If you are considering short-term rental investing, you have made a decision that will afford you financial security and freedom. Many people have the same question at this point: What is cash flow vs. equity in real estate investing? And we have a sneaking suspicion you are wondering the same thing. Well, today’s your lucky day. Let’s get into the difference between cash flow and equity:
What is Cash Flow in Real Estate Investing?
Like most people preparing to begin the process of short-term rental investing, you are probably wondering: What is cash flow? After all, this concept is integral to determining if a property is a viable investment. In vacation rental investing, cash flow is the immediate routine return you receive from a property investment after paying monthly expenses.
What is Equity in Real Estate Investing?
Now, you’re probably thinking, “OK, OK – great, you’ve answered my question, What is cash flow? But what is equity in real estate investing?’
Truthfully, equity is a little more complicated. Equity is the value of a property regardless of the revenue it generates from renters. In short-term rental investing, the amount of equity you are entitled to hinges on how much you’ve paid into your mortgage.
The Difference Between Cash Flow vs. Equity in Real Estate
Clearly, these two concepts are closely related, but there are key differences. Simply answering a question like What is cash flow or What is equity is not enough to get the full picture. The ideal solution depends on your investing goals.
“Cash flow is king when it comes to vacation rental investing. This can seem counterintuitive because there is security in equity and equity can help grow an investment faster by enabling you to make larger down payments on properties. But tying up all your investments in property is a huge risk. In a down market, investors often have to sell their property in a rush to free up cash, which results in a huge loss,” Desh Weragoda, mbanc CTO, explained.
The target for many people pursuing short-term investing is to put as little money down as possible. Especially with streamlined, simple DSCR loans from a premier lender, you want the property to pay for itself, which is when cash flow is so important. Cash flow also hedges against potential market changes to secure your investment.
“Cash flow and equity in real estate are two breeds of the same species. Equity is ideal for building or rehabilitating properties to sell or flip and is particularly great for people new to real estate investing. You want to create instant equity by investing less than you sell the property for,” Desh continued.
Still, don’t approach this as a black-and-white, this-or-that situation. We live in the technicolor, modern world, and you should be taking advantage of both. Aim to build significant equity and create good cash flow for long-term and short-term gains.
Equity can also yield significant advantages for short-term rentals because it enables you to buy, rehab, rent, refinance, and repeat (BRRRR), meaning you can maximize cash flow by maximizing equity and even own properties without investing your own money.
And, let us tell you, brrrr is right because you’ll be seeing cold, hard cash money.
Investing to build equity means you will make a significant profit on the property if you decide to sell it to fortify your future. Still, remember good cash flow makes it significantly easier to get approved for financing.
We’ve Answered, “What is Cash Flow vs. Equity?” Contact Us for DSCR Loans to Start Short-Term Rental Investing
Cash flow and equity in real estate are two sides of the same coin and can yield incredible returns that enable you to continue to succeed and live life on your terms. Because, at the end of the day, is there freedom without financial freedom? Create a steady cash flow, and you can travel the world. You can see all seven wonders twice over if you want, and you’ll never have to worry about your next paycheck. Build enough equity, and you can ensure that, when you retire, your Golden Years will be even more precious than gold.
To learn more about how our DSCR loans can finance the start of your vacation rental investing journey with a fast and easy approval process, talk with our team today. Our passion is helping modern investors like you continue to succeed on your terms.