Cash Flow Is King!!!

Is cash king or is cash flow king?

I am going to convince you why you want to invest for cash flow and cash flow’s brother appreciation!

But first, what is cash flow? 

Cash flow is the monthly profit left over after all the income has been collected and all the operating expenses to include the mortgage paid!

And appreciation? Appreciation is the increase in value of an asset over time.

Simple enough right? Good now let’s check this out…

Take an apartment building worth $5M. Let’s say this apartment building has a total of  33 units (or $150K a door). Using LEVERAGE, I purchase this property with $1.5M as a down payment. Then I would finance the remaining $3.5M (or 70% of the purchase price).

See what I did there… $1.5M bought me a $5M worth of Real Estate. That’s leverage!

Now let's say after I collect rent from all 33 tenants and any other additional income I have my total “effective gross income”. I need to pay all the bills. Think my insurance, property taxes, marketing, maintenance, property management, etc. I would now have my total “operating expenses”. I would take my “effective gross income” — “operating expenses,” I am left with my Net Operating Income. (STAY WITH ME, BELOW IS A BREAK DOWN).

Effective Gross Income — Operating Expenses = Net Operating Income

The only person or expense left is the mortgage. I would take my Net Operating Income — Debt Service = Cash Flow.

So the overall formula looks like this:

Effective Gross Income

      — Operating Expenses

Net Operating Income

       — Debt Service

Cash Flow 

Keep in mind I am being basic so you can see where the cash flow actually comes from but that’s it. Keeping with our example of the $5M property above, I make 7.3% cash on cash a year or I make $110,000/year CASH FLOW. This is all profit! That would be $9,166.67/month. Would that change your life?!

What if I told you that monthly check of $9,166.67 would be tax free? Don’t believe, it’s true. What if I told you the equity in the deal the initial $1.5M you would get back and not only get it back but double it, tax free? Again, it’s true. Real estate has so many advantages. 

Hanging out with cash flow’s brother is appreciation. Remember appreciation is when an asset’s value increases over time. 10 years from now my $5M property is worth a lot more. If the property only appreciated at 3% a year for 10 years that would be a total of  $1.5M. If rents never  went up and I only made $110,0000 a year in cash flow that would be $1.1M. 

Let’s see where we are at then:

Purchase property in 2021 for: $5M

Equity invested: $1.5M

Cash flow (10years): $1.1M

Appreciation (10years): $1.5M

Total Gain: $4,100,000

So did I double my initial investment of $1,500,000? I sure did. As a matter fact I took my $1,500,000 and multiplied it by 2.73x!!!

I took my money and made money off it, I protected my money during the 10 years because the property cash flowed, and finally I used the appreciation over 10 years to multiply my money.

The property is now worth $6,500,000 in 2031. This is only one property think of owning multiple properties that cash flow. Now you not only are creating wealth but generational wealth for you and your family. 

So, is cash king or is cash flow king?

This is such a great example why Sarah and I invest for cash flow. Not a flip, not wholesaling but  investing for the long term. Think this.. it’s not a get rich quick scheme, but a get rich for sure. 

If you have questions, feel free to send an email at sean@jamesonassetmgmt.com. I look forward to hearing from you. 

The best investment on earth is earth!

~ Sean

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