Why getting into real estate primarily for cash flow is wrong - and even dangerous

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Why getting into real estate primarily for cash flow is wrong - and even dangerous

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

Hear me out.

Over the last years, more and more of the BP discussions circle around cash flow. As LTR was getting harder 2018-2020 STR became the new thing everyone started chasing. Until that started getting difficult. So now what?

The idea aspiring investors get mesmerized with is basically to start in real estate and somehow build a portfolio out of thin air. And gurus are happy to feed that dream. Basically, they suggest to buy a property with very little money, collect the cashflow, then refinance to pull money out of the property, buy more real estate for more cash flow and quit the W2 they hate.

The first flaw is that a lot of the books written before 2020 will tell you to analyze more deals until you find one that cashflows. The problem is that the market landscape has fundamentally shifted. Back then looking at more deals would eventually get you a "quality" deal, today it will get you a deal in the hood. And as you can read here on BP this is probably the number one recipe for financial failure. Best case, you learn a lot, survive financially and trade up. You certainly won't achieve any significant wealth in that asset class. The second flaw is the idea that you can refinance your way to wealth - that has always been very risky even with low interest rates.

It is called in-vesting for a reason. You are putting money in. Let me explain.

The goal of real estate investing is to allocate your capital in a low-risk investment that grows your net worth predictably over long periods of time - think at least decades if not longer! The superpower of real estate investing is equity growth: the asset appreciates, while inflation and loan payments erode the underlying debt until you own the asset free and clear and can leverage it again. When you run numbers in a BP calculator you can see quickly that equity gains DWARF cash flow. So, for anyone who wants to go into real estate primarily for cash flow, they have not yet understood the concept! 

Don't get me wrong:  cash flow is still an important factor, it keeps the lights on, it pays for repairs and upgrades. And eventually, it helps you buy more real estate (until when you start milking your portfolio to cover your living expenses).

If cash flow is what you want, buy a business. 

A business has an inverted financial profile: it is literally designed for cash flow. That's the main objective. And not just $200 per month per door (which has been the long-standing average, at least here in Milwaukee) Yes, you can also create equity with a business, if you are growing it to a size where it becomes a sellable asset, you replace yourself, hire a manager and a team of workers. But ask anyone who ever sold a business: it is not easy!! That's why many businesses just close instead of being sold.

Real estate investing provides a lot more creative angles than the stock market, but on a conceptual level, nobody would seriously attempt to replace their W2 income in a few years by investing a few thousand dollars in the stock market. In a way, STR is a hybrid because while real estate is part of it, you are really running a one-room hotel.

So if you are an aspiring real estate investor, the first question you should ask is where do I have a consistent source of free cash that I can use to invest? That can be excess income from your W2 job, or it can be a business you run on the side. Then you can take that cash and buy quality real estate, accumulate the cash flow and grow your portfolio-wide before you grow it deep - meaning paying off loans. 

The day you start siphoning cash flow out of your real estate portfolio, you are stifling future growth. So you will have to decide if your portfolio has grown enough to support your goals and dreams at that point. Otherwise, keep pushing!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
1y

The CF mistake REI make is they think you can accumulate CF properties starting from the beginning. You can't, and you shouldn't. Even if you could (and you can) find a lot of PCF deals out there, how do you buy them? It's not like you have an unlimited source of DP's available to you, and buying all cash is foolish. If you think you are accomplishing something just because an all cash deal is PCF, it's an illusion. All you are doing is playing catch up to your cost,...you cost being the cash you put into every deal. That's your cost. The more you put in, the more you have to recover before the PCF is actually a profit. That's one of the big reasons to leverage. You can spread your cash out, and each property then accumulates CF to recover the same cash you might have used on one all cash deal.

Buying for accumulating equity is also an illusion.  The equity is actually what you are paying for the property.  It's a form of cash that is locked up and useless to you.  Those that say it has value, I'll give you all of my sports trophies I've accumulated over the years.  I'll even through in my daughter's.  They are both the same value.

The power of the equity is the PV it buys.  When you initially buy a property, ad 20% DP, you are buying a property that's worth 5 times what you are paying for it.  As the equity grows, it's diluting the power of that equity since it grows on a 1 to 1 ratio to the PV growth.  Remember, that equity started out as a 5 to 1 ratio.

Here's my take on the roles of CF and equity, and why I say you must have both:

Role of CF - To accumulate within a property to equal the cash you put into it. As long as you have PCF, this really means you have a clear property since the tenant is paying for the rest.

Role of Equity - To grow from appreciation to a point where the growth is equal to the original equity, thus doubling it.

When both things occur (order doesn't matter), I sell.

Banking only on either CF or equity is a loss.  You have to have both, and to say you can't just means you are looking in the wrong markets, and/or using the wrong strategies.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    1y

    The CF mistake REI make is they think you can accumulate CF properties starting from the beginning. You can't, and you shouldn't. Even if you could (and you can) find a lot of PCF deals out there, how do you buy them? It's not like you have an unlimited source of DP's available to you, and buying all cash is foolish. If you think you are accomplishing something just because an all cash deal is PCF, it's an illusion. All you are doing is playing catch up to your cost,...you cost being the cash you put into every deal. That's your cost. The more you put in, the more you have to recover before the PCF is actually a profit. That's one of the big reasons to leverage. You can spread your cash out, and each property then accumulates CF to recover the same cash you might have used on one all cash deal.

    Buying for accumulating equity is also an illusion.  The equity is actually what you are paying for the property.  It's a form of cash that is locked up and useless to you.  Those that say it has value, I'll give you all of my sports trophies I've accumulated over the years.  I'll even through in my daughter's.  They are both the same value.

    The power of the equity is the PV it buys.  When you initially buy a property, ad 20% DP, you are buying a property that's worth 5 times what you are paying for it.  As the equity grows, it's diluting the power of that equity since it grows on a 1 to 1 ratio to the PV growth.  Remember, that equity started out as a 5 to 1 ratio.

    Here's my take on the roles of CF and equity, and why I say you must have both:

    Role of CF - To accumulate within a property to equal the cash you put into it. As long as you have PCF, this really means you have a clear property since the tenant is paying for the rest.

    Role of Equity - To grow from appreciation to a point where the growth is equal to the original equity, thus doubling it.

    When both things occur (order doesn't matter), I sell.

    Banking only on either CF or equity is a loss.  You have to have both, and to say you can't just means you are looking in the wrong markets, and/or using the wrong strategies.

    18Reply
  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y

    Totally agree with having both, that's IMO a balanced investment. But why would you sell a property that is performing well? Amongst other issues selling will cost you at least 6%. And then you have to find another one, 1031 etc. If the asset continues to perform well, why would you sell it, like.. ever?

    And to clarify, you are leaning heavey towards cash flow? If your trigger point is to accumulate CF to match your original cash outlay (buy+rehab). If you have a unit that cashflows $200 per month, $2400 per year it takes 10-30 years to get there depending on how much you originally spent. Whereas, if appreciation just follows inflation (no real gain) you reach your equity goal within 10 years, at the moment more like 3-5 years.

    In either case, it takes time. If a new investor wants to get started and use cash flow as a propellant to grow, it has to come from somewhere else and not from the first property they bought.

    4Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    1y
    Quote from @Marcus Auerbach:

    Totally agree with having both, that's IMO a balanced investment. But why would you sell a property that is performing well? Amongst other issues selling will cost you at least 6%. And then you have to find another one, 1031 etc. If the asset continues to perform well, why would you sell it, like.. ever?

    And to clarify, you are leaning heavey towards cash flow? If your trigger point is to accumulate CF to match your original cash outlay (buy+rehab). If you have a unit that cashflows $200 per month, $2400 per year it takes 10-30 years to get there depending on how much you originally spent. Whereas, if appreciation just follows inflation (no real gain) you reach your equity goal within 10 years, at the moment more like 3-5 years.

    In either case, it takes time. If a new investor wants to get started and use cash flow as a propellant to grow, it has to come from somewhere else and not from the first property they bought.

    A property that is gaining equity isn't performing well, it's losing value.  Your assumption that gained equity defines a performing property is wrong.  It's actually the opposite.  Let's look at the numbers:
    1 - Property bought at $100k, paid 20% DP ($20k) cash = 20%/$20k equity.
    2 - Property gains $20k in value, and thus $20k in appreciation.  New PV is $120k, and new equity is $40k.  Sounds good, right?  Wrong.  You think you gained $40k in equity, but you really doubled the cost of the property from $20k to $40k.
    3 - With new values, you are paying $40k for a property worth $120k,...that's a 3 to 1 ratio.  You started with a 5 to 1 ratio.
    4 - Sell that property and that $40k in equity, the same equity, now goes back to a 5 to 1 ratio, and buys you a property worth $200k.  That's an $80k difference/loss.
    Notice I didn't mention the paydown, that's because I don't count it in the new equity.  This paydown is usually enough to cover the closing costs.

    In my experience, it takes between 3 to 7 years for the CF to payback my costs, and the equity to double.

    I never said this happens overnight.  Of course it takes time, but not that much time, and as you continue to move your equity forward as it grows, you are gaining an exponential return, not a linear one.
    5Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 826 posts · 810 votes
    1y

    You both make good points, but like everything else the points are not absolute. Well, I fully align with Marcus that the largest value of REI is equity growth via debt paydown and appreciation. Debt paydown in my markets is 1-2x FCF and appreciation is 3-5x FCF.

    I also agree with Joe in minimizing dead equity. However I favor refi as the means of equity stripping instead of selling. So many transaction inefficiencies with selling & buying... and I don't sell because I already have a stable asset that I know well. 

    10Reply
  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y

    @Joe Villeneuve - ah I see, basically you are optimizing for ROE - return on equity. Makes sense. You could also hold it and refinance to avoid selling and access the equity gains.

    3Reply
  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y
    Quote from @Allan C.:

    You both make good points, but like everything else the points are not absolute. Well, I fully align with Marcus that the largest value of REI is equity growth via debt paydown and appreciation. Debt paydown in my markets is 1-2x FCF and appreciation is 3-5x FCF.

    I also agree with Joe in minimizing dead equity. However I favor refi as the means of equity stripping instead of selling. So many transaction inefficiencies with selling & buying... and I don't sell because I already have a stable asset that I know well. 


    Yes, it takes a while to stabilize an asset. And frankly we tend to over-improve a little bit, because I don't want to touch a house again in the next decade or two. For example, we replace marginal roofs, rip out all the old galvanized plumbing because it saves me a lot over the long run. Wouldn't do that for 3-7 years.

    I understand what Joe is saying, but it's a little beside my point I want to make to new investors: short-term cash flow to replace W2 with little capital is not a viable strategy. 

    If cash flow is what you are after, set up a coffee trailer, wash houses, sell digital assets, launch a Shopify store, set up ATMs, buy a title company, coin laundry, a party rental business a car body shop etc.. and then invest the cash flow in real estate!

    9Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    1y
    Quote from @Marcus Auerbach:

    @Joe Villeneuve - ah I see, basically you are optimizing for ROE - return on equity. Makes sense. You could also hold it and refinance to avoid selling and access the equity gains.

    Not the same. A refi only moves part of the equity forward and usually produces a higher mortgage payment because the principal is larger, so the cash flow goes down too
    1Reply
  • Paul Novak
    Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes
    1y

    Marcus I think this was a great post.  I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow.  I have actually taking the unpopular stance of the exact opposite.  I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals.  Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum.  We have put down 20 - 40% on some properties to achieve this goal.  Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.  

    11Reply
  • Gernide J Antoine
    Property Manager · FL · Member since 2025 · 33 posts · 12 votes
    1y

    Hi great covo just by reading I'm on Marcus opinion cause it true don't put your basket into one investment me and my spouse own 2 ATM machine and also ice machine and place them in store and shopping plaza so now After buying our home through personal W2 we now want to invest in Real estate, wholesale and BRRR.

    3Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    1y

    Hey @Marcus Auerbach and @Joe Villeneuve you both have great points.

    In my situation, I am in a market that has appreciated out of positive cash flow for the average investor. The average house cost in Arizona is somewhere around 400k and rent on a house at that price point is about $2300. With rates where they are right now, Once the loan gets higher than about 250k, the property stops cash flowing. 

    So in order to continue to invest, I buy properties in a couple of cities on the outskirts such as Florence, Coolidge, and Casa Grande where the properties are below the median price point. And I also buy a few in Mesa and Apache Junction. Those are basically the areas where I buy and I buy at a discount through wholesalers. 

    My strategy is to buy a discounted property, hold that property for ideally about 3 years but sometimes up to around 7. My quickest equity growth occurs by buying the property below market value and forcing equity usually through improvements. Then I will sell and usually use a 1031 exchange to trade up.

    You guys mentioned the transaction costs which can be around 6% or even more if your in a buyer's market and have a buyer that is particular and wants a ton of BINSR items taken care of before the sale. Those transaction costs can annoyingly reduce your net gain on the deal. 

    My strategy to reduce the sales costs and maximize the investment in a shorter time frame is using the lease option model.

    Since I have deal flow from so many wholesalers in Arizona, I will buy a property well under market value and then fix up anything that would be a deterrent for getting a tenant buyer into the house. If the pluming is working and there are no leaks in the roof then I don't replace them. I only replace things that would make the appraised value come in at lower than my estimated value or that are likely going to stop working or cause an issue within the next 3-5 years. 

    Also, with a lease option I usually collect a higher than average rent. About $100 to $200 more than the comparable rents. This helps with creating some cash flow. Additionally, I collect a $3900 - $5900 option fee which helps lower the amount that I personally leave into the property and if there is a turn over and the tenant buyer doesn't exercise the option, and there needs to be repairs made to turn the property over, I usually recoup the cost of those repairs with the next option fee of $3900 - $5900 from the next tenant buyer. 

    So for me, my model is to buy a discounted property, spend less on the rehab when I can, get it refinanced to get as much of my money out as possible, get a little bit higher than average rent, pass the repairs of all minor things onto the tenant buyer, help the tenant buyer qualify for a loan, contract to sell the property at around 10% higher than current market value within a 3 year period of time, pay very little in transaction costs, and then 1031 the gain into a new property or properties that I find from wholsalers that are priced below market value and just trade up and keep repeating the process.

    The cash flow helps offset vacancy and also pays my assistants to help manage my businesses. But when we don't have vacancy, cash flow great. But to be honest, it pails in comparison to the gain from the equity creation. 

    480-206-1209Podcast Guest on Show #287
    7Reply
  • Gregory SchwartzBusiness Member
    Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
    1y

    I always tell new investors—if you want to cash flow more, you have to work more. It’s like getting a second job. We self-manage, so in reality, most of my "cash flow" is just management expenses I pay myself.

    @Marcus Auerbach as you pointed out, managing an STR is a great real estate-related job that generates cash flow.

    The investment is the house. What you do with it—whether it's STR, flipping, wholesaling, or refinancing as part of a BRRRR—determines the cash flow. But in every case, new investors need to understand that this takes work. For a lot of people, they'd be better off putting in overtime at their primary job or getting a raise through continuing education rather than trying to run an STR business, or flip 3+ houses a year.

    [email protected]443-812-0357
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    5Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    1y

    @Gregory Schwartz I would have to disagree about the idea of just improving your skill rather than diversifying your skills set.  There are probably only a few jobs that improving a skills set at that job will pay you more than investing in real estate.  For business owner, I would agree with you. Investing in themselves and into their business will likely create a better return than investing in real estate until they have an exit or a stabilized business at the level that they want it.  Funneling profits into buying real estate from a high paying job or a business and learning the basics of how to do it profitably can create 10's of thousands and 100's of thousands of and even millions of dollars that would be hard to achieve through getting promotions at work. So I would say to continue to develop yourself at work and learn how to invest effectively on the side.

    480-206-1209Podcast Guest on Show #287
    3Reply
  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y
    Quote from @Shiloh Lundahl:

    Hey @Marcus Auerbach and @Joe Villeneuve you both have great points.

    In my situation, I am in a market that has appreciated out of positive cash flow for the average investor. The average house cost in Arizona is somewhere around 400k and rent on a house at that price point is about $2300. With rates where they are right now, Once the loan gets higher than about 250k, the property stops cash flowing. 

    So in order to continue to invest, I buy properties in a couple of cities on the outskirts such as Florence, Coolidge, and Casa Grande where the properties are below the median price point. And I also buy a few in Mesa and Apache Junction. Those are basically the areas where I buy and I buy at a discount through wholesalers. 

    My strategy is to buy a discounted property, hold that property for ideally about 3 years but sometimes up to around 7. My quickest equity growth occurs by buying the property below market value and forcing equity usually through improvements. Then I will sell and usually use a 1031 exchange to trade up.

    You guys mentioned the transaction costs which can be around 6% or even more if your in a buyer's market and have a buyer that is particular and wants a ton of BINSR items taken care of before the sale. Those transaction costs can annoyingly reduce your net gain on the deal. 

    My strategy to reduce the sales costs and maximize the investment in a shorter time frame is using the lease option model.

    Since I have deal flow from so many wholesalers in Arizona, I will buy a property well under market value and then fix up anything that would be a deterrent for getting a tenant buyer into the house. If the pluming is working and there are no leaks in the roof then I don't replace them. I only replace things that would make the appraised value come in at lower than my estimated value or that are likely going to stop working or cause an issue within the next 3-5 years. 

    Also, with a lease option I usually collect a higher than average rent. About $100 to $200 more than the comparable rents. This helps with creating some cash flow. Additionally, I collect a $3900 - $5900 option fee which helps lower the amount that I personally leave into the property and if there is a turn over and the tenant buyer doesn't exercise the option, and there needs to be repairs made to turn the property over, I usually recoup the cost of those repairs with the next option fee of $3900 - $5900 from the next tenant buyer. 

    So for me, my model is to buy a discounted property, spend less on the rehab when I can, get it refinanced to get as much of my money out as possible, get a little bit higher than average rent, pass the repairs of all minor things onto the tenant buyer, help the tenant buyer qualify for a loan, contract to sell the property at around 10% higher than current market value within a 3 year period of time, pay very little in transaction costs, and then 1031 the gain into a new property or properties that I find from wholsalers that are priced below market value and just trade up and keep repeating the process.

    The cash flow helps offset vacancy and also pays my assistants to help manage my businesses. But when we don't have vacancy, cash flow great. But to be honest, it pails in comparison to the gain from the equity creation. 


    Lease options are a great tool. I have not done one in ages, but they are a great alternative when it comes to liquidate SFRs and you have an open time frame. What I found is that more than half of the tenants don't execute the lease option and would rather stay and rent. Some investors will just not renew, keep the option money and find another tenant to do it again.

    You have clearly exceeded critical mass, you buy above median assets. That's perfect! The question that I am trying to answer for new investors is where do you generate the capital to buy real estate in the year 2025. 

    Starting by buying a cheap D-class rental and then hoping you somehow can leverage that into a portfolio will not work. You need an outside source of cash flow to fund the in-vesting.

    0Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    1y

    @Marcus Auerbach Yes. I agree with you 100%. D class properties don't usually produce cash flow in the long-term. And is it possible to build an awesome real estate portfolio starting out with no money? Yes it is possible, but it's similar to going straight from high school into the NBA. Does it happen? Yes. But rarely.

    480-206-1209Podcast Guest on Show #287
    1Reply
  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y
    Quote from @Paul Novak:

    Marcus I think this was a great post.  I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow.  I have actually taking the unpopular stance of the exact opposite.  I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals.  Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum.  We have put down 20 - 40% on some properties to achieve this goal.  Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.  


    Hi Paul! I think I am just south of you?  Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.

    And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)

    1Reply
  • Paul Novak
    Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes
    1y
    Quote from @Marcus Auerbach:
    Quote from @Paul Novak:

    Marcus I think this was a great post.  I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow.  I have actually taking the unpopular stance of the exact opposite.  I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals.  Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum.  We have put down 20 - 40% on some properties to achieve this goal.  Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.  


    Hi Paul! I think I am just south of you?  Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.

    And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)


    Marcus, you are just south. I invest in the Sheboygan area. I agree with your assessments. So much content I see about ways to put as little money down as possible or doing the BRRR method so you can purchase a property and then pull out all the equity so after it's rehabbed you can get all your capital back out. I am not trying to knock those approaches and obviously they have worked great for many people but I feel the market is different then it was in the past. Personally I am not finding deals that could support those strategies in my market today based on my current skills and available time. If I took that approach I would have negative cashflow which isn't a good sustainable business model. I am okay with limited cashflow while I'm in my prime W2 working years but not negative. My business still needs to sustain itself. In my opinion that leaves me with two options. Sit back and wait for the market conditions to flip to where those strategies would work for me, or adapt to the current market. Sitting on the sidelines for me isn't an option. Knowing I'll be holding onto these properties for the next 30 years plus I have no issues with my strategy. I also am not looking for cheep properties in bad locations that could turn a quick buck. I want properties that I am proud to own and if I was personally looking for a rental I would be willing to rent. Obviously that isn't a requirement for most to buy a property but it's something that's important to me. Because I purchase properties like that I feel we attract tenants that we can relate to which helps us on the property management side with communication and working through issues.

    5Reply
  • Taz Zettergren
    Real Estate Agent · Memphis, TN · Member since 2019 · 365 posts · 264 votes
    1y

    @Marcus Auerbach I couldn't agree with you more, great post! 

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    Excellent perspectives from different types of investors here.  I love the depth and breadth of the BP community!!

    There is one holy grail metric that encompasses and values every aspect of RE investing that hasn't been mentioned here specifically - the IRR (Internal Rate of Return)!!! It takes into account cash flow, leverage and amortization, depreciation and tax advantange, and appreciation.

    A property with great cash flow but minimal appreciation might not be the best return for money and effort.

    A property with negative cash flow and double digit appreciation can be a gold mine.

    A property with sucky cash flow and very high leverage could still be a great investment if the leverage is low interest because of amortization.

    The two biggest questions I challenge my clients to ask are not about performance (The IRR gives a definitive picture of that). They are

    1. If you're thinking to sell - why?  Maybe it's cash flow or trapped equity.  But maybe it's deferred cap ex looming, neighborhood or regional demographic changes or or or ......!

    2. What are your cash needs from your investing?  If you need access to cash to live on from your real estate investments this can impact your type of investing greatly.  If you don't then you can be more aggressive in minimizing equity and cash flow.

    What I've seen over the years is that this debate over style of investing has tended to mirror the life cycle stage of the investor. Youngish (new) investors many times need the cash flow because they are stretching themselves to jump in. Or they are being very very patient to let the amortization arm of the IRR work for them.

    As they gain experience, money and age, they tend to become more amenable to letting their equity drive their investments rather than keeping it to provide additional cash flow. much like @Shiloh Lundahl's model.  This is really where the 1031 exchange shows it's worth because it allows investors to not only get access to all of their equity like @Joe Villeneuve said, it gives you the additional access to the deferred tax and depreciation recapture that can let you lever many more times than by paying the tax and investing the rest.

    And as investors get older (like me I'm afraid to say) and more averse to risk and more focused on preservation of weatlth then cash flow once again becomes much more important.  I realize that my wife has been saying this for years (because she is much smarter than I).  But I aml finally becoming more tolerant of the dead equity that provides a buffer to keep my cash flow coming.

    Humans don't come in one shape and size.  Nor do RE investing styles!  Otherwise, it would be really boring.  But these folks commenting above represent some of the best of the best at using different styles!!!  And all here for all RE investors to use or not because of the open knowledge sharing style of Bigger Pockets.  

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  • Ethan Brackin
    Real Estate Agent · Chattanooga, TN · Member since 2024 · 13 posts · 8 votes
    1y
    Quote from @Paul Novak:
    Quote from @Marcus Auerbach:
    Quote from @Paul Novak:

    Marcus I think this was a great post.  I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow.  I have actually taking the unpopular stance of the exact opposite.  I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals.  Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum.  We have put down 20 - 40% on some properties to achieve this goal.  Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.  


    Hi Paul! I think I am just south of you?  Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.

    And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)


    Marcus, you are just south. I invest in the Sheboygan area. I agree with your assessments. So much content I see about ways to put as little money down as possible or doing the BRRR method so you can purchase a property and then pull out all the equity so after it's rehabbed you can get all your capital back out. I am not trying to knock those approaches and obviously they have worked great for many people but I feel the market is different then it was in the past. Personally I am not finding deals that could support those strategies in my market today based on my current skills and available time. If I took that approach I would have negative cashflow which isn't a good sustainable business model. I am okay with limited cashflow while I'm in my prime W2 working years but not negative. My business still needs to sustain itself. In my opinion that leaves me with two options. Sit back and wait for the market conditions to flip to where those strategies would work for me, or adapt to the current market. Sitting on the sidelines for me isn't an option. Knowing I'll be holding onto these properties for the next 30 years plus I have no issues with my strategy. I also am not looking for cheep properties in bad locations that could turn a quick buck. I want properties that I am proud to own and if I was personally looking for a rental I would be willing to rent. Obviously that isn't a requirement for most to buy a property but it's something that's important to me. Because I purchase properties like that I feel we attract tenants that we can relate to which helps us on the property management side with communication and working through issues.

    Why do you believe there is a higher likelihood of negative cash flow with BRRRR? Is it because the loan you assume after a cash-out refinance is more likely to be higher than your gross cash flow?

    0Reply
  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y
    Quote from @Paul Novak:
    Quote from @Marcus Auerbach:
    Quote from @Paul Novak:

    Marcus I think this was a great post.  I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow.  I have actually taking the unpopular stance of the exact opposite.  I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals.  Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum.  We have put down 20 - 40% on some properties to achieve this goal.  Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.  


    Hi Paul! I think I am just south of you?  Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.

    And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)


    Marcus, you are just south. I invest in the Sheboygan area. I agree with your assessments. So much content I see about ways to put as little money down as possible or doing the BRRR method so you can purchase a property and then pull out all the equity so after it's rehabbed you can get all your capital back out. I am not trying to knock those approaches and obviously they have worked great for many people but I feel the market is different then it was in the past. Personally I am not finding deals that could support those strategies in my market today based on my current skills and available time. If I took that approach I would have negative cashflow which isn't a good sustainable business model. I am okay with limited cashflow while I'm in my prime W2 working years but not negative. My business still needs to sustain itself. In my opinion that leaves me with two options. Sit back and wait for the market conditions to flip to where those strategies would work for me, or adapt to the current market. Sitting on the sidelines for me isn't an option. Knowing I'll be holding onto these properties for the next 30 years plus I have no issues with my strategy. I also am not looking for cheep properties in bad locations that could turn a quick buck. I want properties that I am proud to own and if I was personally looking for a rental I would be willing to rent. Obviously that isn't a requirement for most to buy a property but it's something that's important to me. Because I purchase properties like that I feel we attract tenants that we can relate to which helps us on the property management side with communication and working through issues.


    Same. 100%. Especially the properties we pick, the tenants we want to attract etc. I start looking at purchases today more as adding to my collection and "do I want to own this" has replaced "do the numbers work" as my first question to ask. (Still looking at the numbers, but it's now the second question). But it has not always been this way, I have had my low-income rentals and I am in a very fortunate position today that I can take this approach. But that's not how you can start out.

    4Reply
  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y
    Quote from @Ethan Brackin:
    Quote from @Paul Novak:
    Quote from @Marcus Auerbach:
    Quote from @Paul Novak:

    Marcus I think this was a great post.  I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow.  I have actually taking the unpopular stance of the exact opposite.  I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals.  Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum.  We have put down 20 - 40% on some properties to achieve this goal.  Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.  


    Hi Paul! I think I am just south of you?  Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.

    And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)


    Marcus, you are just south. I invest in the Sheboygan area. I agree with your assessments. So much content I see about ways to put as little money down as possible or doing the BRRR method so you can purchase a property and then pull out all the equity so after it's rehabbed you can get all your capital back out. I am not trying to knock those approaches and obviously they have worked great for many people but I feel the market is different then it was in the past. Personally I am not finding deals that could support those strategies in my market today based on my current skills and available time. If I took that approach I would have negative cashflow which isn't a good sustainable business model. I am okay with limited cashflow while I'm in my prime W2 working years but not negative. My business still needs to sustain itself. In my opinion that leaves me with two options. Sit back and wait for the market conditions to flip to where those strategies would work for me, or adapt to the current market. Sitting on the sidelines for me isn't an option. Knowing I'll be holding onto these properties for the next 30 years plus I have no issues with my strategy. I also am not looking for cheep properties in bad locations that could turn a quick buck. I want properties that I am proud to own and if I was personally looking for a rental I would be willing to rent. Obviously that isn't a requirement for most to buy a property but it's something that's important to me. Because I purchase properties like that I feel we attract tenants that we can relate to which helps us on the property management side with communication and working through issues.

    Why do you believe there is a higher likelihood of negative cash flow with BRRRR? Is it because the loan you assume after a cash-out refinance is more likely to be higher than your gross cash flow?

    Hi Ethan, I have been BRRRR-ing in Milwaukee for over a decade and after 2016-2018 or so I had to work increasingly harder to make deals work (much more complex rehabs: mold, foundation issues etc). Today our inventory is so low, that sellers don't have to give me 50% discount because of poor condition. They will find a first time home buyer that will be happy to pay close to what the neighbor's house (in great condition) is worth. If you can find one where you get the price to match the work needed, it is still one of the best strategies! But that's a big IF in 2025.

    The approach that I take now is to let market appreciation and inflation do the heavy lifting for me. We have seen prices go up 8.2% in 2024 here and why would I work hard for half a year to do not that much better, if I can just do nothing instead?

    Money, time and energy are interchangeable in real estate. If you don't have much money, but you do have time and energy, you can use that to find a unicorn deal that will still work with BRRRR.

    Paul?

    2Reply
  • Paul Novak
    Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes
    1y
    Quote from @Ethan Brackin:
    Quote from @Paul Novak:
    Quote from @Marcus Auerbach:
    Quote from @Paul Novak:

    Marcus I think this was a great post.  I have not subscribed to the stance of trying to get into a property with as little down as possible just to generate cashflow.  I have actually taking the unpopular stance of the exact opposite.  I have tried to focus on properties that are in good locations where I can attract good tenants and then adjusted what I put down to hit my cashflow goals.  Not adjusting for vacancy and maintenance my cashflow goal on a property is $500 per month at a minimum.  We have put down 20 - 40% on some properties to achieve this goal.  Like you said we have been saving upwards of 60% of our W2 income and business cashflow in order to do this.  


    Hi Paul! I think I am just south of you?  Unpopular maybe, but for sure realistic and prudent. Buying quality assets that are in a desirable location and in good condition with a modest amount of leverage is IMO the only approach that I feel comfortable recommending. I have tried pretty much anything personally and I have seen so many investors start and either succeed or fail - well, let's call it abort and sell to never touch RE again.

    And then I get calls from OOS investors who want to buy a 120k duplex in Milwaukee and when I try to tell them what will happen they go: uhm, I don't think we are a good fit. (Which is true, because I do mostly luxury residential, just trying to help)


    Marcus, you are just south. I invest in the Sheboygan area. I agree with your assessments. So much content I see about ways to put as little money down as possible or doing the BRRR method so you can purchase a property and then pull out all the equity so after it's rehabbed you can get all your capital back out. I am not trying to knock those approaches and obviously they have worked great for many people but I feel the market is different then it was in the past. Personally I am not finding deals that could support those strategies in my market today based on my current skills and available time. If I took that approach I would have negative cashflow which isn't a good sustainable business model. I am okay with limited cashflow while I'm in my prime W2 working years but not negative. My business still needs to sustain itself. In my opinion that leaves me with two options. Sit back and wait for the market conditions to flip to where those strategies would work for me, or adapt to the current market. Sitting on the sidelines for me isn't an option. Knowing I'll be holding onto these properties for the next 30 years plus I have no issues with my strategy. I also am not looking for cheep properties in bad locations that could turn a quick buck. I want properties that I am proud to own and if I was personally looking for a rental I would be willing to rent. Obviously that isn't a requirement for most to buy a property but it's something that's important to me. Because I purchase properties like that I feel we attract tenants that we can relate to which helps us on the property management side with communication and working through issues.

    Why do you believe there is a higher likelihood of negative cash flow with BRRRR? Is it because the loan you assume after a cash-out refinance is more likely to be higher than your gross cash flow?


    Ethan, good question. I used my comment more as a generalization then practical application. I am not saying that a BRRRR's always have negative cashflow, that isn't the case. My point is that I see many people trying to find deals where you pull as much equity out of the deal as possible and still get cashflow. I just don't see where the properties in my buy box allow for that option. I need equity to cashflow, sometimes north of 30% down and I don't feel that is a bad thing. I just want to temper expectations of new investors that are being told that you can buy a property with 5% down and generate cash flow, or they can flip a house pull out there entire investment and cash flow. I feel if there is too much information out there like that when new investors start analyzing deals and they don't see the numbers work like many describe it discourages them to the point of passing on good deals or passing on real estate investing all together.

    I am still new and didn't get started until 2021.  I only have 5 properties and know I have a lot to learn but from my experience to do this takes cash.  I have taken a more traditional route with conventional financing and a high savings rate from my W2 vs. creative financing, house hacking, 1031 exchanges, and other methods.  My main point is two fold, you can invest in real estate in any market at any time you just might have to change your approach, and don't think that there is a magic bullet that you can do this with no cash.  This is a capital intensive business.

    4Reply
  • Dominic M.
    Property Manager · Northern Virginia & DC · Member since 2020 · 157 posts · 69 votes
    1y

    I agree - we underwrite conservatively.

    IRR and deal multiple looking (ROIC) are the metrics we closely look at.

    17-25% IRR and 2x deal multiple over 5 years is the general target.

    So long as there's cashflow (NOI - Debt service)

    This could be low single digits in y1 - for newer properties.

    (The higher the cashflow means typically leads to buying older properties. This cashflow is quickly wiped out to as expenses stack up)

    My thesis and we execute this is:

    We buy newer vintage properties with seller financing about 10-15% below market

    Great asset/ property management - keeping expense ratios low.

    Paydown + 2-3% YoY appreciation gets to the 2x multiple in 5 years on exit after expenses.


    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    1y
    Quote from @Dave Foster:

    Excellent perspectives from different types of investors here.  I love the depth and breadth of the BP community!!

    There is one holy grail metric that encompasses and values every aspect of RE investing that hasn't been mentioned here specifically - the IRR (Internal Rate of Return)!!! It takes into account cash flow, leverage and amortization, depreciation and tax advantange, and appreciation.

    A property with great cash flow but minimal appreciation might not be the best return for money and effort.

    A property with negative cash flow and double digit appreciation can be a gold mine.

    A property with sucky cash flow and very high leverage could still be a great investment if the leverage is low interest because of amortization.

    The two biggest questions I challenge my clients to ask are not about performance (The IRR gives a definitive picture of that). They are

    1. If you're thinking to sell - why?  Maybe it's cash flow or trapped equity.  But maybe it's deferred cap ex looming, neighborhood or regional demographic changes or or or ......!

    2. What are your cash needs from your investing?  If you need access to cash to live on from your real estate investments this can impact your type of investing greatly.  If you don't then you can be more aggressive in minimizing equity and cash flow.

    What I've seen over the years is that this debate over style of investing has tended to mirror the life cycle stage of the investor. Youngish (new) investors many times need the cash flow because they are stretching themselves to jump in. Or they are being very very patient to let the amortization arm of the IRR work for them.

    As they gain experience, money and age, they tend to become more amenable to letting their equity drive their investments rather than keeping it to provide additional cash flow. much like @Shiloh Lundahl's model.  This is really where the 1031 exchange shows it's worth because it allows investors to not only get access to all of their equity like @Joe Villeneuve said, it gives you the additional access to the deferred tax and depreciation recapture that can let you lever many more times than by paying the tax and investing the rest.

    And as investors get older (like me I'm afraid to say) and more averse to risk and more focused on preservation of weatlth then cash flow once again becomes much more important.  I realize that my wife has been saying this for years (because she is much smarter than I).  But I aml finally becoming more tolerant of the dead equity that provides a buffer to keep my cash flow coming.

    Humans don't come in one shape and size.  Nor do RE investing styles!  Otherwise, it would be really boring.  But these folks commenting above represent some of the best of the best at using different styles!!!  And all here for all RE investors to use or not because of the open knowledge sharing style of Bigger Pockets.  


    as markets shift thought process's do as well. 10 years ago if you posted on BP about appreciation you got hounded by those that said appreciation is gambling ONLY invest in cash flow full stop.. Now you get the post were cash flow while important is not how you really attain wealth.. Myself being born and raised in Silicon valley its always been about appreciation and was and is never about cash flow other than enough cash flow to keep the property functioning . some of my biggest hits have been on land deals and they dont cash flow you generally have to pay cash and hold and then pay tax's and maintain the land in some places.. But if you choose correctly there is big time money to be made.. On one deal you can make equal to 10 or 20 rentals cash flow for 20 plus years.. if not a lot more.
    Tend to be more sophisticated transactions and of course you need some cash. RE simply is not only cash flow rentals that tends to be the majority of course since its the easiest concept to grasp and financing is by far the easiest for beginners or non experinced folks.
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  • Marcus Auerbach
    OP
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y

    @Jay Hinrichs I remember one of your land deals: to this day that is one of the best real estate stories I have ever heard! 


    From what I recall that deal was many years in the makings, besically there were almost different chapters to it, which new moves to adapt - you can't put that in a rinse and repeat formula. That was an applied master class. If anything it was a huge inspiration to me to keep my eyes open for these once-in-a-decade opportunities - and then have the patience and foresight to sit on it and pay maintenance for MANY years. In hindsight, it's so much easier to say: yeah I would have done that too!

    1Reply
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