High-Yield Real Estate Investments, Even with Negative Cash Flow

What Is Cash Flow?

Real estate cash flow is a financial indicator that measures the profitability of a real estate investment. It is calculated by subtracting all expenses (co-ownership charges, energy costs, taxes, mortgage payments, insurance, etc.) from rental income received (rent). It is essentially a measure of your savings effort.

A positive cash flow means that income exceeds expenses, leaving a financial surplus for the investor.

Conversely, a negative cash flow indicates that expenses exceed income, requiring additional financial input (or reserves) from the investor.

Why Positive Cash Flow Is Not Always the Ideal Solution

Many investors prioritize positive cash flow, thinking it equates to immediate profitability. However, this approach can be limiting. A real estate investment has two essential components: rental income and asset appreciation.

Rental income ensures short-term profitability, but it is often asset appreciation that generates substantial long-term gains. The value of a property in a major city, like Paris, tends to increase significantly over time, even if cash flow is initially negative (largely due to very high prices). On the other hand, in medium or small cities, like Roubaix, property prices are more affordable while maintaining reasonable rents. You can therefore achieve positive cash flow there.

Negative Cash Flow Can Be Highly Profitable... Really!

Profitability Calculation Example: Paris vs. Roubaix

To illustrate these concepts, let us compare two real estate investments: one in Paris and one in Roubaix, both with a budget of 150,000 euros.

Investment in Roubaix

• Purchase price: 150,000 euros for a 103 sqm property
• Monthly rent: 1,450 euros
• Mortgage: 20 years at 3.70% with a down payment covering notary fees (10,989 euros)
• Monthly cash flow: positive +202 euros

Investment in Paris

• Purchase price: 150,000 euros for an 18 sqm property
• Monthly rent: 833 euros
• Mortgage: 20 years at 3.70% with a down payment covering notary fees (10,989 euros)
• Monthly cash flow: negative -183 euros

At first glance, the Roubaix investment seems more attractive due to its positive cash flow. However, let us factor in asset appreciation over 20 years.

Asset Appreciation: The Decisive Factor

In Roubaix

• Property appreciation: Let us assume a 20,000 euro increase over 20 years
• Total gains: Positive cash flow of 48,480 euros (202 euros x 12 months x 20 years) + 20,000 euros = 68,480 euros

In Paris

• Property appreciation: Let us assume a doubling (value of 300,000 euros) or tripling (value of 450,000 euros)
• Total gains with 2x appreciation: 300,000 - 150,000 - 43,920 = 106,080 euros
• Total gains with 3x appreciation: 450,000 - 150,000 - 43,920 = 256,080 euros

Conclusion

The detailed analysis shows that even with negative cash flow, an investment in a major city like Paris can be much more profitable in the long term thanks to asset appreciation. Positive cash flow should therefore not be the sole criterion for evaluating a real estate investment's profitability. It is crucial to consider property appreciation over the long term to maximize your gains.

As an investor, it is essential to understand that every real estate project is unique. You should carefully evaluate all financial and asset parameters before making a decision. Do not limit yourself to cash flow alone, but consider all factors to optimize your real estate investments.

Investing in real estate is an art that requires a long-term vision and thorough analysis. Be strategic and think beyond immediate gains to ensure lasting and truly significant profitability.