CASH FLOW: Why you have been analyzing your deals all wrong.

Andrew Postell · 2023-05-29T12:38:26-07:00

This might be my most controversial post ever…that is, until you see what I have to say. And what I’m talking about is cash flow – and you’ve been lied to about it. Ok, maybe not LIED about it. But it has been GROSSLY exaggerated. I’ve seen the same articles you have. The same books. The same videos. “Just sit back and relax! Collect mailbox money!” That might be possible for someone with significant means but for the average real estate investor this isn’t realistic. Especially in this environment. Real estate is difficult, it is not a “get-rich-quick-scheme” but if you do participate in it then real estate will be one of the best investments you can make. As long as you have the right expectations. Cash flow is NOT the most important piece of the equation. And I’m going to show you why. First, some historical perspective. If you have been investing in the past 10 years the current environment is VERY foreign to you. But for those of us been doing this for a while, we’ve seen it before. And if you are “newer” then get used to this. This occurs every 8-12 years. If you learn from this one, you’ll be better prepared for the next one. This is where we make our money. Pre-Housing Crises (pre-2008) interest rates for investment properties were 6.5%-7%. Cashflow wasn’t even part of the discussion. Frankly, neither was the interest rate! Pre-9/11 rates were 7%-8% for investment properties. Everyone knew the score. If you wanted to be a full time investor then you flipped properties. That’s what you did. But if you kept a couple of properties a year, then in the long run you would be very wealthy. Only in the past few years has “cash flow” even been a strategy. But now that prices are so high, interest rates are high, insurance premiums have shot through the roof, etc. many investors are wondering how to make this work. I’ve had people tell me “I’m only buying a property if I cash flow $500 per month”. Ok….I guess I’ll see you in about 5 years? Meanwhile, the rest of us are becoming millionaires while you wait on the sidelines. And at no fault of their own – cashflow is what they were SOLD on. Here's what I want you to understand about “buy and hold” residential real estate: Let’s use a single family home with a property value of $300,000Let’s use an initial loan amount of $240,000Let’s use an interest rate of 7.25%And I’m going to give you $150 of cash flow per monthUse a 5% appreciation amount for your property Let’s see what happens after 5 years: After 5 years… $150 of cash flow per month = $9,000Your mortgage has been paid down to $227,000 = $13,000Your property is now worth $382,000 = $82,000 So that’s $9,000 of cash flow, $13,000 of principle buy down, and $82,000 of appreciation. We make money in 3 ways with “buy and hold” properties…and cash flow is the smallest piece! Will you cash flow in this environment currently? No, you will not. At least, I want that to be your expectation. Make your offer a little lower because of it. Also, don’t forget you will increase your rents in year 2, year 3, year 4, etc. So you WILL cashflow eventually but go into the property expecting not to cashflow now. And then you are still going to make $95,000 on a property. Remember Brandon Turner’s article on “How to Make $100,000 per year” – you can read it HERE. Don't forget about it. If you analyze properties on their "Year 1 Cash Flow" then you are going to miss the boat. Buyer's have all the power now. It's not your fault someone is asking too much for their property! Just adjust your numbers on your offer to account for the difference. Don't miss out on the opportunity that's in front of you.Thanks for reading!

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

3y

I agree a few things to consider. At what point does cash flow take precedence over appreciation? If appreciation is only 1% annually and cash flow $300/mo that make a difference?

Appreciation is locked and cannot be reinvested, if you get a HELOC you are still arbitraging it, paying interest on it and taxes so arbitraging is not as easy as it sounds.

Cash flow can increase income which provides more borrowing capacity and ability to reinvest that money.

Again, not disagreeing as cash flow pays bills and appreciation builds wealth, but you have more control over cash flow than appreciation and if appreciation goes negative for a few years it takes a while to recoup.

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7 Reply

Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

3y

And frankly, BP played a huge role in selling cash flow. The original owner Josh Dorkin pushed cash flow a lot, because he has seen what happens when you bank on appreciation and it goes the wrong way in the wake of 2008. And for a while this worked like magic, real estate was basically a preputium mobile throwing of money like an ATM and people quit their job and traveled the world. Remember the "what's your freedom number?" discussions?

Now we are back to RE investing is actually hard, takes a very long time and you need capital to get started. I would love to see BP's user data, as undoubtedly it will shrink over the next years as REI is slowly falling out of fashion as a get started easy thing!

11 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Questions...(before I prove you so very wrong):

1 - So it's OK to buy a property if it has negative CF?

2 - If that example property you mentioned had negative CF instead of positive, doesn't that take away from the gains in property value?

3 - So how do you figure in when property values go down, and they have,...sometimes (see the past few years...big time) ?

4 - WHEN, property values go down on a property that has positive CF, does the CF also go down?

One quick comment regarding your last paragraph.

What the $%&# are you talking about? Who ever said REI was easy? It doesn't take a long time, unless you don't understand the roles of CF and Equity...and, where is REI "falling out of fashion"?

4 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Joe Villeneuve thanks so much for your patience here. Certainly open to talking about all of these. Here's how I would answer the questions you have posed:

1 - So it's OK to buy a property if it has negative CF? - I have purchased properties that did not cash flow. Of COURSE the preference is to have them cash flow...but what if rates continue to increase? We make our money when we BUY properties. For those of us who are advanced, we usually are buying "off market" so we can adjust our buying numbers, I feel, a little better than someone buying from the MLS. So, adjust your offer accordingly. If you gave me $50 per month (representing a negative cash flow) and I have you $100,000 after 5 years....would you do it? Of course! But I have to go into the property knowing this.

2 - If that example property you mentioned had negative CF instead of positive, doesn't that take away from the gains in property value? - I calculate my properties with each segment separately. So, the "principle buy down" of the mortgage for example: the mortgage is still paid off the same even if my cash flow changes. If cashflow is AMAZINGLY high...my mortgage is still paid down at the same rate. Appreciation, principle buydown, and cashflow. Those are the 3 segments that I analyze when purchasing a property.

3 - So how do you figure in when property values go down, and they have,...sometimes (see the past few years...big time) ? - Yes, exactly. I would advocate that we don't stop buying properties in these markets. I have purchase real estate during 9/11, during the housing crises, and I am purchasing today. This is my 3rd "economic downturn" (or whatever "they" want to call it). Property values certainly fluctuate. Now, part of my personal strategy is to focus on long-term real estate that is below the median price point of that metro area. So, no high value properties. When times get tough, people downsize into the homes I own. Values have certainly gone down. And values have gone up. When they go down, I have to hold the properties longer. I just sold a property this year that I purchased in 2008...but that was always the intention of that property - buy and hold. And then one day sell it to buy two other properties.

4 - WHEN, property values go down on a property that has positive CF, does the CF also go down? - I have not experienced this. My rents have gone up even in difficult times. Frankly, I have increased rents this year MORE than other recent years and this year might be HARDER for a lot of people out there. But there is certainly a lot of competition of tenants in this space. There's probably several factors that go into something like this...like maybe the price point of my homes. During covid, not a single tenant missed a payment - probably because my property manager screened well. So, while that is my experience I would guide people that you still need to do ALL of the other steps properly too.

My last paragraph was about people analyzing a property on it not cash flowing for 1 year. If you analyze a property with only a 1 year outlook you will miss out on all the other years you will own it. Right now, a lot of people are stepping away from investing in real estate because they don't see the cash flow...I would state that those people are missing a lot of other benefits to owning real estate if that's all that they are comparing.

Hope all of that makes sense.

11 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Marcus Auerbach all sorts of things are "falling out of fashion" right now. That's what happens when the market contracts like it is. All that disposable income is gone. You should see some of the reports that banks are releasing about their account holders and how much they have eaten through their savings. Everyone has a different perspective of course but I am still acquiring properties. Even Warren Buffet says that he doesn't know how to time the market - he just buys on value.

I wonder what people will say in the year 2028...you think they will say, "I really wish I would have purchased a property 5 years ago" ?

5 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Chris Seveney thanks for responding here and thanks for your patience as I found time to respond.

The cash flow discussion is always a personal decision of course. Some people are not good with putting $50 away per month into a savings account. But if you gave me $50 per month and I gave you $80,000 after 5 years, would you do it? If your answer is yes, then you are ok with being negative $50 per month on the property I referenced above in the initial post.

Appreciation is locked for that 5 years but YOU BETTER BELIEVE I AM REINVESTING IT! Read that Brandon Turner article again. He doesn't say to take out a HELOC...nor to do a "cash out loan". He says to sell it.

And OF COURSE I want cash flow - I just don't want people saying "unless I cash flow I'm not buying real estate"...I mean, they can say whatever they want. But the rest of us will continue to build wealth by acquiring more real estate.

5 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Quote from @Andrew Postell:

@Joe Villeneuve thanks so much for your patience here. Certainly open to talking about all of these. Here's how I would answer the questions you have posed:

1 - So it's OK to buy a property if it has negative CF? - I have purchased properties that did not cash flow. Of COURSE the preference is to have them cash flow...but what if rates continue to increase? We make our money when we BUY properties. For those of us who are advanced, we usually are buying "off market" so we can adjust our buying numbers, I feel, a little better than someone buying from the MLS. So, adjust your offer accordingly. If you gave me $50 per month (representing a negative cash flow) and I have you $100,000 after 5 years....would you do it? Of course! But I have to go into the property knowing this.

2 - If that example property you mentioned had negative CF instead of positive, doesn't that take away from the gains in property value? - I calculate my properties with each segment separately. So, the "principle buy down" of the mortgage for example: the mortgage is still paid off the same even if my cash flow changes. If cashflow is AMAZINGLY high...my mortgage is still paid down at the same rate. Appreciation, principle buydown, and cashflow. Those are the 3 segments that I analyze when purchasing a property.

3 - So how do you figure in when property values go down, and they have,...sometimes (see the past few years...big time) ? - Yes, exactly. I would advocate that we don't stop buying properties in these markets. I have purchase real estate during 9/11, during the housing crises, and I am purchasing today. This is my 3rd "economic downturn" (or whatever "they" want to call it). Property values certainly fluctuate. Now, part of my personal strategy is to focus on long-term real estate that is below the median price point of that metro area. So, no high value properties. When times get tough, people downsize into the homes I own. Values have certainly gone down. And values have gone up. When they go down, I have to hold the properties longer. I just sold a property this year that I purchased in 2008...but that was always the intention of that property - buy and hold. And then one day sell it to buy two other properties.

4 - WHEN, property values go down on a property that has positive CF, does the CF also go down? - I have not experienced this. My rents have gone up even in difficult times. Frankly, I have increased rents this year MORE than other recent years and this year might be HARDER for a lot of people out there. But there is certainly a lot of competition of tenants in this space. There's probably several factors that go into something like this...like maybe the price point of my homes. During covid, not a single tenant missed a payment - probably because my property manager screened well. So, while that is my experience I would guide people that you still need to do ALL of the other steps properly too.

My last paragraph was about people analyzing a property on it not cash flowing for 1 year. If you analyze a property with only a 1 year outlook you will miss out on all the other years you will own it. Right now, a lot of people are stepping away from investing in real estate because they don't see the cash flow...I would state that those people are missing a lot of other benefits to owning real estate if that's all that they are comparing.

Hope all of that makes sense.

1 -Rationalization. The role of cash flow, which is why it must be positive, is to recover your cost. The cost of a property to an investor is only the cash they put into it. That means, if you have negative CF, you are adding unnecessarily to the cost of the property.

2 - Another rationalization. Yes, negative CF takes away from any other gains in the property. Worse, CF is tangible, equity gains are not...until they are converted to cash. Paydown is a bonus that takes too long to be of any real value (term of the mortgage). The only way to speed up the paydown, is to add cash to it every year. All that does is add to your cost. Equity paydown is free since it comes from the rent (tenant's money). Equity gained from appreciation is also free, so don't pay for it.

3 - Speculating isn't investing, it's guessing with experience...and hope. Hope isn't, or shouldn't be, a strategy.

4 - My question was rhetorical. Of course rents down go down as property values go down, and as you stated, more often they go up...and cash flow goes up with it since the biggest expense, the mortgage, doesn't change. However, banking on rents going up to fix a negative CF property is foolish. Rents won't increase enough, fast enough, to counter the effects of negative CF. Also, $50/month cash flow is just negative CF waiting to happen.

The role of CF is to recover your cost, the cash you put into the property. once this takes place, the property is basically free to you from that point forward, as long as you keep a positive CF. This turns the equity build up (from appreciation) as the true profit gained from these investments and must be accessed (i.e. sell the property) as soon as the appreciated equity equals the paid for equity (down payment). This must also be after the cash flow has paid back the down payment. This is when the property is at it's maximum value, and starts to lose value from this point forward.

Keeping a property until the property has 100% equity is losing money. The closer you get to 100% equity, the faster you are losing it. REI isn't about buying properties, it's about buying money,...or at least buying access to free money. That free money must be moved forward to reach it's full potential. Equity is dead money, and is actually what you are paying for a property

2 Reply

Jeremy Horton

Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes

3y

Lots to unpack here...

In my experience the cash flow is essentially a marketing tactic to push people thinking they will retire within a few short years due to this "mailbox money". I'm sure there are some locations where this is possible but for most of us you'll find out you need quite a few properties to replace your W2 and still be making enough to continually invest in RE at a high rate. This goes for my lifestyle anyway. I mean there is a huge fake push from social media influencers talking about how they quit their W2 and cashflow $1000+ on every property they buy, this is, for 99% of them, FAKE NEWS. They are selling a dream, in my opinion.

It's funny too because once you dig into these "gurus" they either have partnerships1 where they don't actually own much themselves, parents/grandparents that were involved in real estate and got them started, don't cashflow any where near to what they claim...the list goes on.

The other thing here is you need a base of properties that do cashflow well. The business is simply unsustainable without cashflow. Without cashflow you can't recoup your initial investment - this is a problem. So you need cashflow...now the question is how much? I think that is where many people vary. Certainly enough to cover repairs/maintenance, vacancy, CapEx etc...I don't believe you can build a portfolio of properties that break even...

Equity is nice and builds wealth but this money is hardly usable - on top of that it costs you to use this money. And it takes years to build equity. Once you build high equity...now what? Your ROI on equity is low and it's time to move that money. You can't actually use this money for anything until you sell, then your either hit with capital gains or forced to put it back into another property. So I'd argue that the end goal is to move all this equity into a property that does cashflow and retire.

I've adapted my strategy to buying in mostly B areas. The cashflow is lower sure but the stability of the property is SO much better. The properties actually appreciate - there is a desire to live there due to the location (great schools, low crime etc). And you get all the unseen benefits - appreciation, tax deductions, cashflow varies but it'll still be a 6-8% CoC ROI (in this market).

That being said I still have a chunk of money in my brokerage accounts and a full 401k. A lot of that has done 20%+ this year. I can honestly say I'm glad I left it where it was and didn't have it tied up in a property. One of the accounts I use for RE investing started with about 200k, it's up 40k in 7 months. Think any of my houses appreciated like that? Not even close. I've bought 2 houses this year but that'll be it for the year unless I get a steal

6 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Jeremy Horton your story sounds REALLY familiar. I started my real estate journey with a $30k-$50k houses. That's all the money I had! Over the years I have upgraded and upgraded and scratched and clawed...and then one day I met some other real estate investors that were doing what I was doing but a little better (actually a lot better) and I learned to get better. 20+ years later, I STILL only buy 1 or 2 properties a year. I also don't own any $30k houses any more. In my market a 3BR 2BA home that is below the median price of the area is what we/I target. That's where the working class of people go to rent and they compete and pay to rent. I am much more effective with two $250,000 homes than someone in my market with one $500k home. All of this is really hard - but it's worth it. And yes, I do sell my properties and upgrade them after about 5 years...sometimes 7 years. There's lots of ways to skin this for sure but it does sound like you have a consistent strategy that is now realistic based on results. Stay with it. Look forward to seeing where you will be in 5 years.

3 Reply

Travis Andres

Investor · Los Angeles · Member since 2022 · 107 posts · 48 votes

3y

First, thank you ALL for this extremely valuable insight! As someone looking to get started, this is a tremendous help to see what's actually going on out there and how to start navigating it all.

Question...only speaking to the cash flow portion, are any of you doing STR in your properties to generate the higher CF? (or is that no longer viable either?)

@Andrew Postell we're actually considering Fort Worth/surrounding area, so will definitely be reaching out just as soon as we get some of our ducks in a row.

Thanks!

0 Reply

Andrea Lane

Member since 2021 · 116 posts · 79 votes

3y

Great information. I have been in the business for more than 30 years - things go up and things go down. However, I think this market is not a normal swing as in the past. Usually, rates go up & prices go down. I don't see a big dip in prices. If the recession continues maybe - but otherwise current owners have rates you will probably never see again, so why sell? That creates a greater shortage of inventory and no reason for a price decrease.

As a buy & hold person, I never buy without cash flow (at least $1.00). I purchased on appreciation in the past and it did not work out as well as it should have. Real estate as a landlord is a long slow process. I know if I do my numbers right and cash flows from day 1, I will have a property that will produce year after year. My cash flow is after ALL expenses including property management and reserves. If the property needs rehab or is not rented, I research the current market to make a decision.

Travis, if you want to do STR a few things to consider, will the property cash flow as a full-term rental? If the laws change, are there too many air B&Bs in the area to support full-time rentals? STR rents are great as long as you can ensure a consistent supply of renters. You should always have a backup plan

2 Reply

Travis Andres

Investor · Los Angeles · Member since 2022 · 107 posts · 48 votes

3y

Quote from @Andrea Lane:

Great information. I have been in the business for more than 30 years - things go up and things go down. However, I think this market is not a normal swing as in the past. Usually, rates go up & prices go down. I don't see a big dip in prices. If the recession continues maybe - but otherwise current owners have rates you will probably never see again, so why sell? That creates a greater shortage of inventory and no reason for a price decrease.

As a buy & hold person, I never buy without cash flow (at least $1.00). I purchased on appreciation in the past and it did not work out as well as it should have. Real estate as a landlord is a long slow process. I know if I do my numbers right and cash flows from day 1, I will have a property that will produce year after year. My cash flow is after ALL expenses including property management and reserves. If the property needs rehab or is not rented, I research the current market to make a decision.

Travis, if you want to do STR a few things to consider, will the property cash flow as a full-term rental? If the laws change, are there too many air B&Bs in the area to support full-time rentals? STR rents are great as long as you can ensure a consistent supply of renters. You should always have a backup plan

Thanks for this Andrea!
yes, I’ve already realized the deal will still have to cash flow as a LTR (expecting maybe only $100-$200/mo) and that would definitely be the back up plan if the STR market doesn’t support.

0 Reply

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Man, every single one of my personal residences I've bought in my lifetime would make horrible, horrible on paper investments at the time I bought them. Within 2 years, latest 3, all of them would've been incredible investments. What does that tell me?

You're looking at Year 0 numbers if you're strictly looking at cash flow. Go grab your $200/mo, $2400 annual and wipe it away with a new water heater. Buy in good areas, favorable landlord laws, population growth. Don't buy too OTM, but a little break-even ish in year 1,2 is fine if the area is growing and growing rapidly.

My Miami condo for my family, and for my parents, I bought would've been about $1,000 OTM in a rent to mortgage rate had I needed to do that. By year 2-3, both were $1,000 ITM. ****, I could've rented out just October-March and made my entire 1 year mortgage payments back. My Austin residence would rent probably $400-$500/mo out of the money day 1, now it'd rent probably $500/mo ITM. That's 4 years. By year 2, I would've been a bit in the money. My original Boston residence would've been probably $200/mo out of the money, by the time I had to move, I had to rent it for a bit and was making $800/mo on it. That was within 2 years.

Buy in a good areas, quit chasing pennies and costing yourself dollars. People are being blinded by this previous 12-15 year of low interest rates; houses were never intrinsic. That is a fallacy created by the historically low rates, you buy things on the come up through speculation, you add value(ROI items on a house reno), and you mitigate risk(legal, insurance). This whole get levered, and preserved cash against it bogus. Scaling is great if you have the means to, but for the average joe you should go for quality over quantity. Not scale to 15 houses, go grab 5 better one's.

I've said this before-- no one I know, besides me, that is investing well over $30, 40, 50MM in real estate does this scale to die, grab affordable housing, chase $100/mo in cash flow ******** or even leverage. I'm a bit leveraged in my ways of doing. They buy in great areas, and buy a lot of it. They don't scatter around **** and hope to find gold, they find a trend and then pounce it. No diversification nonsense, no CoC or ROI calculation to determine. It's simple-- is the parcel of land in a good area, is the cost to rebuild around where the current house is(if it's under, take it), how much up to date is the property(how much do I need to put in day 1), are there state laws that'll impact me and if so how-- then you just swallow areas whole. If you have less means, don't just look at the numbers. Prioritize quality and risk mitigation more than ever, you will depend on this a lot more than the ones with more means.

4 Reply

Lucia Rushton

Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes

3y

@Andrew Postell GREAT post !

1 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Travis Andres thanks so much! For me, I have not been personally involved in STR as of yet. The main reason - it's more money out of pocket. I have to furnish the property. That takes away money for me to buy more homes. Now, I see the same tik tock/youtube videos you do...insane profit from Short Term Rentals...but the properties I have seen the real numbers on haven't quite made it realistic for me.

The secondary reason - this is not a "tried and true" technique yet. Meaning, the STR method hasn't been tested yet. Have you seen the headlines across the country on this? Cities from NYC all the way to Palm Springs have limited or completely outlawed STR properties. I mean, how does Palm Springs limit their STR owners? That's the main source of people staying there! But even Dallas and Fort Worth have both nearly eradicated the Short Term Rental market here. Something to think about.

Yes, the long term buy and hold method is quite boring...but it works. Anyway, hope some of that helps.

0 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Andrea Lane awesome feedback. Everyone is different. If you have been doing this for a while, you probably have good contacts and good relationships and maybe even come across good deals from time to time on your own. A well established, full time investor should absolutely stick to their methods. Great to hear from you!

0 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Lucia Rushton thanks so much!

1 Reply

Travis Andres

Investor · Los Angeles · Member since 2022 · 107 posts · 48 votes

3y

Quote from @Andrew Postell:

@Travis Andres thanks so much! For me, I have not been personally involved in STR as of yet. The main reason - it's more money out of pocket. I have to furnish the property. That takes away money for me to buy more homes. Now, I see the same tik tock/youtube videos you do...insane profit from Short Term Rentals...but the properties I have seen the real numbers on haven't quite made it realistic for me.

The secondary reason - this is not a "tried and true" technique yet. Meaning, the STR method hasn't been tested yet. Have you seen the headlines across the country on this? Cities from NYC all the way to Palm Springs have limited or completely outlawed STR properties. I mean, how does Palm Springs limit their STR owners? That's the main source of people staying there! But even Dallas and Fort Worth have both nearly eradicated the Short Term Rental market here. Something to think about.

Yes, the long term buy and hold method is quite boring...but it works. Anyway, hope some of that helps.

Thanks for this Andrew.

Yeah, I've been seeing the headlines but have a feeling that's more the media looking for some drama to write on...I've been doing my own research, I've heard directly from several STR investors here on BP (who most have said they aren't seeing any of these massive drops that the media is reporting, only that they're seeing more last-minute bookings, where before they were booked out 30 days+...who knows if that's just the sign of less bookings coming??)

Also though, I've reached out to John Bianchi (The AirBnB Data Guy and also the head of data for Techvestor) and I got his new analytics tool that he developed so that I can pull up actual STR data for any market. Fort Worth for example is currently showing 113 3-bedroom rentals with a median annual income of $49,425

So not sure about what you mentioned the DWF markets stopping Airbnb's, but yes Palm Springs is crazy (I'm in Los Angeles and was shocked when they started banning them) BUT, the surrounding towns allow STR evidently, it all depends on each of the HOA's. And since that whole area has been developed into almost one large sprawling city, it doesn't really matter to visitors if they're staying in Palm Springs proper, or one of the other towns (since usually too hot to walk anywhere anyway, everyone just drives wherever they're going)

I'm hoping to BRRRR then STR, so we'll see...if STR doesn't pan out we'll LTR

0 Reply

Johnathan Le

New to Real Estate · Northern Virginia · Member since 2020 · 14 posts · 4 votes

3y

Thanks for directing me to this post yesterday. It’s really helpful!

What is your threshold for negative cash flow?

Also, when you say $150 cash flow, are you taking into consideration cap ex and repairs or is that just PITI?

0 Reply

Andrew PostellPro Member

OP

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

3y

@Johnathan Le ah, so all of those "examples" above were just for example purposes. I 100%, absolutely, without fail, use cap ex/maintenance/vacancy/etc. in my calculations of cash flow. My cash flow does not occur until AFTER those are subtracted.

The way that I analyze properties is that does the property fit the mold of are they Below the Median Price Point, a 3Bedroom/2Bath, and in my geographical area. That's it. Because over time, those properties produce better that properties outside of those metrics. In my market, two $250,000 homes will SIGNIFICANTLY outpace one $500,000 home. Because that's where the majority of working class families reside in my market. And working class families usually rent. And there's a TON of working class people that cannot "afford" a home...which means they compete for my properties and pay more rent. That's why lower valued homes outpace higher valued homes. When things get dicey in the economy, people in higher valued homes will DOWNSIZE to lower valued homes. Even in tumultuous times the lower valued homes perform better. Now, I started out on $30,000 homes. Those will rent at a higher rate...but your tenant class is a little different. Also, the maintenance expense ratio is a little higher too (replacing a door is the same cost whether the home is worth $30k or $300k). You don't have to go all the way down to the bottom...but plenty of people do that exact strategy. But in most markets, investing below that median price point is usually a good place to be.

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Rose JonesPro Member

Member since 2019 · 57 posts · 18 votes

3y

Quote from @V.G Jason:

Man, every single one of my personal residences I've bought in my lifetime would make horrible, horrible on paper investments at the time I bought them. Within 2 years, latest 3, all of them would've been incredible investments. What does that tell me?

You're looking at Year 0 numbers if you're strictly looking at cash flow. Go grab your $200/mo, $2400 annual and wipe it away with a new water heater. Buy in good areas, favorable landlord laws, population growth. Don't buy too OTM, but a little break-even ish in year 1,2 is fine if the area is growing and growing rapidly.

My Miami condo for my family, and for my parents, I bought would've been about $1,000 OTM in a rent to mortgage rate had I needed to do that. By year 2-3, both were $1,000 ITM. ****, I could've rented out just October-March and made my entire 1 year mortgage payments back. My Austin residence would rent probably $400-$500/mo out of the money day 1, now it'd rent probably $500/mo ITM. That's 4 years. By year 2, I would've been a bit in the money. My original Boston residence would've been probably $200/mo out of the money, by the time I had to move, I had to rent it for a bit and was making $800/mo on it. That was within 2 years.

Buy in a good areas, quit chasing pennies and costing yourself dollars. People are being blinded by this previous 12-15 year of low interest rates; houses were never intrinsic. That is a fallacy created by the historically low rates, you buy things on the come up through speculation, you add value(ROI items on a house reno), and you mitigate risk(legal, insurance). This whole get levered, and preserved cash against it bogus. Scaling is great if you have the means to, but for the average joe you should go for quality over quantity. Not scale to 15 houses, go grab 5 better one's.

I've said this before-- no one I know, besides me, that is investing well over $30, 40, 50MM in real estate does this scale to die, grab affordable housing, chase $100/mo in cash flow ******** or even leverage. I'm a bit leveraged in my ways of doing. They buy in great areas, and buy a lot of it. They don't scatter around **** and hope to find gold, they find a trend and then pounce it. No diversification nonsense, no CoC or ROI calculation to determine. It's simple-- is the parcel of land in a good area, is the cost to rebuild around where the current house is(if it's under, take it), how much up to date is the property(how much do I need to put in day 1), are there state laws that'll impact me and if so how-- then you just swallow areas whole. If you have less means, don't just look at the numbers. Prioritize quality and risk mitigation more than ever, you will depend on this a lot more than the ones with more means.

I am really trying to familiarize myself with the best areas that are landlord friendly, with modest initial buy- ins before I crunch any numbers. That is why I have decided not to be a landlord in New York or California, which might be decent to flip in.

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Atul Mohlajee

Oak Park, IL · Member since 2014 · 285 posts · 114 votes

3y

I have 25 tenants in 12 properties total. I just reached a cash flow of $10000 basically because half of my mortgages are paid off. That is reason for good cashflow. Otherwise Chicago has high taxes, insurance is high, repair costs are high, vacancies etc. For sure shot cash flow and keeping risk low, try to pay off some mortgages. That is what keeps me calm and low risk.

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Dave KushPro Member

Frankfort, IL · Member since 2022 · 204 posts · 133 votes

3y

Thank you. This is super helpful.

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Quote from @Atul Mohlajee:

I have 25 tenants in 12 properties total. I just reached a cash flow of $10000 basically because half of my mortgages are paid off. That is reason for good cashflow. Otherwise Chicago has high taxes, insurance is high, repair costs are high, vacancies etc. For sure shot cash flow and keeping risk low, try to pay off some mortgages. That is what keeps me calm and low risk.

What is the total cash you have put into these deals (don't forget anything), and how many years have you been at 10k/m?

0 Reply

Jonathan KlemmBusiness Member

Moderator

Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes

3y

Thank you for sharing the post @Andrew Postell!

I completely agree that cash flow is heavily scrutinized, espeically here on BP...but in my opinion, that's because the majority of newer investors need to build their cash flow to leave their current jobs.

So while it makes sense to invest for the long term to build generation wealth the short term for the average newer investor on BiggerPockets is going to naturally focus on cash flow in hopes of covering their W-2 income.

I think the main question to always ask is, what's your why? Then figure out which strategy fits that why best.

Chicago is a great place to invest because there are very clear cash flow markets, specific appreciation markets, and a mix of both in some neighborhoods.

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CASH FLOW: Why you have been analyzing your deals all wrong.

CASH FLOW: Why you have been analyzing your deals all wrong.

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