Why getting into real estate primarily for cash flow is wrong

Marcus Auerbach · 2025-02-02T07:47:42-08:00

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!

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

1y

Quote from @Marcus Auerbach:

@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!

land in the path of progress one just needs to read the comp plan from the county and figure out where the county staff and politics wants the city to grow and buy ahead of it.. but how many BP members even know what a comp plan is.. this is not real tough its public knowledge that is available to any citizen. Its just a different niche .. I suspect there are many in Texas right now making life changing profits on path of progress plays as well.

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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 @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.

Thanks for the response! You make great points, and I definitely agree that I have often seen unrealistic expectations from people in my age demographic who are trying to break into the real estate investing game.

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Ethan Brackin

Real Estate Agent · Chattanooga, TN · Member since 2024 · 13 posts · 8 votes

1y

Quote from @Marcus Auerbach:

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?

Thank you for the thorough response. Do you personally use traditional financing with BRRRR or do you pay for properties with cash? I have read the BRRRR book as well as some other investment books and though I am aware that the author recommends buying properties with all cash, I am still torn between going that route or going with traditional financing instead (or perhaps even a "hybrid" of those two options; saving up to put 40 to even 50% down or more to get higher cash flow and more equity right away, while also being able to forego the waiting process of building up enough capital to invest all-cash in another property again (assuming I don't use a hard-money loan). I'm not sure how this "hybrid" approach would affect the cash-out refinance or if the approach is even viable at all, though. I have never invested before so forgive my ignorance.

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Joe S.Pro Member

Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes

1y

Quote from @Joe Villeneuve:

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

Brother Joe…..

I take the time and try to read your post as much as possible. :-)

I follow your logic… I think.
So a person will leave some of their equity in a property if they do a refi. It seems to me that a person would lose part of their equity on a sale as well. I’ve had some refinances that went through where the appraiser appraised the property for way more than what it would’ve actually sold for on the open market. So in a case like that a refinance would have worked better than simply a forced sale IMO. 🧐🤔🤓

2 Reply

Joe VilleneuvePro Member

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

1y

Quote from @Joe S.:

Quote from @Joe Villeneuve:

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

Brother Joe…..

I take the time and try to read your post as much as possible. :-)

I follow your logic… I think.
So a person will leave some of their equity in a property if they do a refi. It seems to me that a person would lose part of their equity on a sale as well. I’ve had some refinances that went through where the appraiser appraised the property for way more than what it would’ve actually sold for on the open market. So in a case like that a refinance would have worked better than simply a forced sale IMO. 🧐🤔🤓

Timing has a lot to do with it. I've always sold for more than I could have gotten out with a refi. Don't forget the other problem with a refi...the higher mortgage payment, generating a lower cash flow.

1 Reply

Scott TrenchPro Member

Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

1y

Quote from @Joe Villeneuve:

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.

Why is buying all cash foolish? I think that, right now, it offers excellent risk adjusted returns.

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Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

1y

Cash flow is basically the cherry on top for real estate investors. You really don't get rich off it. The important part about cash flow is that you stay solvent; bring in enough to pay your bills and a little extra for a rainy day. Unless you're not using debt, you're not going to be able to live off your cash flow, at least for a loooonnnngggggg time.

The key for real estate investment is building equity; through built-in equity by buying right, appreciation and principal paydown. That's how you get rich in real estate.

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Joe VilleneuvePro Member

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

1y

Quote from @Scott Trench:

Quote from @Joe Villeneuve:

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.

Why is buying all cash foolish? I think that, right now, it offers excellent risk adjusted returns.

Thinking you are ahead with all cash deals are an illusion. It's bad, very bad, math.
If you buy a property with all cash for $200k, and that allows you to have PCF of $1000/month, that means it will take you 200 months before you break even. That's illogical.
Thinking that you can focus on the equity as an offset is even less logical, and worse math. The DP is the initial equity you buy. Added equity comes from appreciation, which has nothing to do with how much cash you have in, or how much equity you start out with. Added equity is gained from appreciation, which is based on the property value, which starts out the same, and increases at the same rate, whether you ny all cash or no cash.

2 Reply

Marcus Auerbach

OP

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