Cash Flow Dead?/Financing Options/General Advice

[Ray Pantle]

Hello, 

I'm a newbie looking to purchase my first rental property and in need of some advice.

My main goal venturing into REI is to gain some cash flow so I can scale down (not quit) my day job, which seemed fairly attainable based on the deals analysis on this site and discussions on the BP podcast, but recently I've seen several forum posts stating it's no longer possible to have cash flow, that you'll be lucky to break even. Is that true? Or does it just take more careful planning and knowledge in today's world?

I've heard high interest rates are one thing hampering cash flow, but my plan was to tap into the equity from our home to cover the first rental, understanding that we could get a better interest rate on a HELOC than with a traditional loan, and therefore create more cash flow. Is that correct? Or does it all depend on the LTV ratio on the HELOC as to how low the interest rate will be?

The other option is to withdraw money from our Roth IRAs to pay in cash, which would give us a decent cash flow on the first property, but we would still need to finance the second, third, fourth, etc. property either through a HELOC or traditional loan, and would then face the same question of whether we can find a deal that will give us some (as in $200-300) cash flow.

So I'd like to figure out if cash flow is still an option, and if so, what's the best strategy if that's my goal.

[Don Konipol]

Quote from @Ray Pantle:

Hello, 

I'm a newbie looking to purchase my first rental property and in need of some advice.

My main goal venturing into REI is to gain some cash flow so I can scale down (not quit) my day job, which seemed fairly attainable based on the deals analysis on this site and discussions on the BP podcast, but recently I've seen several forum posts stating it's no longer possible to have cash flow, that you'll be lucky to break even. Is that true? Or does it just take more careful planning and knowledge in today's world?

I've heard high interest rates are one thing hampering cash flow, but my plan was to tap into the equity from our home to cover the first rental, understanding that we could get a better interest rate on a HELOC than with a traditional loan, and therefore create more cash flow. Is that correct? Or does it all depend on the LTV ratio on the HELOC as to how low the interest rate will be?

The other option is to withdraw money from our Roth IRAs to pay in cash, which would give us a decent cash flow on the first property, but we would still need to finance the second, third, fourth, etc. property either through a HELOC or traditional loan, and would then face the same question of whether we can find a deal that will give us some (as in $200-300) cash flow.

So I'd like to figure out if cash flow is still an option, and if so, what's the best strategy if that's my goal.

Cash flow is ONE part of ROI - in MOST cases it's importance is providing STAYING POWER while price appreciation, value add, more effective management and leverage provide the bulk of the return on investment.

Newer investors (and some naive more experienced ones) believe that the opportunities all lie within asking prices for property that listed on a formal, or in the case of commercial property, informal MLS. That exists for the no brainer invest at retail - done for you - turnkey investor - though I tend to think those types may be better off investing in REITS or private syndications. Here's the real deal - good or great investments aren't found listed as great investments. They're either MADE through negotiation, creative use, or restructuring, or identified with superior knowledge of changing economics, demographics, zoning, etc.

BUT, while this is true always, it’s particularly true TODAY.  However, as always the season will change, and just like 2008-2012, or 1986-1990, the window will open allowing cash buyers to “cherry pick” they’re choice of properties returning double digit cash flow without even working up a sweat.