‘Cash flow is like oxygen: run out and it's all over very quickly.’ I've lost count of how many times John has told me that over the years — possibly a thousand or more!
Going right back to basics: how do we define ‘cash flow’? In simple terms, it's the difference between cash coming in (such as rent or dividends) and cash going out (such as management fees, rates, insurances and bank interest). Cash flow and growth are interrelated in any investment, almost like a fulcrum or seesaw.
You can't have growth without sacrificing cash flow and you can't have cash flow without sacrificing growth. This is true whether you're buying property or investing in shares (or any other type of investment). Your return typically comprises a periodic cash flow return (i.e. a dividend in shares, or rent in property) as well as any increase in the asset's value (i.e. the value of the shares or the property).
For shares, your cash flow typically comes from dividends. If the company makes a profit, it generally chooses to pay you part of that profit by way of a dividend. If you have cash in the bank, the bank will pay you a percentage return for the privilege of holding your money. The bank then uses the money as it sees fit, either re-investing it elsewhere or lending it out at a higher rate of return than you're being paid.
Your cash flow from property ...
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