Limited Cash Flow vs. Scalable Income
Here are the four core ways real estate makes money:
- Cash Flow – Consistent monthly income after expenses.
- Tax Savings – Legally keeping more of what you earn.
- Passive Appreciation – Your property naturally gains value over time.
- Active Appreciation – Increasing income & value via improvements.
Now, we’re going to get into how they work individually. And, maybe more importantly, how they work together.
Let’s start with the foundation…Cash Flow.
Starting out, I went to smaller towns to find deals because I knew I could buy a house for cheap, spend a few thousand dollars on improvements, look at the market comparables, and increase cash flow pretty quickly.
Back then it was all about a monthly check. I wasn’t focused on long-term appreciation.
For example, I bought a trailer for $26K and sold it 10-years-later for $36K. It only appreciated by $10,000, but it brought in $925 a month.
The rent I collected from this and 12 other properties is what enabled me to become a full-time investor.
After single-family homes, I stepped into multi-family, which included a 14-unit apartment building. There I increased cash flow by not only renovating but also furnishing so that I could rent to traveling workers and run mid-term rentals.
Throughout all of this, I learned sooooo much.
Like accounting for vacancy and maintenance. And having a contingency plan for unexpected costs, like if the furnace or the water heater goes out.
At the most basic level, real estate investing is just like any other business. You want to increase the income and decrease expenses.
One of the reasons I eventually stopped buying single-family rentals was because the available cash flow felt so limiting. You make money only when you have a tenant paying rent. One vacancy can wipe out an entire month.
Another reason is financing. When I was buying single-family homes, I could get financing for way cheaper than what is possible now because interest rates were lower.
With that in mind…in the current market…for me…commercial real estate just makes more sense.
When I shifted into commercial real estate, storage caught my attention immediately. Instead of depending on one renter, you could have hundreds.
The risk is spread out. And the income potential multiplies. You can add insurance, locks, boxes and moving supplies, mailboxes, and even vending machines.
This moves beyond increasing cash flow into scaling income.
And…because the value of the property itself goes up based on how much money the business makes...now we are exploring active appreciation. (Not to mention the increased opportunity for tax savings associated with owning a business.)
At this level the different ways real estate makes money really start to intertwine and compound. It’s exciting!
