Don’t be scared. The real estate business is built on negative cash flow.

But what about Buffett’s first rule? Never lose money!

In my last post, we talked about the difference between cash flow and profit. This post expands on that difference. In fact, to make a profit, you have to be able to manage a business where negative cash flow is pretty much a given. I’ve even discussed situations where you may want to embrace negative cash flow on a rental to reap the benefits of long-term profitability.

So long as you are actively renovating properties, you will experience months of negative cash flow interrupted by brief floods of profits taken. Renovating properties requires you to spend money over time. Even if you have a few rentals, the positive cash flow they generate will not offset the money you spend on renovations.

You see the same thing with rentals, even if you do have more positive months. When you buy a new property, you can expect for it to generate negative cash flow—possibly enough to overcome the positive numbers from your other units—for at least the month of purchase. And if you buy it right, you’ll have to put something into getting it ready to rent. Then there’s ongoing maintenance and capital replacement (think water heaters and ACs). And finally, there’s periodic vacancy.

I only know of two ways around the inevitability of negative cash flow: Continue reading →

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