Cash Flow Vs Equity: a 4-Step Guide to Your Next Investment 

November 17, 2021
a guide to investing in real estate

In real estate, equity is one of the most talked about topics. As a smart property investor, you will know that equity plays a key role in creating a passive income that will accumulate over time, which will allow any owner to eventually work less and do more of what they love. 

As a property owner it’s important you know the ins and outs when it comes to your investment. Your property is one of the biggest assets you will own so it’s essential that you seek out only the best when it comes to valuation experts, The team at Vals NSW are specialised in all property related purposes for any valuation service you require to give you the best outcome for your investment. 

Having a clear understanding about using equity to create cash flow is important and we have broken down these steps for property investors to take the right step from the start of their investment. 

Firstly, there are multiple variables when it comes to real estate investment. These can include: the type of property you buy, property’s location and whether to manage the property yourself or not. All these variables play a role in the value of your investment as time passes. The main point that you need to consider is whether you want to rely on cash flow or equity to help grow your investment. 

What’s the difference between cash flow and equity?

To break it down further, cash is a liquid asset that can be transferred in and out of your investment. With a positive cash flow, you are able to transfer the surplus straight into another investment type, such as stock, or maybe you want to use the cash to increase your real estate portfolio. 

Where on the other hand, equity is tied to the property value itself, and you would need to sell off the holding in order to liquefy your assets. So, you might be asking yourself, would it be better to max out your down payment for the property or focus on getting the most cash flow each month?

Step 1: Assess the quality of your investment

a guide to investing in property

The acquisition period for any property investor is important as they need to be time-efficient when buying the properties and building their portfolio. In other words, the faster you buy a property the quicker you can start making a passive income to reach your goals. These goals could include a shorter working week, early retirement, or a new car

Keep in mind, you want the process to be fast; this doesn’t mean you should be buying any and every property you see. It’s important you do your research as the market is always changing. You need to make sure your property will be a good return on your investment. Don’t sacrifice quality when buying real estate. 

And by quality we don’t just mean the physical building and structure, you need to consider location, the tenants that are attracted to the area that you would need to rely on for a regular rental increase. Keep in mind, you will want the property you buy, to increase in its capital value from the get-go, and this will depend on the quality of: 

  • What you buy (property type)
  • Where you buy (location) 
  • Who you would rent to 

Step 2: Reconsider structural financing 

As a property investor, knowing you made the right decision in a certain property is important, so seeing the results of an increase in capital growth is the best feeling for any investor to have. When it comes to how you came to purchase the property, if this was through a loan, the way in which you structured the loan could mean you can’t access or even afford to access the cash, and this will result in the feeling of “nice to look at but useless”. 

Equity is a benefit to you in terms of the cash flow availability, but only if you are able to access it. If you don’t have a clear understanding of your finances and the various types of loan structures available, it’s important to do your research and seek professional advice. By having the right information and knowledge on your side this will give you an upper hand in the property market and have you on the right track to investing, and the right way to adding value. 

Step 3: Be patient with property investing

Having access to the equity of your property is key, and if you believe selling is the only way, you couldn’t be further from the truth. You not only lose your investment, but a lot of value will go to the agent as well as government taxes. And at the end of the day the amount left will be placed in a savings account earning a less than average interest amount. 

So, selling your property in order to access equity makes no sense. To reach its full potential and go through the ever-changing market cycle, investors need to come to terms that this is a long-term investment, and this can take an average of 20 years to allow the property time and space to grow. 

Step 4: Outline your goals 

be patient when investing in property

We all know when it comes to real estate it’s all a numbers game. As property investors, knowing the amount needed to create the life you want, having to determine how many properties you need, and the rent you require to create that income, will result in you achieving your investment goals

The value of your property has to be high for the equity to be able to act as cash flow, taking too much equity out of your properties can leave you vulnerable in the real estate industry.

Keep in mind no more than 2% should be taken out. Again, it’s all about having someone in your corner to get you on the right track to help with all the numbers and Informed decisions to make equity act as a positive cash flow. 

So to conclude…

Property investment is a great source of income when done properly! Whether you’re starting out or have decided to start investing in various other types of property, a property valuer is the person to turn to. No matter your requirements, Valuations Australia’s team of experts can find a valuation service suited to you. The valuers have over 20 years’ experience, and are highly qualified and specialised in all property types. 

Services range from residential, commercial, and industrial valuations so we guarantee you will receive a comprehensive report that will have clear details and data analysis of the subject property to help make any informed decisions for your next financial investment. 

Keep yourself updated with useful tips like these by getting registered on Soho. Not only are we finding you your dream home, but we’re also helping you save for it and decorate it! So don’t forget to swipe on your property matches so we can get you there faster.

James Clarke
James Clarke is a Senior Property Valuer with a specialized skill set tailored towards litigation and settlement valuations. James has over two decades of experience conducting property valuations for all purposes and uses this expertise to create career development programs for our team of valuers at Vals NSW. In addition to this, he has presented at various industry conferences and tertiary education events.
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