Cashflow Smashflow

43 Replies

I keep hearing about cash flow and I've been beating myself up because my condo rental has only $39 cash flow each month. The property is in Laguna Niguel CA. I purchased a 3 bdrm condo for $365,000 in Dec 2009 with 20% down. I now have a 4% loan but pay $280 in HOA fees monthly. I did about $16,000 in improvements - paint, carpet, remodel kitchen, new AC etc. I lived in it for one year and then started renting in Jan 2011. I started renting at $2,175 and next month the rent will be raised another $95 to $2,340. In December 2012 I got a new 20 year 4% loan.

Two years ago the roof leaked and did $2,500 in damage to walls and ceiling. But HOA fixed roof and insurance paid for repairs, the contractor covered my deductable so there was 0 out of pocket for me. Each of the 3 years I have rented it I have had between $300 and $400 in repairs each year (usually plumber and maybe pest control).

Since I have been renting it the condo has appreiated by 30% (over $100,000). Subtract my $16000 in repairs and I have $84,000 in real appreciation. Looking at my loan - $800 in principal is being retired each month (by my tennant). If I consider $28,000 in real appreciation per year plus $9,600 principal retirement each year - then this tennant has been adding $37,600 of wealth to me each year. This is $3,133 per month - am I missing something?

I beleive my risk is managed somewhat as HOA will pay for any issues related to roof, structure, grounds etc. I beleive repairs will stay around $300-$400 per year. I put in a new AC and kitchen along with bathroom faucets etc 4 years ago so the place is solid.

Even with a reasonable appreciation of 3% per year and 3% rent increase along with $9,600 of principal retirement increase, I will add $24,900 in wealth next year ($2,075 per month). Things will get better as time goes along because with my 20 year loan, principal retirement will escalate (all paid by my tennant).

Also, my tennants are great - treat the property like it is their own, never ever late on rent etc. They can't quite afford to buy so they will likely be there for years. So I still wonder if I am missing something. If my tennants are addding $2,075 (consertive) of wealth each month how can I go wrong? There is no need for me to find excessive cash flow as my job pays all my bills and allows me to save 20% of each pay chaeck. Of course my cash flow will sky rocket in 18.5 years once my tennants pay off my loan.

The question you're asking is all relative.

Is this a good return for CA... I have no idea.

Is this a good return for the rest of the county... I don't think so.

I base my rental investing on cash flow. You put down $73,000 plus your repairs, and in return are receiving $500/yr cash flow.

I think I would cash out if I were you and invest in another part of the country.

In Ohio you could buy 10 discounted single family's in working class neighborhoods and pull in $9000 in rent each month.

Originally posted by @John Horner :

In Ohio you could buy 10 discounted single family's in working class neighborhoods and pull in $9000 in rent each month.

But then you'd have 10 tenants, toilets and trash (roofs, HVAC'S, interior & exterior painting etc. . Ten trips to Ohio. Ugh, don't kill the golden goose.

@Brad Rondeau I guess it's a matter of goals, business model, and risk tolerance. First problem for me is a HOA being involved. Too much politics and the board is the law. Second is that your projections assume nothing will change. As the property ages do you consider it possible the HOA might assess you a $20,000 property repair fee. If not, think again. Not will, but might.

You say it has appreciated over 30%. Not really. Not for you. Your condo appreciation comes at the time you sell it. Maybe. Maybe not. In fact such paper appreciation could end up costing you more in taxes between now and when you sell, appreciation that you may never actually see.

You will get the mortgage pay down, so it could still pay off nicely, but it isn't as clear cut as you paint it.

Good luck!

@Bob Bowling and a lot less chance of a vacancy bankrupting you. The tenant loses their job and refuses to move until evicted and he is SOL.

If you're happy with it, then keep it. A lot of folks did get burned in the last crash by banking on their appreciation, but not everybody did. If you feel confident about the area and the complex and don't want any additional hassle then why rock the boat? It's not what I would do.... but there's a lot of 'right' ways to do stuff

I would get out of that property.

It is at peak price and little cash flow.

Originally posted by @Bob Bowling:
Originally posted by @John Horner:
In Ohio you could buy 10 discounted single family's in working class neighborhoods and pull in $9000 in rent each month.

But then you'd have 10 tenants, toilets and trash (roofs, HVAC'S, interior & exterior painting etc. . Ten trips to Ohio. Ugh, don't kill the golden goose.

Close remotely, hire a property manager and collect your checks. Better then a 0.005% cash flow... IMHO.

Its not a good business model to buy a bunch of, a lot of what you have would be hard to replicate I think. But keeping one you lived in and breaking even like that is fine, your math works with you not needing the cash and being focused on appreciation and loan pay down, although you shouldn't bank on appreciation like it is guaranteed, even at the smaller %. Like has been mentioned, the condo is going to age, I've never been assessed $20k, but did get a $7k one on a flip I owned less than a year.

If you've got one and you can cover it if it goes vacant and/or needs major repairs, that's a lot different than having 10 of these. With that many you're over exposed and could get wiped out because you're paying for too many empties with no cash coming in.

Different strokes for different folks, there's no right or wrong on this stuff. What works for you may not work for other people. I'd never do that model here in Atlanta, but out there in a hot area with a 4% loan, money in the bank and W-2 income to cover things if you need to, you're in good shape.

@Brad Rondeau I'm not a believer in buying for appreciation even in CA but you obviously bought at the right time and have done very well as many people do in CA so congratulations on that. Having said that however, the market is running out of steam and isn't going to continue to appreciate at the rates it has in the last 2 years. When the market flattens, you'll want to evaluate any future appreciation against cash flow that you can get in another market and consider moving your money to a better cash flowing market. Keep in mind that appreciation is only realized when you sell so you have to factor in the net present value of that future gain. Your $28,000 yearly appreciation will be worth considerably less than $28,000 in 10 years or whenever you happen to sell.

for me this comes down to whether or not you think of you property as a business. If month after month you are writing checks to carry it then it seems less like a business and more like an annuity.

Keep in mind that cashflowing properties appreciate also.

Originally posted by @Darrell Shepherd :
Its not a good business model to buy a bunch of, a lot of what you have would be hard to replicate I think. But keeping one you lived in and breaking even like that is fine, your math works with you not needing the cash and being focused on appreciation and loan pay down, although you shouldn't bank on appreciation like it is guaranteed, even at the smaller %. Like has been mentioned, the condo is going to age, I've never been assessed $20k, but did get a $7k one on a flip I owned less than a year.

If you've got one and you can cover it if it goes vacant and/or needs major repairs, that's a lot different than having 10 of these. With that many you're over exposed and could get wiped out because you're paying for too many empties with no cash coming in.

Different strokes for different folks, there's no right or wrong on this stuff. What works for you may not work for other people. I'd never do that model here in Atlanta, but out there in a hot area with a 4% loan, money in the bank and W-2 income to cover things if you need to, you're in good shape.

I tend to think the opposite, with 10 units you spread out your risk. Yes you could have 1 or 2 empty but the other 8 or 9 would cover temporarily, especially when your cash flow is MUCH higher. If you only have one that is not rented and no additional cash flow saved up then you are really stuck.

Yes it's more work, but that will be the case with anything you choose to be successful in :)

I also don't like the idea of banking on appreciation, didn't 2009 teach us anything?

People often use cash flow because you can put that in the bank. Your appreciation is zero benefit to you until you start to monetize it (via a sale or higher rents, eg cash flow). Appreciation is somewhat more speculative.

John, if they're cash flowing having several makes sense to spread the risk. If they are breaking even and your money is being made in increase in value and loan paydown, having one or two can still be a good play as long as you can cover the vacancy and repairs out of other resources, but you wouldn't want a lot of those unless you had massive reserves.

His situation is a little different than someone building a portfolio, he already owns it and its performing. At a year he'd get taxed at short term capital gains, so renting it was smart and now that its chugging along and he doesn't need the money, its still a smart play. I wouldn't do a bunch with these numbers and he didnt really factor in the opportunity cost on his equity, but for a guy with one rental he shouldn't be beating himself up over a few hundred bucks a month in cash flow he doesn't need if everything else is working. Its hard to cash flow in that kind of market, but there's still money to be made. Hell back in the day, I knew people that were buying houses in hot California markets and leaving them vacant because they didnt like tenants, but appreciation was 20%/yr and they couldn't get that anywhere else.

Anyway, there is a huge difference in effort (and risk) between having one rental close to home, especially a high dollar one where your tenants are night and day different than low income folks, and having 10 in another state.

@Brad Rondeau Generally, investing on the West Coast (especially CA) and other more expensive areas like NYC, Boston, etc. is very different from investing in fly over states. Most of the people giving advise above are not familiar with your market. Matter of fact, what normally works for them (cashflow focus) is counterintuitive in places like Orange County.

I think you your investment is a winner, and your perspective spot on! You brought at a good time, you have a good property in a very solid market, and it covers cashflow. You're making good money from loan pay down, and already gained substantial appreciation. It's wise to scale back future appreciation expectations, as you had a big bump the last 3 years.

I strongly disagree with those who state that appreciation means nothing until you sell, or that it can vanish at any moment. 1- an appreciated property will allow you to borrow against it, to pull cash out for another investment. 2- you brought at the bottom of a serious recession, and up already 30%. It's gonna be a cold day in hell if that condo goes back down by 30%.

You also have an investment that is a cinch to manage- fixed up, professional tenants, an expensive location. Try comparing that with 10 houses in a middling hood, with lower incomes, more wear and tear and 10x factor of things that can go wrong!

I could go on. But suffice to say that my market, San Francisco, is even more expensive and crazier than So Cal! We have rent control, nutty pro tenant/anti growth politicians, and even worse cash flow. Have you heard about the protests against the tech, or Google commuter busses here? It made national news- only in SF would (some vocal) people be against tech companies providing free shuttles to their SF based employees. It all leads to an extremely restricted housing supply and hence RE inventory is almost zero. So why are well healed investors tripping all over themselves making multiple offers on seemingly any available property? Because they became very wealthy investing here!

Brad Rondeau - your post is why I prefer notes to rentals.

In 1978, I started investing in foreclosures behind the Orange Curtain. I got impatient with my rentals' cash flow, too. My first investment property had a HOA that cut into my cash flow but wasn't substantial. When I complained about the HOA expenses, I ended up becoming board President. All I learned was that it does, in fact, cost a lot to maintain common grounds and I was now the guy that got the phone calls from whining owners. Arggghh.

When I began venturing out more, and focused on SFR's without associations, buying directly from distressed owners. Buying subject to existing loans, I avoided having to qualify and pay the origination fees for new conventional loans. Most of these loans had already been partially amortized five or ten years.

And then I bought my first note, a 2nd behind an old FHA loan. Everything that could go wrong with that loan did, but I caught the note bug. That was many, many notes ago. Now I'm mostly in first TD's, on CA property.

While I do balance my portfolios between paper and property (as well as property that I get via reversions) I clearly prefer paper. I love the cash flow. Granted, I don't get appreciation from paper (although I do get upside profits from prepayment penalties on some notes) I prefer having the ability to allocate cash better. Also, when I rent money it keeps on collecting interest. Not so with a non-paying tenant.

Lastly, equity's great but I'd rather find a way to make it work. That means either to encumber or slaughter the cow by selling. As my friend John Schaub's wife Valerie once told him in their early days, "You can't eat equity."

@Amit M you would borrow against a property with no cash flow already? Wow. Ok. Not my style, for sure.

Darrell said it best..."Different strokes for different folks". Thats what I say. Personally I see most of the posts about using leverage as plain crazy. Its what imploded this whole market years ago and when it was at the bottom the banks laffed at anyone trying to buy property on credit. Now its worming its way back to more leverage. I say wonderful ! With a frothy stock market ready toi correct just a matter of time to when I will be profiting again on the backs of over eagar investors spread way to thin.

Brad if its working for you and it passes Brad-Math keep on truckin ! Its all that matters in the end.

@Brad Rondeau To those not familiar with the area it may seem that your property has peaked in value. However; real estate prices are based on supply and demand. In the coastal areas of O.C. there is demand, and no available vacant land on which to build, therefore; for those wanting those specific areas (and thousands do) they have to choose from what is available. That demand drives up prices.

Add to that we have perfect year round weather, a broad based, and strong economy, plus all the other great things O.C. has to offer, and the future for appreciation looks pretty bright to me. Of course the politicians in Washington could bungle everything and throw the whole country into a tailspin again, but, it's not something we can know for sure, so we should deal with the reality of what's happening now, in our market, and it is appreciating nicely.

I'm with @Walt Payne . I wouldn't borrow against the equity of a property that isn't cash flowing. It has no debt service coverage to begin with.

@Brad Rondeau

HI Brad,

Base your decision on the numbers in the deal as they stand today and not speculation on capital growth.

No one has a crystal ball that can predict where the market will be in the future.

Just my opinion.

Thanks and have a great day.

Guys, thanks for the great replys and different perspectives. I've had friends/family members that thought they were making money in businesses only to find out years later they were losing everything. That's why I like to analyze this from every angle to see if I am missing something.

I especially like the input from the other CA investors as they understand what I am going through (things are definitly different here - the google busing story made me laugh when I read about it a while back). I feel my 20 year 4% loan gives me a huge andvantage. I know appreciation will not continue for ever but I still feel ok with my tennant retiring 10K of principal each year and each year I will have $100 more cash flow as I continue to raise rent. Also if cash flow were the only important thing I would refinance - into a fourty year loan and have plenty of cashflow (my principal retirement would now be almost 0 for many years but I could at least say that I had cash flow).

Local experts are expecting 5% appreciation for each of the next 2 years and then it should level off - maybe time to sell at that point or do a 1031 tax exchange for income producing property in mid-west or Texas or South east. I'm going to talk to memphisinvestmet about buying cash flow properties remotely. The "remotely" part scares me but who knows - if I can get good property management maybe I will sell stock market investments and buy cash flow property. Again I don't need the cash flow (my job as SAN engineer produces plenty) but it might be nice to have more assests that produce passive income. Of course I would be trading in the huge gains I have made from my stock assets.

All good info and I will cotinue to educate myself. I want to get out of the corporate rat race at some point and aquiring solid assets seems to be a good way to get there.

Originally posted by @John Horner :

I also don't like the idea of banking on appreciation, didn't 2009 teach us anything?

Obviously not! Where were the epicenters of disaster, Vegas and Florida? Those are areas that don't have long term high appreciation rates. Yet thousands flocked in to be plucked because of a spike.

The people that I know that KNEW their appreciation rates and long term rent growth stayed with the areas that "investors" shy away from because of INITIAL lack of cash flow and misunderstanding of what an appreciation rate is.

Some were convinced to 1031 to the "cash flow" locations and saw their money go down the drain while their properties and rents in Hawaii and California lost little value and rebounded very quickly.

The lesson to learn is to KNOW all the financials of the area you are investing in and don't buy cheap for cheaps sake AND immediate cash flow is not a predictor of profitability.

There are different risks and rewards of different strategies.

Most places that will cash flow better will not appreciate the same as the high end low/no cash flow areas. Though there are plenty places that should cash flow pretty well and could get decent appreciation.

Cash flow is safer generally. You get in cheaper (so less money outlay and less at risk) and it is easier to carry when you have a vacancy or other issue. It is also the play for people that are looking to replace income from a job at some point.

Highly appreciating places can be marvelous as long as you can afford it. Your cash flow is pretty thin so it will not take much for you to have to feed the investment. If you can afford to maybe not a big deal.

What I will say is look at it this way. Say you made these statements during the roaring market of 2004. Making a few bucks each month and gaining tons of appreciation month over month while your tenants are improving your equity position. Awesome! Then in 2008/9 your company gets hit hard by the bad economy and you lose your job, at the same time your awesome tenants also lose their jobs and have to move, the condo also has lost 30%+ of value and you are under water. So now you have no income, you have a huge expense to carry with the vacant unit and you can't possibly sell it without bringing money to the table or short selling it. There is your risk. Likely scenario? No of course not. Possible scenario? Sure it happened to a ton of people in your markets in that tough time period only a scant few years ago.

BTW I am NOT saying it is a bad investment. I'm just saying you are looking at it in some very best case glasses. Just objectively look at what kind of sh*t can hit the fan and make sure you are okay with that possibility. If so then rock on!

Originally posted by @Bob Bowling:
Originally posted by @John Horner:

I also don't like the idea of banking on appreciation, didn't 2009 teach us anything?

Obviously not! Where were the epicenters of disaster, Vegas and Florida? Those are areas that don't have long term high appreciation rates. Yet thousands flocked in to be plucked because of a spike.

The people that I know that KNEW their appreciation rates and long term rent growth stayed with the areas that "investors" shy away from because of INITIAL lack of cash flow and misunderstanding of what an appreciation rate is.

Some were convinced to 1031 to the "cash flow" locations and saw their money go down the drain while their properties and rents in Hawaii and California lost little value and rebounded very quickly.

The lesson to learn is to KNOW all the financials of the area you are investing in and don't buy cheap for cheaps sake AND immediate cash flow is not a predictor of profitability.

I just plain disagree. I will choose guaranteed cash flow over potential appreciation every time.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here