Ever seen this plant before? It’s rhubarb. We’ve got to think of a better name for this plant. If you aren’t from the north, you probably have never heard of it. Rhubarb, shockingly, is the best food you’ve never heard of. It looks a little like pink celery but has a tangy flavor unlike anything else. It is used like a fruit and will make the best pie you’ve ever tasted. But, sadly, this is not a food blog, and I won’t give you my recipe at the end of a drawn out story of the first time I tried it or anything. Though, I suppose would send you my recipe, if you email me to ask for it.
Alas, this is a real estate blog, and we need to talk about equity. And why it is so important. I’ve talked about the benefits of equity over cash flow before. Read that post first if you haven’t done so.
Equity and Rhubarb
Equity and rhubarb have more in common than you think. Once you’ve tried rhubarb pie, you will realize why you need more. But you can’t just buy the stuff at most stores. You have to grow it yourself. The roots of the plant are called rhizomes but I’ll just call them roots here. To grow rhubarb, you need to get a cutting with root from a friendly neighbor and plant it. It takes work to dig the hole right. Then, you must water it. The first few years you spend watering it and marveling at it get bigger. Don’t harvest much yet, if at all. It’ll stunt the growth. After the third to fifth year, you start getting more rhubarb than you know what to do with and you are suddenly the neighbor who gives out rhubarb to anyone who will take it. It’s amazing, but it takes a long time and a lot of work to get there.
Interestingly, buying an investment property is similar. If you buy it for a low price, you might start getting some money back, but your mortgage and expenses as you fix the place up will eat into that. You’ll get very little in the first few years. Start taking cash flow out now and you won’t have money to do the necessary rehab, stunting the rent growth for many years in the future. If you just wait, you’ll gain huge dividends, much faster than you would have otherwise.
I will repeat: taking out cash flow hurts your investment’s growth. Only when it is fully matured, should you take the benefits out as cash flow. At that point, you’ll have more than you know what to do with.
