{"id":616,"date":"2019-09-03T20:03:05","date_gmt":"2019-09-03T20:03:05","guid":{"rendered":"https:\/\/blog.stepstonetexas.com\/?p=616"},"modified":"2020-10-01T18:14:49","modified_gmt":"2020-10-01T18:14:49","slug":"cash-flow-is-not-always-king","status":"publish","type":"post","link":"https:\/\/blog.stepstonetexas.com\/?p=616","title":{"rendered":"Cash-Flow is Not Always King"},"content":{"rendered":"\n

It is common for real estate investors to think that profit is generated through cash-flow. We pay $1,000.00 per month for property and collect $1,500 per month in rent. Every month we are “making” $500.00.<\/p>\n\n\n\n

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While this is somewhat true, it’s not always where “profit” truly lies. This is particularly true in owner financed wraps.<\/p>\n\n\n\n

It is actually possible to be paying $1,000 per month, collected $1,000 per month and be reaping HUGE profits.<\/p>\n\n\n\n

Profit in a wrap is not equal to the cash-flow, but rather that net interest payment. Sure, there can be profit just in the difference in the two notes. For example, if I take over a note of $100,000.00 and give a new note to an end buyer for $150,000.00, I have immediately created $50,000.00 in profit (equity).<\/p>\n\n\n\n

But monthly <\/em>profit is simply the difference of interest collected and interest paid. In fact, that is 100% of the monthly profit. Always. Every time. It’s never more than that. It’s never than less than that. It is always, forever, equal to the net interest. Always. Did I pound that point home?<\/p>\n\n\n\n

As an example. If I pay $1,000.00 in principal and interest to an underlying lender, but collect $1,000.00 in principal and interest from the new buyer (now the new borrower), I have $0.00 per month in cash-flow. But I can still have monthly profits.<\/p>\n\n\n\n

If my $1,000.00 payment to the underlying lender breaks down such that $500 is applied to principal and $500 is interest, but the amount I collect is $900 in interest and $100.00 in principal, then my profit is $900.00-$500.00 (the net interest) or exactly $400.00.<\/p>\n\n\n\n

But I received $0.00! So how can that be true? Well think of the difference that was just created in equity. Remember, I owed $100,000.00. Now I owe $99,500.00. I was owed $150,000.00. Now I’m owed $149,900.00. Instead of $50,000.00 in equity, I now have $50,400.00 in equity.<\/p>\n\n\n\n

Another way to think about it is this: I have put $400.00 into a savings account and $0.00 into my pocket. Sometimes, there is cash-flow. So perhaps I pay $1,000.00 but collect $1,200.00. If my payment is $500.00 to interest and $500.00 to principal, and the payment I receive is $700.00 to interest and $500.00 to principal, I’m actually making<\/em> less money than in the first scenario, even though I’m collecting more! <\/em>That’s because there has been no change in the equity, although I get $200.00 cash.<\/p>\n\n\n\n

So when evaluating a possible Sub2 to Wrap scenario, it’s important to always look at net interest. While cash-flow seems like profit, it’s not always where the profit lies. Even worse, sometimes, your equity can go down<\/em> even as you cash-flow. Look at the PI payments, compare and make sure your deal generates a profit, <\/em>not just a cash-flow.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

It is common for real estate investors to think that profit is generated through cash-flow. We pay $1,000.00 per month for property and collect $1,500 per month in rent. Every month we are “making” $500.00. While this is somewhat true, it’s not always where “profit” truly lies. This is particularly true in owner financed wraps. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-616","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=\/wp\/v2\/posts\/616","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=616"}],"version-history":[{"count":2,"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=\/wp\/v2\/posts\/616\/revisions"}],"predecessor-version":[{"id":621,"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=\/wp\/v2\/posts\/616\/revisions\/621"}],"wp:attachment":[{"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=616"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=616"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.stepstonetexas.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=616"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}