If you lived through the recent real estate and economic recessions, the very headline of this article might cause you some emotional pain. Less than ten years ago, the country was swept with an economic crisis the likes of which our generation had never seen. I personally remember driving down the street in California’s Central Valley and seeing “for sale” signs on practically one of every four houses. It felt like the market would never recover. Fast forward a few short years and now massive wealth is being built through real estate—often by average Joes.
Cash flow is the money you have left over from the rent you’ve collected after all expenses have been paid. Most real estate has expenses such as a mortgage, property taxes, insurance, maintenance, and property management fees. When you buy a property that pulls in more rent each month than the expenses you carry to own it, your cash flow is positive.
In the majority of investments (stocks, art, jewelry, bitcoin, etc.), you are hoping to buy something that will appreciate in value, then sell it later for a profit. In some forms of investing (buying a poorly run business, for example), you may be buying something that produces income and hoping to improve that asset's performance in order to increase its value. For most, this involves too much work and is undesirable. What we are left with is the subconscious understanding that to “invest” is to buy something you believe will be worth more later. If this is based on sound principles, it can work. If it’s not, it’s really more like gambling.