Is it more about Quality or Quantity? - Real Estate Investing

26 Replies

Hi everyone! I'm a newbie and excited to start my real estate journey. My goal for real estate investing is purely cash flow. 

I'm looking to purchase my first rental property in 2019 and was wondering if I should focus on purchasing many properties that bring me a below average cash flow or buying few properties that give me a GOOD cash flow. 

I plan to buy 1 GOOD property per year but was wondering if I should focus on buying fair properties that bring an below-average cash flow. (My goal is to get at least $500 a month cash-flow on a good property, is this realistic? What are your goals for cash-flow properties?) 

Thanks in advance for your responses!

I would let the deal you find dictate what it is good for. Keep an open mind let it tell you what it can do for you. Good deals are not that easy to come by. 

Id take higher cash flowing properties in a better neighborhood all day. Even if it meant half the properties.

This is also because these types of rentals are more local to me, so I can minimize the maintenance and management expenses by doing it myself. 

Right now, its critical that I get the most return on my cash. So I shoot for cash flow and appreciation. 

Hi Andres,

You want quality vs quantity for sure.  Quality will have better tenants, fall in a better area, and will be more stable.  Now quality will not necessarily mean a higher cash on cash.  Usually, it is the opposite. A better property will have less cash flow because of the higher cost of acquisition.  The goal is to find the sweet spot where you can maximize cash flow with quality.  For each investor, the sweet spot is different based on how they view what quality is.  

Lots of investors goal is to get as many doors as possible. For example, they want 30 doors netting $200 a piece. I rather have a fewer amount say 8 doors with zero loan balances which will net me the same amount as 30 doors maxed out on LTV. For me it's about time. I don't want to deal with 30 doors netting me $200 each. Yes, I get the argument that I don't have 30 houses leveraged for appreciation. On the flip side I also don't have the risk of 30 houses leveraged should the market go against me.

@Andres Aguero I think there is some confusion when you talk quality versus quantity. Higher quality properties often generate less cash flow. Lower quality properties generally generate higher cash flow. 

On BP there is this concept that more doors is better, but more doors is more tenants and more problems. I like to get more dollars per door rather than just having more doors. I also like lower expense per door, which means avoiding landlord paid utilities and finding properties with less maintenance and CAPEX.

So you can put two properties side-by-side and one may have higher cash flow, but that is only part of the story. Quality comes at a price.

@Andres Aguero I second what @Joe Splitrock said. Great advice.

Do you have a specific reason why you have the goal of investing solely for cash flow?

Do you plan on buying for all cash? $500/door with debt is a high bar to clear. 

I know this differs from most of the cash flow is king folks on BP, but I personally don't care about CF. I care about overall risk adjusted return. If the cash flows are lumpy, so what. Being 100% blunt, it is not that impressive to go from 0-18 units 6 months, or 0-37 in 12 months. Banks are in the business of lending money. That is how they put food on their tables. Simply because a bank made a loan on a property, doesn't mean it is a good investment. It isn't that hard to take part in the greater fool theory and acquire door after door leveraged to the hilt receiving a small risk premium for a lot of work. Getting properties that yield above average returns is a difficult yet rewarding accomplishment. 

As for the quality of quantity, a smart investor said "I'd rather buy a great business at a reasonable price than a reasonable business at a great price.", an idea that I subscribe to, but it is only one investing style; it depends on your goals, knowledge, skills, and abilities. Both quality and quantity have their pros and cons. 

For instance having lots of rentals spreads vacancy risk out over a greater number of properties, but also requires you have some expertise in managing systems, process, employees and the like. Those are a lot more than buzzwords thrown around on podcasts. The fact of the matter is some people are good a managing people and others aren't. 

It matters more that you have done a solid self assessment of your knowledge, skills, abilities, strengths, weakness, ect and set goals that fall in line with that self analysis rather than adopt someone else's investing style and metrics simple because they have had success. 

The answer comes down to how much cash you have to invest. You need cash for the DP on every property so you are limited by how much you have.

You need to establish a goal based on what you can afford. Generally higher cash flow per door is found in lower quality propeties. The down side is you will likely have less appreciation. 

You will be able to buy more higher cash flow properties at lower prices than lower cash flow properties that will be at a higher price.  The price and cash flow are generally in relation to the quality of property/community.

C/D class higher cash flow, lower purchase price, little appreciation, more work. A class  lower cash flow, higher price, higher appreciation, less work  

@Andres Aguero I wouldn't buy ANY property that give you below average cash flow, and I definitely wouldn't recommend buying many of them.

I would say come up with a plan to buy many properties that give you good cash flow. It's definitely doable, but I wouldn't recommend doing it here in CA.

@Joe Splitrock   @Bill F.   & @Thomas S. - Had no idea that higher quality properties often generate less cash flow. Bill - my goal is to have 10 properties within the span of 10 years which generate $500/mo in cash flow. I'm not planning to invest in CA, but other places where cash flow is known to be "good". I may have to re-develop my strategy, but just curious if you guys think $500/mo is realistic. What are some of the best cash flow properties you guys have in your portfolio? 

Again I appreciate everyone's responses. Just trying to get a grasp of everything and trying to set a strategy to reach my goal, which is $5,000/mo in the span of 10 years for RE investing. @Thomas

@Andres Aguero how are you defining "Cash Flow"?  If you mean net in your pocket spendable cash after all expenses, $500 a unit is very high unless you own them free and clear. 

Getting $500 month more than you mortgage payment is easy. However there are a LOT of other expenses besides your mortgage payment.

@Ned Carey - Yup, I'm using the BP rental property calculator. This is after property management, cap ex, mortage payment, etc. 

Some investors like to focus on the most profit per property rather than per door (i.e. one 20 unit property at $200/door versus ten individual properties at $400/door).

I'd much prefer to have a few higher cash flowing properties than a ton of below average cash flowing properties.  Work smart, not hard!  Especially if you don't have a lot of capital to spend on a lot of properties right now. Shoot for quality. And by quality I mean highest cash flow. If a lower income area brings higher cash flow than a higher income area, I would buy the lower income area properties all day.

@Andres Aguero if you can do it that is great.  I figure about $4000 a year or about $340 a month cash flow for a rental that I have financed. 

cash flow is great but any property can cash flow if you throw enough money at it. you can cash flow $1500 per door if you wanted to. You should look at cash on cash ROI to see which will yield the best returns for your money.

In regards to quality vs quantity - it's both.  there is no one silver bullet.   good RE investor will know how to balance all factors.

@Andres Aguero - It depends on your goals. Reverse engineer what you want and work towards that. If you want to get F U money ($10mm networth & up) in a reasonable amount of time, you will need volume and capital partners. Very few people achieve because it isn't easy to do. The beauty of real estate is leverage and the money multiplier, not only in terms of debt but also in equity. Once you get into larger deals, you can promote and multiply in ways you don't usually get with smaller rental houses. 

Also, the market can affect how many deals you do in certain economic cycle. 

From the last three years in the business I have learned it as a real estate business entrepreneur, it takes deal velocity (speed/number of deals) and piggybacking off other people's money. That's when the business gets fun and where the bigger payouts exist. 

Again, you have to decide what you want. More money and deals doesn't always lead to a happier life. 

@Andres Aguero go for it and never EVER quit your dream. One year ago I was wishing to have my first rental cash flow property...YTD counting dozens and moving forward!! 💪💪
@Andres Aguero $500/month positive cash flow sounds a little optimistic, unless you pay cash for them or put down a monster down payment. I’m cash flowing about $500 on one of my SFHs, but I put 60% down on it. And paid cash for another one which cash flows about $1,500/month. Another one I just bought cash flows about $1,000/month but I paid 95k cash for that one. My three other properties are cheaper homes worth about 150k each and cash flow about $300/month. I put 20% down and have 15 year mortgages. You can probably do better than what I found, but I don’t come across many people finding great deals that cash flow $500/month with only 20% down. I do find that you get a much better return on your investments with cheaper homes vs the nicer more expensive ones. Demand is huge for them and my tenants all seem to be lifers that won’t ever move up or afford to buy a home. They all seem pay check to paycheck kind of people. The yards aren’t as nice, but that’s ok with me. It’s not a beauty contest with my rentals in those types of neighborhoods. All I care about is having long term happy tenants who pay me on time and watching that mortgage dwindle away over the years! Good luck with your RE adventure. And I hope you find some great deals.
Originally posted by @Andres Aguero :

@Joe Splitrock  @Bill F.   & @Thomas S. - Had no idea that higher quality properties often generate less cash flow. Bill - my goal is to have 10 properties within the span of 10 years which generate $500/mo in cash flow. I'm not planning to invest in CA, but other places where cash flow is known to be "good". I may have to re-develop my strategy, but just curious if you guys think $500/mo is realistic. What are some of the best cash flow properties you guys have in your portfolio? 

Again I appreciate everyone's responses. Just trying to get a grasp of everything and trying to set a strategy to reach my goal, which is $5,000/mo in the span of 10 years for RE investing. @Thomas

Pretty tough in today's market to see $500 cash flow per door on leveraged properties if you are factoring in repairs, CAPEX and management. My best cash flow properties were older MFH properties in C neighborhoods. I have sold all those properties, because the money wasn't worth the headache. Lower quality properties attract lower quality tenants. I don't regret starting that way, because it gave me cash to grow my business.

@Andres Aguero 500/door is a lot, especially after calculating in PM costs, vacancy, capex etc. like what others have said, the higher the cash flow (on paper) the worse the property, and the higher the headache factor for you. Fewer properties in good neighborhoods is definitely a better strategy, if you want fewer headaches. Once they are paid off, they will generate A LOT of cash flow! Would you rather have 5 paid for properties bringing in over 5 grand a month, or 30 properties with mortgages brining in the same amount?
@Andres Aguero What’s your strategy for acquiring properties? If your planning to be a passive investor and buy properties through turnkey providers. You might be surprised to learn how low the cash flow really is. I started learning about real estate through bigger pockets content where they preach about finding properties with $500/month cash flow and you splitting that cash flow with an investor that brings in all the money and you found the deal so you get half without ANY OF YOUR OWN MONEY! Those kind of deals are rare and I’ve never met anyone that has one of those in their portfolio. I’ve learned you can generally expect $50-$100 cash flow /month. These are your mainstream deals that are offered through turnkey rentals. This type of cash flow requires no sweat equity just your typical 20-25% down on a $100,000 house in Alabama you can expect around $50-100/month cash flow. If you want to get $500 cash flow per month per property, you would probably have to be active not passive.
@Andres Aguero It seems as though your question pertains to risk. Lower quality locations and construction yield high rates of return because of higher perceived risk (assuming no opportunity for arbitrage). Further, your cash flow will depend on down payment amounts. Determine how much risk you’re willing to take and go from there. Also, it may make more sense to calculate your decisions in terms of cash on cash returns, or ROE. $500 a month in cash flow is easy, just pay cash for something. But, that doesn’t help you understand how hard your money is working for you.

Read up on these terms to start: Cap Rates, Cash on Cash Return, IRR, Gross Rent Multiplier, Class A, B, C, D - just to get familiar

Real Estate is long term - I tend to take a wholistic view. Consider buying a property, and in an area that you believe will continue to be valuable in 20 or 30 years - that is quality. There is no such thing as purely cash flow. If you're looking for instant gratification, you risk missing the rest of your due diligence and running into issues in the long run. Right now, with the market high, you won't necessarily get a good property with high cash flow. You're buying quality at a high market price, and receiving market rents. If you were to purchase a low quality building, you might pay a low purchase price up front, and even if it's occupied, it may not be such a good deal in the long run. There is so much more to this, just don't buy a slum in a questionable part of OC, just because the cashflow numbers look good. Think long term. 

My advice is that you do your research, learn the tools, analyze a purchase for the long run. For this example, even if you break even every month right now, you have a good performing rental and a solid asset for the long run. Over time, rents will go up, your principle will be paid down, and you build wealth and cash flow. You'll get the tax benefits in the meantime. Remember, market conditions will determine a lot of what your cap rates and cash flow will look like, which you might also start to use as a measure to determine if you're in a buying season. 

If you find the right place, buy it. If you don't, you might find that the housing prices will come down sometime within the next 2 years. Now no one can predict or time market corrections, so do your research and buy the place when you find the right one. You want quality and stability.

Originally posted by @Frank Wong :

Hi Andres,

You want quality vs quantity for sure.  Quality will have better tenants, fall in a better area, and will be more stable.  Now quality will not necessarily mean a higher cash on cash.  Usually, it is the opposite. A better property will have less cash flow because of the higher cost of acquisition.  The goal is to find the sweet spot where you can maximize cash flow with quality.  For each investor, the sweet spot is different based on how they view what quality is.  

Lots of investors goal is to get as many doors as possible. For example, they want 30 doors netting $200 a piece. I rather have a fewer amount say 8 doors with zero loan balances which will net me the same amount as 30 doors maxed out on LTV. For me it's about time. I don't want to deal with 30 doors netting me $200 each. Yes, I get the argument that I don't have 30 houses leveraged for appreciation. On the flip side I also don't have the risk of 30 houses leveraged should the market go against me.

Couldn't agree more. Unless the property was acquired at a really good price in downturn market, in order to obtain a higher cash flow property right now means it will be less appreciating and not the best neighborhoods. Zero or lower cash flow would be the opposite and better neighborhoods but bigger payoff with appreciation.

If you do opt for higher cash flow properties and aim for more doors in coming years, time and energy spent will be higher obtaining and maintaining than with less doors but less cash flow but better appreciation.

Best strategy would be a balance of both. Good luck.

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