Published by
January 1, 2024

Equity vs. Cash Flow

Equity and cash flow are two key concepts in real estate investing that refer to different aspects of a property's financial performance.

Equity is the difference between a property's current market value and the outstanding mortgage or other liabilities secured by the property. In other words, equity is the portion of a property's value that the owner actually owns. For example, if a property is worth $500,000 and the owner owes $300,000 on the mortgage, the equity in the property is $200,000 ($500,000 - $300,000). Equity can be built up over time through mortgage payments, appreciation in property value, and improvements to the property.

Cash flow is the amount of money that a property generates after all expenses have been paid, including mortgage payments, property taxes, insurance, maintenance costs, and any other operating expenses. Cash flow is the income that the property produces on a regular basis. For example, if a rental property generates $15,000 a month in rent and the expenses are $10,000 per month, the cash flow would be $5,000 per month.

Equity and cash flow are both important aspects of real estate investing, but for different reasons. Equity represents long-term wealth building and the potential for capital appreciation, while cash flow represents regular income and the ability to cover expenses and generate profits on a regular basis. Successful real estate investors often aim to achieve a balance between building equity over time and generating positive cash flow in the short-term.

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