Here’s a metaphor to hopefully tweak your perspective on your real estate investments and the role of cash flow.
This is a wood stove in my house (and no, it’s not our only heat source!). But I love it–getting the wood, splitting it, stacking it, and building the fire each morning of the Winter. I absolutely love it.
This wood stove taught me something recently–and that’s where the metaphor comes in.
It’s very common to think: “I build a fire to heat my house.”
But it turns out that’s not true.
We build a fire to hear the STEEL of the wood stove. Then it’s actually the steel that heats the air by radiating its heat.
The fire doesn’t warm the house–the fire warms the steel which warms the house.
Let’s pivot to real estate investing.
It’s very common to think something like: “I buy a property so that the cash flow improves my financial life.”
In this metaphor, the cash flow is the fire, and the financial life is the house. Just like we think the fire heats the house, we think the cash flow is what enhances the financial life.
But here’s a different perspective for you…
What if the cash flow is not meant to enhance the financial life, but rather has one other very specific job:
To make the property support itself, so that its sustainable over time.
It’s only when the property is sustainable over time that the REAL life-enhancement happens.
How? All the benefits of real estate compound together….but they take TIME for it to happen. Inflation pushes “value” higher (often called ‘appreciation’); depreciation–and possibly interest–deductions improve your tax bill greatly; loans get paid off via amortization; cash flow accrues, etc.
But it all takes TIME.
SO…what if the job of the cash flow was not to “heat the house” (mixing the metaphors here), but rather to provide fuel to keep the investment in business while the compounding benefits of ownership have enough TIME to act as the steel, and actually heat the house?
Cash flow is not the end, it’s the means to the end. And it’s indeed a very important means. But it’s just a means.
Keep lighting that fire every time you can. But let’s not pretend it’s the fire that’s keeping us warm–it’s what the fire RESULTS IN that’s keeping us warm.