only thing that matters. I personally don’t care if the value of my investment goes up, down, or sideways (at least in the short term). The only thing that really matters is that the rental income covers all of my monthly obligations. This includes the mortgage payment, property taxes, condo/ strata fees, property management fees, and any maintenance required.

I know that my money is made by paying down the mortgage over a period of 25-35 years, using tenant’s money to do so. If the value goes up, that’s a bonus. In theory, if I buy in the right area, it should increase a couple percent each and every year (although certainly not in a straight line.)

I will give you some real life examples. We purchased several single family homes with basement suites in Edmonton back during the peak of the market in 2007. They cash flow nicely. We rent the main floors for around $1200/ month, and the basement suites for around $800, for a total monthly rental income of $2000. Our monthly costs including the mortgage payment and maintenance total around $1500, for positive cash flow of around $500 per month.

One of these was purchased for $285,000 back in 2007. We had it re-appraised in 2012 for around $250,000. That’s a 12% decline in value over a 5 year period. Disaster, right? Well, it would be if not for the little thing called positive cash flow.

I often hear people tell me that they ONLY have to kick in $500 per month to cover their defecit. Well, that probably works if you only have one or two rental properties, but doesn’t work so well when your plan is to own 10 or 20. Could you really afford $5000 or $10,000 per month to cover your losses in hopes of the property value increasing?

If I can offer any advice to anyone, this is the #1 most important rule in becoming a successful long-term real estate investor. You may be able to get away with negative cash flow for awhile, but eventually it will come around to bite you in the ass!

By Chris Stepchuk July 25, 2013