Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
Many have argued/claimed here on BP that cash flow on residential properties is of vital importance and investors can not put food on the table with appreciation. I disagree. Once you have built a business with many rentals, you could sell one or two, or as many as necessary each year grabbing the gains from it to live off. This is not to say that you should not have positive cash flow on residential properties, you should. Only to say that it is not the only income source form the property.
Another claim is that you must buy at huge discounts to turn a profit in residential RE. Although I agree getting a huge discount is advantageous, it is not the ONLY way. Just because you buy a sfr for $30k and it appraises for $50k, does not assure you have 40% equity, nor does it assure you will turn a profit on the sell down the road. In fact, in many cases, the $30k you paid is all it is really worth and the so called equity in that area will vanish. What is important is the demographic studies: Strong diverse economy, strong job grwoth, improvement in infrastructure, strong potential appreciation, reduced vacancy trends, ratio of supply & demand, and an undervalued market.
I have read here that some buy in lower income areas at 60% of the current value in places that show poor demographics where population is decreasing and jobs are leaving. So just because you can buy at 60% of value today and turn positive cash flow, does not assure a profit down the road. Who will rent the unit when the supply beats demand and when there are no jobs.
I understand and believe that becoming wealthy from cash flow on residential properties is most likely not going to happen. True wealth is obtained from the appreciation and many tax benefits from residential RE investing. Although I beleive in cash flow, and always strive for it, the true ultimate goal is to eventually sell the residential property for large gains and defer/avoid taxes as permitted by law.
Commercial property is where wealth and long term residual income lives. When purchasing a commercial property, in essence, you are buying the cash flow. In fact, it is valued based on it's performance and not what the unit down the street sold for (comps) like residential is.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
18y
Originally posted by "SROC4":
Or was it house rich but cash poor? :)
I think we're all cash poor.....lol. At least that's what I've seen with 99% of investors for the first 10 years. I've got a nice "pay day" coming up this weekend and already have the closing set up for next friday where I get to wave bye bye to all of it...lol For me, anything but positive cashflow just isn't an option for long term survival.
Honestly I know of one person who has the financial backing to take 6-10 years of negative cashflow. She's a multimillionaire heiress who already started is operating 3 businesses that cashflow extremely well and has an incredible mind for money (I need to marry this girl). In her case she's buying prime beachfront property now that doesn't cashflow well but she's getting it at 60-70 fmv and is playing speculation. If you're in a position to inherrent a fortune and have 3 businesses that are cashflowing very well, by all means go for it.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
Interesting blog Richard. I would have to agree that different or changing market conditions require differnt strategies to maximize profits.
My point of the last post was that True wealth is created over a long term through appreciation and not cash flow, residentially speaking. I also refered to commercial properties as the reason for cash flow. Most experts will agree that residential properties are purchased for appreciation while commercial for the cash flow. Of course, a combination of the two never hurts either.
Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
18y
Having cash flow allows you to wait for appreciation. Without a doubt, long-term wealth is achieved through appreciation. But having cash flow and the paying down of mortgage debt are all pieces of the puzzle.
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
18y
Great Blog Richard. There is definitely a market condition now that is favoring "value investors" in certain areas of the country. With excellent cashflow and forced equity at closing that is becoming a daily occurence in this current market, cash flow and equity is not really an "either/or" scenario.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
Cash flow on residential RENTALS IS OF VITAL IMPORTANCE! In fact, the number one reason any business fails is lack of cash flow. So, unless you have a great big pile of money that you want to get rid of, you must have cash flow if you're to be in business.
No one has ever said that you can not put food on the table with appreciation. Many people made a lot of money with appreciation in the boom of the past few years. Unfortunately, millions have also gone bust when they bought at the peak and now are upside down on properties that will not cash flow as rentals and can't be sold, except at a huge loss.
Betting on appreciation is speculation. It's just that simple. Is that a valid business model? Yes. If you've got a good crystal ball and don't bet wrong, you can make a lot of money on appreciation.
This is where your argument falls apart. Unless you are rich, most people can not afford to stay in business with negative cash flow on many rentals. So, the hope of future appreciation is totally meaningless when they can't afford to stay in business.
I agree that appraisals are meaningless. What matters is market value. If you buy a property for $30k that has a market value of $50K, you have $20K equity - period! Of course that equity could go up, down, or remain the same - EXACTLY LIKE IT COULD DO IN YOUR SPECULATION BUSINESS. Millions of people in the boom areas had big net worths until the real estate bust occurred. Now, their speculation isn't looking so good. And since historically (in a normal boom-bust cycle), it takes inflation adjusted prices 8-10 years to once again reach their pre-bust high, they might be back to where they started in about 2018!!! Unfortunately, since this is an unprecedented bust, it could take substantially longer.
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That's very true and Detroit is a good example of that.
Of course you're not going to become "wealthy" from cash flow, but the cash flow is what allows you to keep the property and hold the wealth. If you buy 50 properties with an average equity per property of $20,000, you're a millionaire - WEALTHY. The positive cash flow allows you to keep your wealth and of course pay the bills.
That's YOUR goal because you're not in the rental property business. However, in the rental property business, the goal is certainly not to sell the asset that generates our income. The goal is to use the asset to generate income. The appreciation, paydown of principal with the tenant's rent, and tax benefits are just icing on the cake!
It doesn't make any difference whether it's residential or commercial. If you have positive cash flow and equity from either investment, the result is wealth and long term income. Money is money and where it comes from is totally irrelevant.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
Tim is exactly right (as usual)! Cash flow and equity are directly related. If you buy a property at prices close to retail in most markets, you won't have positive cash flow. Therefore, to get a positive cash flow you MUST buy at a big discount to market value.
Real Estate Investor · San Francisco, CA · Member since 2008 · 51 posts · 0 votes
18y
Mike, I agree 1000% on your post regarding cashflow. For me appreciation is just icing on the cake.
I live in San Francisco (high appreciating area) and I know a lot of people who "invested" for appreciation rather than cashflow. They did get "rich" during the boom, but have since gone broke when the market turned. The rents were less than the mortgage, even with interest only/neg am loans, so they all had to put money out for the difference. You can just imagine having several multimillion $ properties with negtive cashflow can do to one's bank account. I don't care how rich you are.
For me it's all about having your money work for you. Most of my investments are outside of CA since I mainly invest in cashflowing properties. Even if none of my properties appreciate, since my tenants pay down my loan through rents (principal included), I still build equity without doing anything else but make sure my properties are occupied. So in the end I still become richer because someone else paid for my loan, increased my net worth and still had money coming in every month. The only money I put out was my down payment. That's why I look at my tenants as my sales team in my business, because they're the ones that pay down my loan and increase my net worth. In short, they bring in the revenue!
Speaking of commercial RE, cash flow definitely matters since a property's value has a lot to do with it's income and expenses. So the higher the income/lower expenses, the higher your property value becomes.
As they say: Equity does not pay the bills....cash flow does. Or was it house rich but cash poor? :)
Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes
18y
Originally posted by "SROC4":
Or was it house rich but cash poor? :)
I think we're all cash poor.....lol. At least that's what I've seen with 99% of investors for the first 10 years. I've got a nice "pay day" coming up this weekend and already have the closing set up for next friday where I get to wave bye bye to all of it...lol For me, anything but positive cashflow just isn't an option for long term survival.
Honestly I know of one person who has the financial backing to take 6-10 years of negative cashflow. She's a multimillionaire heiress who already started is operating 3 businesses that cashflow extremely well and has an incredible mind for money (I need to marry this girl). In her case she's buying prime beachfront property now that doesn't cashflow well but she's getting it at 60-70 fmv and is playing speculation. If you're in a position to inherrent a fortune and have 3 businesses that are cashflowing very well, by all means go for it.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
I expected you to chime in on this one Mike, and as usual, you make assumptions in regards to what and how I run my particular business when you know nothing about it. My post was not to argue that cash flow is not important, simply to point out that cash flow and appreciation can go hand in hand if you build a business model that strives for that.
Appreciation is not gambling over long-term and no crystal ball is needed, only the ability to study history. You still can not name one real example of more than a ten year period in which RE did not appreciate. It has time and again, and once we get through this current buyers market, the sellers market will return in the future creating more appreciation.
To refresh your memory lapse, you did! You said (and I quote) "I can not eat appreciation".
While I agree with this statement, you are talking about greedy or uneducated investors in this example. I know many others who cashed out close to the peak and made and kept millions. Now that the market is depressed, they are back in buying. The key is doing your homework, avoiding what the masses are doing, and and use fundamental analysis to evaluate the market conditions. You do not. You buy and hold low income properties for cash flow. That is fine for you. Not for everyone. I do not believe it benefits me, you or anyone else to attempt to poke holes in my business and strategies. It reflects a more poor image on you than me.
We are all here to learn and we all have differnt ways, goals, and strategies to invest in RE. One of the many reasons why this business is so great. A person with a shy personality would not do well talking to homeowners in foreclosre, so there are many other opportunities for them to make $ in this business. My goal of this post was to discuss differnt points of view and strategies in rleation to cash flow and appreciation. If we can stick to that, rather than make assumptions or attacks on other's business models, more people can learn from the post.
I agree, which was my point that cash flow and appreciation can go hand in hand. While cash flow is a positive, if an investor was to have $0 cash flow and brake even for 10 years on 10 properties, but cashed out on the appreciation of $50k on each of the 10, the investor would have made much more than just the $100 per door.
Again this senario is talking about foolish and uneducated investors. Had they done their homework and avoided the urge of greed, they would have cashed out of the market prior to the peak.
Final point is that while cash flow on res. properties is good, and in many cases needed to sustain the property over time, it is not always necessary to have boat loads of $ in reserve but simply enough to cover rainy days which we both know will occur over a sustained holding period.
Real Estate Investor · San Francisco, CA · Member since 2008 · 51 posts · 0 votes
18y
I do get your point. I would agree that cash flow and appreciation can go hand in hand. But I still think the way to wealth/riches IS cash flow. Perfect example of this are the uneducated investors. Using my scenario here in SF, since a lot of these people "invested" based on appreciation rather than cash flow, they lost their shirt when the market slowed down since their "investments" no longer appreciated as much as it used to.
Imagine if those same people invested in cash flowing properties. No matter if they're uneducated, they won't be in the same situation they're in now...unless they are really stupid.
Look, appreciation is good. It's a way to create wealth, but it should not be the primary target. I think it should always come in second to cash flow. Perfect example is the lady Tim mentioned in his post. She can afford to invest in speculative properties because she has businesses that have good cash flow which allows her to play the specuation game. If she didn't have that then she is in a riskier position with those beach front properties. Cash flow allows her to do this - not appreciation.
For me I look at my cash flowing investments as a money printer. I don't have to do anything and money is coming in. I could reinvest that money, buy a new car, house, or go on a nice vacation. This without doing anything. All passive activity. Plus my business partners (tenants) are paying down my loan and increasing my net worth.
No one said you can't become rich through appreciation, but it doesn't pay the bills. You make your money when you buy and realize your gains when you sell. So the only time you will be able to hold on to that cash is when you sell. Once you sell you lose that asset. It's no longer making money for you unless you reinvest it.
Going back to what I said about my investments printing money. When you own good cash flowing properties, you actually build a more solid base for long term, safer, steady wealth. Money that will work for you.
The money you get from the cash flow of your investments can be used to acquire more assets, which will increase your cash flow again. The cash flow that pays down your loan builds you equity through time which you can cash out (tax free) and use to buy more assets or spend as you wish. Add appreciation into the mix then you speed up the equity in your property you can pull out to use as you wish - as long as the income of the property still pays for itself so you don't have to shell out the difference. Like I said... my properties are printing money.
What if we change the words cash flow to appreciation on the scenario above? Do you think you will get the same result? I highly doubt it. The only way you can try to make this work is if you have cash flow coming in from another source. So here we go again....now we're back to cash flow...not appreciation.
The reason I'm emphasizing cash flow over appreciation because a lot of new investors read this board. A lot of people have lost their shirt by speculative investments in hopes of becoming rich quick through appreciation. I say focus on cash flowing properties in growth areas. Everything else will follow.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
I agree that investing in properties that cash flow make sense and to sustain a negative while holding requires other sources of income or reserves, there is no question. But as you said, "everything else will follow, meaning the appreciation over time will amount to large paydays, and by keeping some as income, and re-investing the balance using tax deferred strategies to avoid tax liability, will put the $ right back to work for you again, only in larger and larger properties/profit makers.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
This below was taken from an article that listed the 10 bigest mistakes investors make. It was #4 on th elist of 10.
Real Estate Investment Mistake 4
Making the Cash Flow Mistake
Cash flow is an important piece of the real estate wealth puzzle. But you can rob yourself of future profits by putting too much emphasis on just this one, albeit important consideration. Why? Because no one gets rich on cash flow. Isn't it appreciation over time that yields the real rewards? Did the equity in your home come from cash flow or appreciation? If a slight cash flow at acquisition impresses you to the point it drives your purchase decisions, aren't you looking at the wrong end of the telescope? Cash flow is an important indicator, but potential appreciation flow is the secret to real estate wealth. That's why doing your homework is so important.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
Look at this chart. http://mysite.verizon.net/vodkajim/housingbubble/
If you look at the inflation adjusted housing prices, you'll see that housing prices were actually lower in 1997 than they were in 1979 (adjusted for inflation). Even if you look at ACTUAL prices from 1979 to 1997, you'll see that it took prices 18 YEARS FOR THE PRICES TO DOUBLE! If you would look at a chart of the Dow Jones Industrial Average for the same period, you would see that the Dow went up about 700% in that same time period. So, if you're looking at speculating on appreciation, stocks are almost always better.
The other key thing to take from the chart is the extent of the recent bubble. You can see how abnormally steep the chart was during the boom. What do you think that means for prices on the way down and the length of time it will take for prices to reach their recent high?
I'm not making assumptions, I looked at your website. Why not set the record straight and tell us what your business is? It certainly looks from your website like you're selling properties to newbie investors at near retail price. Is that incorrect? From what you have said, it looks like this is based on speculation of future appreciation (that's how the newbie is supposed to make money). That would mean that you make your money selling the properties and the newbies make money if the property appreciates in the future? Is that right? It also appears that the properties you're selling have a negative cash flow when real world expense numbers are used. Is that correct?
RIDICULOUS! Which guru wannabe wrote something that stupid?
Who do you know that cashed out at the peak and kept millions? I don't know a single person that did that (although I'm sure there are a few. Moreover, many very educated and seasoned investors lost their butt during the current bust. In fact, all along the line, experienced investors lost tons of money. Look at Bear Stearns. You won't find more experienced and educated investors than Bear Stearns. Yet, they misjudged the real estate landscape and lost nearly everything.
Quite the contrary! While the masses were flipping houses in hopes of instant riches through runaway appreciation, I was buying boring little houses and apartment buildings at a huge discount (instant appreciation) that had positive cash flow. My fundamental analysis in the early 2000's revealed that the unprecedented runup in prices could not be sustained and that we were in for a huge real estate bust. My fundamental analysis tells me now that fewer and fewer taxpayers can not pay for all the entitlements in the next few years and that the US economy is going to collapse. When that happens, housing prices will plummet and rental properties will be just about the best thing to be holding. Of course, the value of my rentals will plummet too, but it won't matter because I will still have my silly little cash flow to live on. That's my fundamental analysis.
No one attacked your business model. In fact, I believe that selling properties to newbies is a good way to make money. I also believe that speculation is a valid business model and IF the market starts rapidly appreciating (I don't think that will happen for a long time), appreciation could make many people rich. If I have in any way mischaracterized your business model, I invite you to correct me.
That's ridiculous! How were these people supposed to know when the peak would be? Did you know what day that was in advance? Do you know what day the real estate bottom will occur? What does the future hold for real estate? Please be specific. BTW, that's the reason it's called speculation, because it's all guess work!
Real Estate Investor · San Francisco, CA · Member since 2008 · 51 posts · 0 votes
18y
Originally posted by "nationwidepi":
This below was taken from an article that listed the 10 bigest mistakes investors make. It was #4 on th elist of 10.
Real Estate Investment Mistake 4
Making the Cash Flow Mistake
Cash flow is an important piece of the real estate wealth puzzle. But you can rob yourself of future profits by putting too much emphasis on just this one, albeit important consideration. Why? Because no one gets rich on cash flow. Isn't it appreciation over time that yields the real rewards? Did the equity in your home come from cash flow or appreciation? If a slight cash flow at acquisition impresses you to the point it drives your purchase decisions, aren't you looking at the wrong end of the telescope? Cash flow is an important indicator, but potential appreciation flow is the secret to real estate wealth. That's why doing your homework is so important.
Not sure who wrote that one, is he/she a reliable source? I agree to it to some extent. My examples above show the "extremes" or worst case scenarios where your property does not appreciate over time. Even though it doesn't, the fact that it cash flows will keep your business going, since you don't have to put out any additional money of your own to cover for the negative cash flow of your investments. Plus you build equity through paying down the loan.
As I said, appreciation helps and it contributes to wealth building. I just want to make sure people don't go for appreciation (with neg. cash flow) especially in the beginning of their career unless you have enough funds coming from other sources. Cash flow also allows you to purchase more properties faster. Which in turn allows you to own more properties that will appreciate. Once you hit CRITICAL MASS that is when you can do whatever you want in terms of the type of investing you want to pursue (cash flow or appreciation).
Cash flowing properties in growth areas + equity build up (pay down of principal & appreciation) + buy more properties (cash flow/appreciation play, 1031 exchange, etc.) = RICH MOFO!
Bottom line: Once you hit critical mass you have more options on the type of properties you can go for.
Banker · sydney, Nova Scotia · Member since 2008 · 100 posts · 8 votes
18y
I've only been holding rental propeties for about 2 years now, so I consider myself a noob. But, I don't think of it as buying RE, I'm buying an income stream. If I can spend $3000 and buy a home that pays me $100 per month for as long as I own it, do I realy care what someone else thinks its worth. To take my example to another level, if I own a portfolio of properties that pays me $10,000 per month, does it make any real difference if they are worth 200k or 500k. I'm still retired with a great income (my dream only). The only time the value comes into play is if I sell them....but if I sell them I may have 500k in the bank, but I can't live forever on that. I will miss the income stream more. Back to the 9-5 job in that case. Maybe I'm way off, I'm just a noob.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18y
Originally posted by "SROC4":
Originally posted by "nationwidepi":
This below was taken from an article that listed the 10 bigest mistakes investors make. It was #4 on th elist of 10.
Real Estate Investment Mistake 4
Making the Cash Flow Mistake
Cash flow is an important piece of the real estate wealth puzzle. But you can rob yourself of future profits by putting too much emphasis on just this one, albeit important consideration. ....
Not sure who wrote that one, is he/she a reliable source? ...
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
Your housing chart you posted is absolutely useless. It represents every house, in every city, in every state, over the given period of time. That has nothing to do with particular areas in which one investor has their properties. The media is constantly doing that now, "the national housing market", etc, etc. It is just plain BS. Not to mention we were not discussing inflation. If we were, I could make the same argument for your $100 cash flow. In 20 years, that $100 will only be worth $40.
Thanks for visiting my website. For the record, my website lists many parts, but not all of my business. For one, yes I sell properties (mostly new construction) which I too have purchased, and not just to a rookie, but to anyone qualified in which the investment fits their agenda. The properties I sell (duplex/4-plex for example) do have cash flow. You can argue all you want that they don't and spout off all the rules you desire, but it does not change the fact that I, and my investors, are enjoying positive cash flow from these units. I run a landlord business as well, as I have many doors in various cities. Yes, they cash flow, and most are in a position to have future growth potential. Not every one of my sfr's cash flow, as I still have a few which I bought when I started out and made some minor errors. It happens to us all.
I also teach people how to invest with IRA/401k funds and how to use other peoples IRA's, etc. I attend meetings & RE clubs where I look to meet others who I can do business with. I have a radio show where we teach people about RE investing and have guest speakers who are professionals in their respective fields. I am constantly looking for commercial properties to purchase to both flip as well as hold. I deal with contractors and builders who can build a specific product in a specific area at discounted prices. I do this to buy and hold and sell the balance to investors as I am not financially able to hold them all. At least not yet.
Now that I have answered your question, why don't you tell these good forum members why you consistantly attack anyone who does not conform or agree with your business criteria or your rules (50%, 2%, etc)? Why not admit the fact that you believe that your business is the only thriving landlord business and that BP is for landlords only, and that no one can survive in RE unless they invest like you? (If you say this is not true, why do you always bring up "landlording" no matter what the thread topic?) I am sure you will deny these statements, but your many, many previous posts in many threads shows the same thing over and over again. In fact, you have a few paragraphs in which you start out by saying that someone clearly does not understand cash flow, etc, etc. and you have posted this same thing multiple times. (You must copy and paste or else you are a heck of a typer)
You are not doing anyone here a service with your attitude. In fact, you limit the many forum members from speaking there mind as they are afraid to come under your attacks. I obviously am not, which is one of many reasons why I am still here posting. I believe this site to be a great asset to both new and seasoned investors alike and would hope you would keep your comments positive and educational rather than attacking not just me, my business, my properties, but others as well. I know you will claim that you are not attacking me, but your posts are proof enough. This thread in which I started was to have a conversation and opinion between cash flow and appreciation. You choose to turn it into a question about my business, my properties, and my knowledge. Does that make you feel better about yourself and your business?
I am tired both physically, and of this conversation, so I am going to bed.
Real Estate Investor · San Francisco, CA · Member since 2008 · 51 posts · 0 votes
18y
Originally posted by "Wheatie":
Originally posted by "SROC4":
Originally posted by "nationwidepi":
This below was taken from an article that listed the 10 bigest mistakes investors make. It was #4 on th elist of 10.
Real Estate Investment Mistake 4
Making the Cash Flow Mistake
Cash flow is an important piece of the real estate wealth puzzle. But you can rob yourself of future profits by putting too much emphasis on just this one, albeit important consideration. ....
Not sure who wrote that one, is he/she a reliable source? ...
Thanks for the links. The site looks like they just copied different articles and opinions from other websites and compiled it into their own list. Some seem to contradict each other on the same list of "mistakes".
Real Estate Investor · San Francisco, CA · Member since 2008 · 51 posts · 0 votes
18y
I think we should have an "invest off" to settle this once and for all. Let's have one team invest for cash flow and another team invest for appreciation.
Let's do this for the next 2-3 years and see who ends up richer.
The way things are going I don't think we will be able to settle this as we keep going back and forth.
So who's with me? We can have an actual BP competition which will be fully documented for everyone to see. Kind of like our own reality show. Better yet if someone knows anyone from TLC or those networks that show Flip that house, why don't we propose this type of show? I think it would be a hit and the average joe can learn a thing or two on REAL investing.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
The housing chart that I provided provides the information you requested. That fact that you don't like the result doesn't change the facts. You didn't say anything about a specific market in your original post and still haven't.
Why not post the numbers? If true, you're just about the only person in the United States that can pay near retail for a property and get it to cash flow. Please explain to us how a property bought at 90% of market value will cash flow. I have explained probably hundreds of times how I calculate cash flow. Let's see your version.
I fail to understand why you consider someone asking you about your business to be attacking you? You don't seem to want to admit that you sell properties to newbies at near retail, when that seems to be clear from your website. Coincidentally, that seems to be exactly what that Convergent site is about also (the one that Wheatie provided the links to).
I have said over and over that speculation is a valid business model. I have also said over and over that selling properties to newbies is a valid business model. How is that attacking you? You seem to want to distance youself from the idea that you sell properties to newbies? Why?
If you look carefully, you'll see that I generally only reply to topics about the rental business because that's the business I'm in. I replied to this topic because it is about the rental business and how that relates to speculation (betting on appreciation).
True. Many times people will come on here to promote their properties; expensive course; or their expensive mentoring to newbies and will make ridiculous cash flow claims based on only claiming a couple of expenses (like taxes and insurance). In those cases, I (and others on the forum) will frequently say that they don't understand cash flow and expense issues, which is the truth. It's not doing anyone a favor to pretend to agree with such ridiculous statements. If we're all cheerleaders, the newbies that are here to learn something will get the impression that these ridiculous claims are valid, which they are not. Even if every person on this forum claimed that Cash Flow = Gross Rents - Taxes - Insurance, it still wouldn't be true. That is simply not reality and I'm going to question it every time it appears.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
18y
I think we should have an "invest off" to settle this once and for all. Let's have one team invest for cash flow and another team invest for appreciation.
Let's do this for the next 2-3 years and see who ends up richer.
Sounds like fun, I would do it! Although a 2-3 year span would not be long enough or fair on the appreciation side as we can all agree that the majority of any appreciation will not occur for at least 4-5 years. It would have to be more like a ten year period. This gives the cash flow investors 10 years of cash flow, and the appreciation investors 10 years of appreciation. Love the TV version as well. We could probably all become millionaires by putting it on "reality TV"
The numbers are posted for anyone to see and as I have said many times before, each investor needs to calculate in the vacancy/repairs/misc. costs they feel sufficient. Either way, those costs are not in excess of the $380 cash flow. I have also said that these units are new, have no maintenance the first year, and very little for years 2-5. You can argue about that all you want and compare them to your crack houses, but the truth is, they are two different investments in 2 different markets. We also have a waiting list for renters wanting to move in, so we have had 0 vacancies to date. With the rental demand, population growth, and job growth so strong, that will not change anytime soon. Again argue all you want, if you don't agree with the cash flow, don't buy it! In the last 2 months alone, you have written about 5 evictions you have had to do. The most recent, a tenant who bought a motorcycle rather than pay rent, and the other a crack head, both tenants were inherited. If you have 40 properties and 5 evictions in 2 months, and assuming you have no more the rest of the year, your eviction ratio is over 10%! (Very high by any standards)
For your information, I have never posted anything in this forum requesting that newbies need to buy my duplex/4-plex units. IF they, or any other investor (new or seasoned) are interested, I give them the info they request. End of story. I am really tired of going back and forth with you on this. This topic I started was cash flow vs. appreciation, not my business vs. yours. Poking your opinion based holes in mine does no good. I could do the same to your business and turn it into swiss cheese. I can see why you need to use a 50% rule. Your evictions of crack heads each month, attorney costs, high repairs/maintenance costs, low rent, and higher vacancies has to drive up your expenses.
I have done nothing of the sort! Not one time have I posted, hey newbies, you need to buy my duplex, here is the financials. Many new investors (none from BP), have purchased our investments and so have many others who are adding to an existing portfolio. You fail to realize that 95% of all the forum members here and 95% of the general population will not ever be FULL time investors who operate a landlording business. You do, congrats! I do, congrats! So do a few others. All the rest may buy one , two, or even 10 residential properties, but that is no where near enough to become full time. You say you have a few dozen rentals, let's call it 40 for round numbers. At $100 cash flow, that is only $4000 a month. Not an income I could support my family on. I make $ developing property, buying right, and selling it at appreciated prices or gambling, guessing, speculating as you call it. It has worked for me. My last 4 acre project was sold for $100,000 more than I paid for it and did it in less than a year.
That beats your cash flow for the next 2 years.
Bottom line, you keep running your business the way you see fit and I will do the same. You use a 50% rule and I do not (at least not on all properties). You buy low income rentals, I do not. I have never said that your business is a poor business model and many times have said that "Mike runs a great landlording business for himself" You only want to assume my business model lacks cash flow and the knowledge of how it works. You act as if I am attempting to take advantage of someone here on BP. You are mistaken. The truth is, some investors just want to have a passive investment that is low maintenance, low cost, higher rents. Many of these people are full time employees at a company where the vast majority of the income is derived from earned income. They are hammered by Uncle Sam in taxes. Having a passive income RE investment allows them a great paper deduction against their earned income. The cash flow is not intended to live off, as is a full time landlord such as yourself. It is another vehicle other than the stock market with more advantages to them. Multiple income streams, tax deductions, and the ability to defer taxes. The tenants pay down the mortgage and upon retiring, they have a nice net egg, one in which they could live if they had to as they can not do the same in a stock certificate.
All I wanted here was to have a conversation about investor's experiences on cash flow and appreciation. You do not want to talk about that, find another thread. Cash flow & appreciation can go hand in hand on the same investment, and over time, often does. I have posted my thoughts on cash flow (which I always strive for myself) and appreciation (which I believe to be the vehicle to wealth). I refuse to continue a disagreement with you on that as well as the rest of the off topic subjects you have brought into this conversation. It is not a benefit to anyone for me to respond further on this thread so this will be it.
Portland, ME · Member since 2008 · 1 post · 0 votes
18y
Originally posted by "nationwidepi":
I understand and believe that becoming wealthy from cash flow on residential properties is most likely not going to happen. True wealth is obtained from the appreciation and many tax benefits from residential RE investing. Although I beleive in cash flow, and always strive for it, the true ultimate goal is to eventually sell the residential property for large gains and defer/avoid taxes as permitted by law.
Commercial property is where wealth and long term residual income lives. When purchasing a commercial property, in essence, you are buying the cash flow. In fact, it is valued based on it's performance and not what the unit down the street sold for (comps) like residential is.
You made some really strong statements (insinuating that your way is the best and only way) and tried to pad them in a wishy washy way. I'm glad Mike called you on it. Make up your mind then stick to it.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
Unfortunately, that wouldn't be a fair comparison. Those of us that buy rentals at a huge discount would have won before the contest begins. Instant appreciation at closing beats hoping for future appreciation every time.
I don't see the gross rents or your list of expenses on your website. BTW, my cash flows are huge if I pretend that most of the expenses don't exist.
That's because you don't have many rentals. When I first started, I had more than 10 rentals before I ever had a vacancy. However, I don't know of a single successful landlord with many units that hasn't had a vacancy, regardless of the rent rate or class of the property.
Yes, those tenants were inherited tenants I got from distressed landlords. That's part of the business when you buy an apartment building for 13 cents on the dollar. A few evictions (three from this same building so far) is a small price to pay for $200,000 in equity.
Forty rentals - that's funny. I bought 22 just last year! My eviction rate during the building phase of my business has been 1% per month. However, the majority of those have been inherited tenants. I estimate that when the business is stabilized later this year, my eviction rate (for tenants I've screened) will be between .25% and .5% per month (absolutely normal). I won't have 5 evictions for the whole year, there will be at least a couple more. That's just part of the business and you will experience it sooner or later.
What's more significant than the eviction rate is the occupancy rate. Currently, I'm running in the high 90's, which is excellent and the best we've had in this area in the past 5 years. As of today, I only have one 1-bedroom apartment and one 2-bedroom house for rent (the one I just bought). WOW!
As I said, my eviction rate is very good and something you will be experiencing once you have more rentals or are in the business a little longer. My attorney costs, repairs, and vacancies are normal (the vacancies are currently extremely low) and our rent is over 2% of the purchase price per month (some a lot higher).
All the more reason to buy right and have positive cash flow and instant equity.
As I said, I have significantly more than 40 rentals. However, you missed the important point which is that I spend 12-16 hours per week doing the management and maintenance myself. That allows me to earn at least another $100 per unit per month, which you can't do with long distance rentals. Therefore, even someone with only 40 rentals could generate close to a six figure income. Fortunately, I can support my family on a six figure income.
I think we did that and explored most sides of this issue.