Do most properties you buy cash flow positive?
Hayward, CA · Member since 2017 · 70 posts · 7 votes
Do most properties you buy cash flow positive?
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNo....ALL OF THEM DO. Why would you buy a property for cash flow, and have negative cash flow?
What's the risk of buying a negative cash flow property? Try:
1 - running out of money
2 - needing to work harder at your job to pay for someone else to live in your house
3 - bleeding your seed money you could use for future investments
...there's more, but it just gets worse.
Buying a cash flow property with negative cash flow, is like a hockey team starting the game out by spotting the other team a goal...and every period spotting them another goal. The more negative the cash flow, the more goals you spot the other team/period.
Don't think that if you put up a bigger down payment it will change your negative CF to positive CF. All you're doing is paying for all that negative cash flow up front.
62 Replies
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes8y
To further the conversation that seems to be going awry for some of the posters in this thread, the math is the math, whether or not they accept it or understand it.
Also, Cash Flow is only one of 4 ways of making money in Real Estate.
The other 3 are Appreciation, Mortgage Reduction and Tax Savings.
One of the best books that you can possibly read which is not on the best seller's list because it's ALL about the MATH is What Every Real Estate Investor Needs to Know About Cash Flow
A study of the above book will help you to understand that if you value ONLY cash flow then you will not EVER want your investments to be purchased where the Cash Flow is not a large positive amount.
HOWEVER, if you try to understand the other 3 ways of making money in Real Estate, then you will have other metrics that can offset an Investment that is either Negative or Break Even Cash Flow.
The reality is that for the 3 Scenarios, there is not enough information to determine if the single property is good or not.
We only know a few things including the Purchase Price, Rents and Expenses and also the way it was financed.
What most people are making an assumption is that the First Year's Calculation is the same for the ENTIRE time you own the property.
What is unknown is how to workout any kind of future appreciation rates in both Rental And Expenses so that you can determine the Future NOI.
Based on the Future NOI, you can then work out the Value of the Property by using the neighborhood Cap Rate = NOI/Purchase Price.
I have know plenty of Investors who chose to live in NYC only to find themselves priced out because they failed to understand that you need to calculate not only the 1st year Cash Flows but at least the next 10 year cash flows.
As an example, in the year 2000, I bought a 2 Family building for $140k, 15% down or $21k, $7k in closing costs. The total investment was $28k. There was $40k in renovations so total investment was $21k + $7k + 40k = $68k. The rents were $500 each unit and it broke even on the cash flow.
TODAY, the rents are now $1,900 Each Unit.... YES.... that's a $1,400 increase on EACH unit times 2 units = $2,800 of MORE RENTS while the expenses climbed much less than the rents.
The Value of the building is conservatively $1 Million.
If I were to sell the building, I would profit $1 Million minus the remaining balance of the Mortgage, around $50k and some closing costs, say $75k. So... $1 Million minus $75k minus $75k = $850k.
So this building which is a LOSER to the several posters, 17 years later, cash flows hugely per month.
The ROI on the SALE would be $850k returned / $68k invested or 1,250%...... yes... that ONE THOUSAND TWO HUNDRED AND FIFTY PERCENT. Divide that by 18 years and you get approximately 70% per year. AND IT CASH FLOWs today more than $2,500 per MONTH.
I'm so sad I bought this LOSER of a property.
I am not preaching to buy a Cash Flowing Property or NOT.... what I was merely demonstrating is that MATH shows that the INVESTOR cash flows the Property.
So if you want to go to a Cash Flowing scenario in the ACTUAL property I bought in 2000... then I would have merely put more down. Then I would have cash flowed the property.
Did that make the property good or bad? NO... it was the FUTURE results that made it good or bad.
If you believe that there is risk of buying a property where you cannot make it cash flow, then you buy as according to your ability to cash flow the property.
I'm merely stating that the Characteristic of Cash Flow should not be attributed to the Property. It's the INVESTOR that cash flows the property.
- Investor · Austin, TX · Member since 2013 · 443 posts · 174 votes8y
@Bryan Tasumi You are correct Texas has certain conditions that make it more difficult to cashflow. This is not a very good place to invest compared to states in the midwest or other states in the south.
Not to say it is impossible but it is more difficult than other states with low property taxes, cheaper insurance and cheaper water.
Cashflow is a funny thing. You can make projections all day long but until the rubber hits the pavement then you wont know really how things will go. You can go through periods when things dont stop breaking and tenants arent paying rent. Then you go through periods of peace and consistent checks. Some properties will be home runs and some will be duds. Keep growing your portfolio and get rid of the duds along the way.
- Riverside, CA · Member since 2017 · 412 posts · 296 votes8y
Originally posted by @Liz C.:
Mike S. The one cash flow $500 to $1000 do you have mortgage on it? I like to have more info of those properties. How much is it?
I take over the properties with Owner Financing, Subject To & Lease Options. So yes, there is financing on the property, but it isn't my loan. If you do a search above for "Subject To" you will get more info.
- Real Estate Agent/Property Management · Houston, TX · Member since 2014 · 1k+ posts · 827 votes8y
You should always cash flow something. If you purchase a property with no or negative cash flow in anticipation of appreciation, that's not investing. That's speculating.
- Attorney · Akron, OH · Member since 2016 · 535 posts · 389 votes8yI would not purchase a property unless it has cash flow. Keep in mind that if your market doesn't provide the numbers you are looking for, you are free to look to another market.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Fred Heller:
You should always cash flow something. If you purchase a property with no or negative cash flow in anticipation of appreciation, that's not investing. That's speculating.
To paraphrase from a famous Patriot, "I regret I have but one vote to give to this post".
- Investor · Baltimore, MD · Member since 2015 · 20 posts · 13 votes8y
For me appreciation is considered a bonus if it happens. It isn't part of my core investment strategy. I take a conservative approach which means that worst case scenario (all expenses in and estimated high) my rental property still cash flows and enough to fit my risk tolerance. I wouldn't be able to sleep at night if I was banking on appreciation and knew it was probable that I would be in the red every month.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@John Thedford I think In the context of the questions and all the answers were.
you buy a rental put 20 or 25% down get long term financing should it or does it throw off positive cash flow monthly after setting aside Cap ex vacancy turn over re lease fees etc.. in my mind in non appreciation for snail pace appreciating markets and with long term fixed debt that is really the only way to do it. As we have seen by all the posts.
However there are other ways.. I sold a bunch of my OREO on 36 to 60 month NOTES at ZERO % interest.
with 10% or more down.. this was how we got rid of them in the tough selling times.
90% of investors would pass.. WHY because they would have to feed them 100 to 200 a month..
my counter was though 5 years or less is a blink of the eye in the terms of owning rentals and you will then have them paid for.. and your cash flow goes up HUGE ... those buyers that did take advantage of them have pretty much paid them all off.. I had not one default.. and its kind of cool giving them mortgage satisfactions.. and knowing they just joined the free and clear club.. which is really how you gain wealth owning sfrs unless your going to own a few hundred of them.
And at that point if they wanted to refi and pull a little kish out of them I guess they could do that.
but give me sweat heart owner financing that allows tenant to pay off 80% or more of the house in a short amount of time. Like you most of my rentals are paid for.. that's what I like.. I am long term fixed debt adverse ( just me personally and being my age)
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes8y
@Bryan Tasumi To answer your question: YES!
The main premise of investing is to make money, so I'd encourage to only consider investing in vehicles that have asset-attribute to it and definitely not a liability and/or just latent.
Definition of investment:
"the action or process of investing money for profit or material result."
Some could argue that the material result in the above definition can be referred to as "appreciation" in real estate investments. However, investing for cash flow is the best approach to mitigate your risks of losing capital.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Ola Dantis:
@Bryan Tasumi To answer your question: YES!
The main premise of investing is to make money, so I'd encourage to only consider investing in vehicles that have asset-attribute to it and definitely not a liability and/or just latent.
Definition of investment:
"the action or process of investing money for profit or material result."
Some could argue that the material result in the above definition can be referred to as "appreciation" in real estate investments. However, investing for cash flow is the best approach to mitigate your risks of losing capital.
Except you are missing a few elements in your conclusion:
1 - Yes, appreciating equity has value, but it must be looked at in the context of the entire deal. It doesn't stand alone.
2 - If you have negative cash flow, you are losing money every year, and that must be included in your math.
3 - or you are paying all your negative CF upfront to give the illusion of positive CF, you are starting out negative and just playing a game of catch up. The more negative cash flow you pay upfront, the further behind you start.
4 - and, here's the one that seems to be missed a lot...and is the one that negates the "appreciating equity" argument the best...Lost investment returns from the negative cash flow. Actually, compounding ROI lost from the negative CF.
When you put it all together, if the appreciating equity is equal to or less than the lost ROI from the negative cash flow, then the net sum is a loss. Making it more of a loss, is the impact of "compounding" on the lost ROI.
An appreciating property doesn't compound.
Reinvested cash from profits/cash flow does.
This is why I say that "cash" is a verb not a noun...and when it becomes a noun (like appreciating equity), you lose.
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes8y
Originally posted by @Joe Villeneuve:
Originally posted by @Ola Dantis:
@Bryan Tasumi To answer your question: YES!
The main premise of investing is to make money, so I'd encourage to only consider investing in vehicles that have asset-attribute to it and definitely not a liability and/or just latent.
Definition of investment:
"the action or process of investing money for profit or material result."
Some could argue that the material result in the above definition can be referred to as "appreciation" in real estate investments. However, investing for cash flow is the best approach to mitigate your risks of losing capital.
Except you are missing a few elements in your conclusion:
1 - Yes, appreciating equity has value, but it must be looked at in the context of the entire deal. It doesn't stand alone.
2 - If you have negative cash flow, you are losing money every year, and that must be included in your math.
3 - or you are paying all your negative CF upfront to give the illusion of positive CF, you are starting out negative and just playing a game of catch up. The more negative cash flow you pay upfront, the further behind you start.
4 - and, here's the one that seems to be missed a lot...and is the one that negates the "appreciating equity" argument the best...Lost investment returns from the negative cash flow. Actually, compounding ROI lost from the negative CF.
When you put it all together, if the appreciating equity is equal to or less than the lost ROI from the negative cash flow, then the net sum is a loss. Making it more of a loss, is the impact of "compounding" on the lost ROI.
An appreciating property doesn't compound.
Reinvested cash from profits/cash flow does.
This is why I say that "cash" is a verb not a noun...and when it becomes a noun (like appreciating equity), you lose.
Thanks for the reply.
I am not in favour of investing in negative cash flow investments.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Ola Dantis:
Originally posted by @Joe Villeneuve:
Originally posted by @Ola Dantis:
@Bryan Tasumi To answer your question: YES!
The main premise of investing is to make money, so I'd encourage to only consider investing in vehicles that have asset-attribute to it and definitely not a liability and/or just latent.
Definition of investment:
"the action or process of investing money for profit or material result."
Some could argue that the material result in the above definition can be referred to as "appreciation" in real estate investments. However, investing for cash flow is the best approach to mitigate your risks of losing capital.
Except you are missing a few elements in your conclusion:
1 - Yes, appreciating equity has value, but it must be looked at in the context of the entire deal. It doesn't stand alone.
2 - If you have negative cash flow, you are losing money every year, and that must be included in your math.
3 - or you are paying all your negative CF upfront to give the illusion of positive CF, you are starting out negative and just playing a game of catch up. The more negative cash flow you pay upfront, the further behind you start.
4 - and, here's the one that seems to be missed a lot...and is the one that negates the "appreciating equity" argument the best...Lost investment returns from the negative cash flow. Actually, compounding ROI lost from the negative CF.
When you put it all together, if the appreciating equity is equal to or less than the lost ROI from the negative cash flow, then the net sum is a loss. Making it more of a loss, is the impact of "compounding" on the lost ROI.
An appreciating property doesn't compound.
Reinvested cash from profits/cash flow does.
This is why I say that "cash" is a verb not a noun...and when it becomes a noun (like appreciating equity), you lose.
Thanks for the reply.
I am not in favour of investing in negative cash flow investments.
I appologize if I misinterpreted you post, but after re-reading it, I still can't see where it says anything other than "it's OK to invest in NCF if you have appreciating equity".
Two points of extreme importance for smart investors:
1) Appreciation and mortgage pay down only exits on paper, until sold or equity pulled it has next to no true value. It may or may not actually exist at any given point in time (Schrodinger's cat), bragging rights only. A investor can not buy groceries with equity nor can they assume it will be there in the future. As noted your children will be happy to sell the fruits of your life time of labour.
2) Based on the opportunity value of cash a property that can not produce positive cash flow with a hypothetical 100% financing scenario will likely never produce true positive cash flow. Investors can buy artificial cash flow with equity pay down assuming they place next to no value on cash. Paying down a mortgage and accumulating dead equity creates the lowest possible ROI and is the most conservative form of investment.
- Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes8y
All properties should cash flow once they're paid off! :)
The goal is cash flow for sure. However, I do have a property that took a rental rate hit during the market downturn, and took a while to get back up where it should be. Many investors would have sold it and taken the loss, but I held onto it.
It has doubled in value from what I paid for it, and at this point, it breaks even each month. So, I still consider it a solid value to my portfolio because it still fits my overall investing strategy.
I would NOT want ALL of the properties within my portfolio to be like this. However, having a property that pays for itself each month IS a value as someone else is paying for it (the tenant). Once the mortgage is paid off, it is free and clear and will be a HUGE cash flow property! And since my goal is to build a revenue for retirement, this property still fits within my investing strategy.
I guess what I am trying to convey is that investing is strategic. Something that meets your goals won't necessarily meet someone else's investing goals. There are alot of people here who shutter at the notion of holding a property that breaks even, or takes a loss each month, but that is because their investing goals are different.
Not that I am suggesting you do this, but just for the sake of example, let's say you had 10 properties that all broke even and brought in $1,500 per month in rent. Even if they were all on 30 year mortgages, in 30 years, you would have $180,000 in annual rental income (or $15K per month). Of course, the taxes, insurance, repairs and capex would have to be deducted, but again, this is for example, so you get the point.
If someone in their 20s or 30s started this journey and owned a portfolio like that, by the time they were in their 50s or 60s, they would have a retirement income without having put much investment into it. That is a huge value.
Now, there may be trouble when it comes to financing as the lender will likely only allow for 75% of the rental income to count for qualifying for future mortgages. If your portfolio only ha properties that break even or have negative cash flow, then your DTI will likely suffer sooner than later, preventing future purchases.
The key is to have a diverse portfolio that might include higher cash flowing properties that may not appreciate very well, and high appreciating properties that may break even, and everything in between. This will allow you the best options in any market, and also keep your financing options open in order to keep growing.
- Specialist · Baltimore, MD · Member since 2016 · 388 posts · 318 votes8yJoe Scaparra , it didn’t take 6 months to evict tenants, it took 6 months of them paying and then they stopped because they lost their jobs and then I had to evict. The eviction process itself wasn’t long.
let's say you had 10 properties that all broke even and brought in $1,500 per month in rent. Even if they were all on 30 year mortgages, in 30 years, you would have $180,000 in annual rental income.
Based on expenses of say 50% your NOI is 90K annually. This investment logic only works if the total value of your properties then does not exceed 900K or 90K per property to achieve a 10% return on your cash.
Obviously this is a very rough example however it is extremely unlikely (near impossible as appreciation occurs) the return on a paid off property would ever exceed the prevailing mortgage interest rate which would make liquidating and investing the cash, almost anywhere else than in real estate, a smarter investment strategy.
This is the one prevailing principal blind spot that cash/equity investors conveniently always choose to ignore. The fact that owning the bricks and mortar is actually a liability not an asset as equity grows and ROI diminishes to the point of no longer keeping up with inflation. Real estate is a reasonably safe vehicle to park cash only if you deem cash to have low to no value. This is of course contrary to all principals of investmemt.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes8y
Same boat here Jay. Early 60's. So, I don't mind feeding a few because I have the ability to do so. I don't want massive debt at this point. Due to location, just a dozen SFR will gross over 200K a year. Furthermore, we don't have a state income tax and massive tax bills like some states. Life is GOOD! Debt is not a requirement of investing. Even though I have to pull cash out of my pocket, most of it being principal, technically I still have income:) Principal pay down is not a write off.
I'm in Texas, an hour north of DFW. I invest in B and C properties. Everything I have cash flows positive e on a 25 year note and rents at 1.5% or better. The only exception. Is a house I rent to my stepdaughter and her husband. It is about break even, but they have spent thousands of dollars improving the house.
- Investor · Austin, TX · Member since 2013 · 680 posts · 1k+ votes8y
@Cara Lonsdale You are correct in that everyone has their own goals and have there own way of getting there. I live in Austin and if I want to travel to LA I could take a bus, drive a car, take the train or fly. I could go direct or take a scenic route. I got that!
However, the senario you laid out disregards the emotions that can result from stress caused by your investments. You said many investors would have sold and taken a loss but you hung on. Think about that for a minute. The stress was too much that many sold out of fear or out of means. That is what negative cash flow investing can do. It does not account for or has little tolerance if the environment turns sour. The strategy is dependent on the market to move in an upwards trajectory. Most of the time it does, but when it tanks it has the ability to be swift.
I notice you said you had 10 properties and you had this one not cash flowing. Ok, I get it maybe there is something unique about this property and fine you have the resources and CONVICTION to hang with a temporary loser! Good for you as I out lined earlier there are many ways to get to LA.
One other thing caught my attention. You said your property went down but has now doubled in price since you bought it and IS NOW BREAKING EVEN. If a property has to double in price just to be breaking even, would deter me from investing.
For me it is real simple. I buy properties for 20 to 25% down and NEVER SINK ANOTHER DOLLAR OF MY OWN MONEY in the property. I manage it for 10-12 years for which it is now paid off and then I retire living off the cash flow. During this time of growing my portfolio I don't live off any of the cash flow but put it all back into maintenance reserve and paying down mortgages. That is my strategy to get to LA if you will. Many others work, but none of my properties would ever force me to sell because it causing me financial stress. My personal life might cause me financial stress but not my cash flowing properties. Essentially, I am buying property at 20cents on the dollar and letting my tenants pay the rest, thank you very much.
- Business rule #1, You never buy a business that does not offer up cash flow. It's either recurring income or a huge payout sometime in the future. So unless your property has some solid strategic value aka sharp future appreciation, you are not advised to avoid positive cash flow on it. I will confess that one of my properties is not cash flow positive, it's negative $300 per month but I have others offer > 3k per month in free cash flow. So as a portfolio we are in good shape. But I have a ton of strategic faith in the property that is not giving me cash back. It's located in a great part of town with a ton going around that location.
- Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes8y
Originally posted by @Bryan Tasumi:
Do most properties you buy cash flow positive? What percentage of properties that you purchase will cash flow positive when rented out? 95%, 90%, 80% or less? What is the risk of buying a property that does not cash flow positive?
Do all condos and town homes in Texas cash flow positive? I am talking about in the Houston, Dallas, and Austin areas where the property taxes are high 2.6%+ and have high HOA fees.
I don't really understand the percentage of properties that cash flow positive and whether high property taxes in states such as Texas and high HOA fees always make the cash flow negative or what.
Any advice/insight is greatly appreciated. Thank you!
Oh, gawd. You've got the cash flow guys all riled up again. Now, honestly, most of them are pretty sharp guys. And if cash flow is what they want to focus on, that's fine. But that's small-ball.
Six years ago, my divorce wiped out most of my savings. Net worth after the divorce was around $300K. Today it's $2.2MM and rising 20% per year (would be rising more if I was keeping it all for myself instead of spreading it around trying to help my kids, fiancee and key employees build wealth for themselves.)
Cash flowing $200/door won't do that for you. Appreciation, leverage, and having other people pay your mortgages does.
(And I recognize that my wealth is small compared to many others on this forum. But for growth in 6 years, without taking a penny of investor money, I'm happy with it.)
I would never specifically seek out a negative cash flow situation, but I've had a couple that I was able to buy with basically no money out of pocket, and sell three years later for a $40-50K profit. it's not something I'd recommend to a new investor, but it can work. And one in a gentrifying area that had -$150/mo cash flow for the first year I owned it, but appreciated $25,000 in that year and another $30,000 in the 2nd year when I was able to raise rent to break-even. I'll take that deal all day, every day.
I have multiple businesses that bring me a nice income, so properties are a wealth builder, not an income source. And I'm a big-picture guy, so I honestly find it hard to get interested in whether a property cash flows $100/mo or $250/mo. The difference between those is $1800/year. Take that times 20 houses and the difference is $36,000/year. My lowest paid employee makes more than that.
I buy 15 or 20 properties a year at 25% down using 15 year notes so equity builds faster, sell 10 or 15 that I bought in previous years, enjoy the appreciation and equity. I never keep more than 30 in my portfolio at any given time, and the cumulative cash flow is always very positive, so if we have a market correction, I'm fine.
BOTTOM LINE: Negative cash flow properties aren't something to seek out, but occasionally they may make sense.
OTHER BOTTOM LINE: Cash flow is a very slow way to build wealth. At $200/door/mo, you've got to have 42 doors to make $100K/year. I'll make that selling 2 properties that have appreciated, and use it to buy 4 more.
- Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes8y
Originally posted by @Thomas S.:
let's say you had 10 properties that all broke even and brought in $1,500 per month in rent. Even if they were all on 30 year mortgages, in 30 years, you would have $180,000 in annual rental income.
Based on expenses of say 50% your NOI is 90K annually. This investment logic only works if the total value of your properties then does not exceed 900K or 90K per property to achieve a 10% return on your cash.
Obviously this is a very rough example however it is extremely unlikely (near impossible as appreciation occurs) the return on a paid off property would ever exceed the prevailing mortgage interest rate which would make liquidating and investing the cash, almost anywhere else than in real estate, a smarter investment strategy.
This is the one prevailing principal blind spot that cash/equity investors conveniently always choose to ignore. The fact that owning the bricks and mortar is actually a liability not an asset as equity grows and ROI diminishes to the point of no longer keeping up with inflation. Real estate is a reasonably safe vehicle to park cash only if you deem cash to have low to no value. This is of course contrary to all principals of investmemt.
Thomas, please quote me next time so that I am able to respond to your comments about my post. I appreciate it.
I can appreciate your response, and as I mentioned (and you acknowledged) it was JUST an EXAMPLE to convey that someone COULD have a break even property that still offers value in the long run if it aligns with their ultimate strategy. Additionally, 1 property in a portfolio of dozens will not be prohibitive to the investor making money.
I understand that expenses and other things will be deducted from the income. However, the fact that you can use OPM to pay for your asset (the mortgage), and end up with a free and clear property is the point. It beats buying an asset and paying for it yourself, only to have the same result.
And no one says that you have to leave the asset free and clear. You could pull that money out to buy another asset. Then you are TRULY maximizing your OPM because your seed money is now OPM too! For someone with limited resources, OPM is the only way to tap into the RE investing model with any hope of success.
- Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes8y
Originally posted by @Joe Scaparra:
@Cara Lonsdale You are correct in that everyone has their own goals and have there own way of getting there. I live in Austin and if I want to travel to LA I could take a bus, drive a car, take the train or fly. I could go direct or take a scenic route. I got that!
However, the senario you laid out disregards the emotions that can result from stress caused by your investments. You said many investors would have sold and taken a loss but you hung on. Think about that for a minute. The stress was too much that many sold out of fear or out of means. That is what negative cash flow investing can do. It does not account for or has little tolerance if the environment turns sour. The strategy is dependent on the market to move in an upwards trajectory. Most of the time it does, but when it tanks it has the ability to be swift.
I notice you said you had 10 properties and you had this one not cash flowing. Ok, I get it maybe there is something unique about this property and fine you have the resources and CONVICTION to hang with a temporary loser! Good for you as I out lined earlier there are many ways to get to LA.
One other thing caught my attention. You said your property went down but has now doubled in price since you bought it and IS NOW BREAKING EVEN. If a property has to double in price just to be breaking even, would deter me from investing.
For me it is real simple. I buy properties for 20 to 25% down and NEVER SINK ANOTHER DOLLAR OF MY OWN MONEY in the property. I manage it for 10-12 years for which it is now paid off and then I retire living off the cash flow. During this time of growing my portfolio I don't live off any of the cash flow but put it all back into maintenance reserve and paying down mortgages. That is my strategy to get to LA if you will. Many others work, but none of my properties would ever force me to sell because it causing me financial stress. My personal life might cause me financial stress but not my cash flowing properties. Essentially, I am buying property at 20cents on the dollar and letting my tenants pay the rest, thank you very much.
You misunderstood my post, or maybe I didn't make it clear enough. For that I apologize.
I didn't specify how may properties I have in my portfolio. The 10 properties was the example given.
Also, when I stated that the property broke even, I was talking about the monthly cash flow on the property.
When I stated that the property doubled, I was talking about the appreciation on the property (the property's value) two different things. That was the whole point. My point was that even if the monthly rental income is a break even, the property can still provide value, depending on your income strategy, either through appreciation OR by allowing OPM to pay off the asset over time, giving you a free and clear asset that certainly cash flows.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Simple math...you know, that "math" many said they would never use.
A) Equity Appreciation is based on addition and simple annual multiplication: Previous year value x rate of appreciation/year (this can be +/-)
B) Cash Flow is based on simple addition: CF/Yr x # of years CF (this can be +/-)
C) Compounded use of the lost cash flow through reinvesting: NGF x %Profit ^ # of times compounded (or used)
D) Compounded use of Cash USED for DP: CDP used x %Profit ^ # of times compounded (or used)...this is a very large, and with increasing growth every year NEGATIVE number
The smallest numbers are A) and B). The larger numbers will always be C) & D) because they are compounded numbers.
"end up with a free and clear property is the point. It beats buying an asset and paying for it yourself, only to have the same result."
Yes but a free and clear property should not be an end point. You have taken your asset (cash) and turned your real estate into a liability by ignoring it's true value.
My point is that as your equity grows, especially approaching having a property paid off, it becomes a very poor investment/use of cash. Although you have benefited from a tenant paying off your mortgage you have basically stuffed it under your mattress and forgotten about it (dead equity). You have spent 30 years working to attain a certain level of net worth and then have left it to languish in a extremely low level return investment. The logic defies normal investment mentality.
The money came from a tenant but has become your earnings on your investment and by not liquidating a free and clear property you are turning your back on a lifetime of investing to bring in a meager (2% - 3% ) ROI.
I do not understand why old investors give up or lose their ability to understand the value of their money. I guess it's because they no longer need the money and simply no longer care if it earns it's keep.
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