The eternal fight between cash flow and equity continues. You already know which one I think is best. But it isn’t always the best. It depends on the timing.
For high-performers, we don’t need any additional income. That would be nice, but not necessary. Every additional dollar is taxed higher. As I’ve said before, you want to defer that tax to retirement, when your income is lower, and you’ll be taxed lower. But it’s different at different stages of your investment career.
Just Starting Out
This is the time to take risks and get a good foundation to your portfolio. Things will start out slowly and you’ll probably have some setbacks. At this time, your focus should be on building equity as fast as you can. High performers want to get loans that make the property just above cash flow neutral. They can pay out of pocket any unexpected capital expenditures. Low performers will want to have higher cash flow and be saving up a big cap ex account. That will stunt their equity growth, but it at least gets them started.
Mid-Career
At this point, you should have a nice set of properties owned and have built a lot of equity. Some of them can be used to buy new properties, through refinancing or lines of credit. That will wipe out the equity you have in those properties, but think about total equity, not just one building’s equity. Over your whole portfolio, your equity increases when doing that. Keep on setting up loans so they are slightly above cash flow neutral.
Late-Career
At this point you probably won’t have a W2 job anymore. That lack of W2 income would have been a problem in your earlier years, but now, your portfolio helps you get loans secured. You won’t need very many of them because you will be consolidating. You’ll be selling off the under performers and using the proceeds to pay off remaining mortgages, which will maximize your equity, but now with the lack of mortgage, you’ll be maximizing cash flow. Now, you get the best of both worlds. That income will be taxed much lower than before, because your total income is less.
That’s what we are all striving for, so take the time now to get your finances in order and build the foundation of a great portfolio.
