In the world of sports metaphors, there is a very popular cliché that states: “Defense wins championships.” The upshot of this statement is that a high-powered offense may be fun to watch, but it is a stout, consistent defense that creates the stability necessary to win the championship.
In the world of real estate investing, this metaphor continues to hold true. When a property appreciates in value, this is equivalent to the “offense” for a sports team. Continuing with the sports analogy, this is the equivalent of a football team with a monster pass offense. It is extremely fun to watch, and can put some very large numbers on the scoreboard. However, there will also be games when the offense comes out flat or turns the ball over to the other team, creating a large liability. Similarly, real estate appreciation possesses the potential to post big numbers on the scoreboard, but also holds a risk of creating big problems.
Enter the defense. In the world of real estate, defense is the income & cash flow from your investment. In the context of our sports metaphor, the defense protects your end zone so that the offense can get back onto the field and score. In the context of real estate investing, your cash flow acts as the stout defense that continues to pay the expenses of your property, while you are waiting for the appreciation (offense) to show up.
In practical terms, cash flow is much more reliable than appreciation. Investing in properties with strong income will allow you to pay the interest expense, taxes, maintenance, and property management fees without dipping into your pocket every month. Furthermore, inflation has the effect of increasing both your income and appreciation (which is tremendously beneficial if your property is financed with fixed rate debt.)
In the end, we have seen that defense really does win championships, and that prudent long-term investors should seek to build a stout ‘cash flow’ defense so that when the future inflation arrives, it will turbo charge the offense and run up the score on your financial future.
The Heroic Investing Team
Flickr / SD-Dirk