Cash flow vs equity?

Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes

I'm writing this post to get everyones opinions on a deal I'm considering.

All of my previous deals I have purchased were for cashflow. This deal I'm considering has minimal cashflow( 1K-2K a month) but has a high equity potential (500K).

Deal break down: 17 houses ( 3bedrooms/ 1 baths) that have been maintained very well by the same owners all within in a mile radius. Each house rents for $750-800 a month. The seller will sell the homes for $1,275,000( $75,000 a house). I'm a realtor and I know the market well each house is worth 105-110K. Also the seller has sold two homes for $105K each over the last two years.

This will be my biggest purchase and I'm worried on the low cash flow.

What are your opinions on cash flow vs equity ?

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David Ramirez

Investor · Tampa, FL · Member since 2019 · 1k+ posts · 1k+ votes

If the rental income is currently below average and you have the opportunity to increase it over the next two years by making some cosmetic improvements, it's worth considering. I would make sure I have sufficient reserves in case something comes up.

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David Ramirez
Investor · Tampa, FL · Member since 2019 · 1k+ posts · 1k+ votes
3y
If the rental income is currently below average and you have the opportunity to increase it over the next two years by making some cosmetic improvements, it's worth considering. I would make sure I have sufficient reserves in case something comes up.
2 Reply
Andrew BoscoBusiness Member
Rental Property Investor · NH · Member since 2023 · 441 posts · 416 votes
3y
Cash flow keeps you afloat/retaining, but equity/appreciation make you rich. If I had to choose one vs. the other, then I would prefer cash flow since it keeps me owning/alive with my properties.
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Greg Kasmer
Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 500 votes
3y
Shane - I think you need to treat this as a multifamily analysis and do an "As Is" cash flow assuming the current rent and current expenses, but then also do a "pro forma" cash flow assuming future rents and future expenses. I would look at ways you can increase the income (especially if below market rents) or decrease the expenses (insurance payments, property management fees, etc...). I would compare each property's rents to current "market rents" and if their is opportunity to increase $100-$200 per house without or very little improvements/renovations that might be enough to change your perspective. However, if each house's condition is not good and you need to put $10-$20k into each house in order to garner "market rents" that would be a different story. Happy to talk off line if that would help. Also, if you're getting a loan on the deal the lenders might look at this from a multifamily perspective and not give as much weight to the residential ARV and they may look at overall Net Operating Income from the entire deal and apply a cap rate to come up with a value. Therefore, the operations/income of the deal could impact value (and therefore your equity) depending upon how your lender reviews the deal. I would share the mechanics of the deal with them and inquire how they would underwrite it. Good Luck!
1 Reply
Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @David Ramirez:

If the rental income is currently below average and you have the opportunity to increase it over the next two years by making some cosmetic improvements, it's worth considering. I would make sure I have sufficient reserves in case something comes up.

No luck the rents are are pretty much maxed out in this area.
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Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Andrew Bosco:

Cash flow keeps you afloat/retaining, but equity/appreciation make you rich. If I had to choose one vs. the other, then I would prefer cash flow since it keeps me owning/alive with my properties.

I prefer cashflow because that is what I'm use to. This deal would help my net worth and offer a large cash out in the future.
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Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Greg Kasmer:

Shane - I think you need to treat this as a multifamily analysis and do an "As Is" cash flow assuming the current rent and current expenses, but then also do a "pro forma" cash flow assuming future rents and future expenses. I would look at ways you can increase the income (especially if below market rents) or decrease the expenses (insurance payments, property management fees, etc...). I would compare each property's rents to current "market rents" and if their is opportunity to increase $100-$200 per house without or very little improvements/renovations that might be enough to change your perspective. However, if each house's condition is not good and you need to put $10-$20k into each house in order to garner "market rents" that would be a different story. Happy to talk off line if that would help. Also, if you're getting a loan on the deal the lenders might look at this from a multifamily perspective and not give as much weight to the residential ARV and they may look at overall Net Operating Income from the entire deal and apply a cap rate to come up with a value. Therefore, the operations/income of the deal could impact value (and therefore your equity) depending upon how your lender reviews the deal. I would share the mechanics of the deal with them and inquire how they would underwrite it. Good Luck!

Rents are can't be raised much more.
I would like to see how my lender would look at the properties ( SFH vs multi family)
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Lucia Rushton
Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
3y
@Shane Craig definitely sounds worth considering. So many different strategies for growth. Just one - the difference between multiple SFH in a portfolio vs an apartment with equal number of units is you can sell or rehab or tear down and rebuild bigger and better. So many options.
Best wishes.
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Paul De Luca
Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes
3y
Quote from @Shane Craig:

I'm writing this post to get everyones opinions on a deal I'm considering.
All of my previous deals I have purchased were for cashflow. This deal I'm considering has minimal cashflow( 1K-2K a month) but has a high equity potential (500K).
Deal break down: 17 houses ( 3bedrooms/ 1 baths) that have been maintained very well by the same owners all within in a mile radius. Each house rents for $750-800 a month. The seller will sell the homes for $1,275,000( $75,000 a house). I'm a realtor and I know the market well each house is worth 105-110K. Also the seller has sold two homes for $105K each over the last two years.
This will be my biggest purchase and I'm worried on the low cash flow.
What are your opinions on cash flow vs equity ?

What's your projected CoC return? Unless you have better opportunities at your disposal, it sounds like you're getting a pretty good discount given the volume. Is there opportunity to reduce expenses/operate more efficiently?
0 Reply
Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Paul De Luca:

Quote from @Shane Craig:

I'm writing this post to get everyones opinions on a deal I'm considering.
All of my previous deals I have purchased were for cashflow. This deal I'm considering has minimal cashflow( 1K-2K a month) but has a high equity potential (500K).
Deal break down: 17 houses ( 3bedrooms/ 1 baths) that have been maintained very well by the same owners all within in a mile radius. Each house rents for $750-800 a month. The seller will sell the homes for $1,275,000( $75,000 a house). I'm a realtor and I know the market well each house is worth 105-110K. Also the seller has sold two homes for $105K each over the last two years.
This will be my biggest purchase and I'm worried on the low cash flow.
What are your opinions on cash flow vs equity ?

What's your projected CoC return? Unless you have better opportunities at your disposal, it sounds like you're getting a pretty good discount given the volume. Is there opportunity to reduce expenses/operate more efficiently?

No opportunity to reduce expenses ( all the units are separate metered). I guess I could work on saving on insurance.
This an equity play forsure.
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Paul De Luca
Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes
3y
Quote from @Shane Craig:

Quote from @Paul De Luca:

Quote from @Shane Craig:

I'm writing this post to get everyones opinions on a deal I'm considering.
All of my previous deals I have purchased were for cashflow. This deal I'm considering has minimal cashflow( 1K-2K a month) but has a high equity potential (500K).
Deal break down: 17 houses ( 3bedrooms/ 1 baths) that have been maintained very well by the same owners all within in a mile radius. Each house rents for $750-800 a month. The seller will sell the homes for $1,275,000( $75,000 a house). I'm a realtor and I know the market well each house is worth 105-110K. Also the seller has sold two homes for $105K each over the last two years.
This will be my biggest purchase and I'm worried on the low cash flow.
What are your opinions on cash flow vs equity ?

What's your projected CoC return? Unless you have better opportunities at your disposal, it sounds like you're getting a pretty good discount given the volume. Is there opportunity to reduce expenses/operate more efficiently?

No opportunity to reduce expenses ( all the units are separate metered). I guess I could work on saving on insurance.
This an equity play forsure.

I guess it depends on what you want and if the purchase aligns with your goals.
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
3y
@Shane Craig
We like to say if it doesn't cash flow, let the grass grow.
You need cash flow to pay the bills and put money in your pocket, but you do make the majority of your profits from an exit, whether that's refi or sale
If you need to build up your net worth to repurpose the equity into another deal, then I would buy a deal with nice cap appreciation. If my only goal is to cash flow, then I would not buy a deal with very little cash flow
Hope that helps
Gino
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Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
3y
@Shane Craig asset rich and cash poor!
How many can you raise the rents on?
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Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Drew Sygit:

@Shane Craig asset rich and cash poor!
How many can you raise the rents on?

I might be able to raise $50 per unit over time.
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Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
3y
@Shane Craig so what will that do for your cashflow and ROI?
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Sam YinPro Member
Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
3y
@Shane Craig I am NOT an expert in buying a large portfolio of SFH.
However, a logical strategy for me is to buy it! Especially if you can afford the loan as it. If it can sustain you, and you plan a longer hold, you should not worry too much.
Remember, you have unique exits with this acquisition. If you get into tough times, sell a few off to pay for the others and increase cash flow/lower debt that way.
If you have time, and they are all fairly stable, AND you want to grow faster, keep the good ones and sell off the not so good ones to raise money and acquire more.
I concentrate more on Multifamily these days, but I still looks at SFHs from time to time. This seems like a very good deal for you... on the surface.
Just my 0.02
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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
3y
@Shane Craig Normally I would say that you should have a combination of cash flow and equity but that is an awful lot of equity. The concern that comes to mind is what your exit strategy options are. Whenever you decide to sell, who is your end buyer? If there is little to no cash flow, how much can you sell these properties for? You may not be able to sell them to an investor at market value. If that's the case, how much equity will you really have. The other concern that comes to mind is that there doesn't seem to be a lot of opportunity to increase cash flow through increased rents. The data that I see shows rents fairly flat in your market. Just some things to consider but I don't think you can ignore the potential for that kind of equity if it's real.
0 Reply
Gary L Wallman
Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes
3y
Quote from @Shane Craig:

I'm writing this post to get everyones opinions on a deal I'm considering.
All of my previous deals I have purchased were for cashflow. This deal I'm considering has minimal cashflow( 1K-2K a month) but has a high equity potential (500K).
Deal break down: 17 houses ( 3bedrooms/ 1 baths) that have been maintained very well by the same owners all within in a mile radius. Each house rents for $750-800 a month. The seller will sell the homes for $1,275,000( $75,000 a house). I'm a realtor and I know the market well each house is worth 105-110K. Also the seller has sold two homes for $105K each over the last two years.
This will be my biggest purchase and I'm worried on the low cash flow.
What are your opinions on cash flow vs equity ?
Shane,
If these properties are rented at $750-$800 per month and you acquire the properties at $75k each, you have exceeded the old 1 percent rule. This is extremely difficult to do these days. Add in instant equity of over a half a million dollars and I think you would be foolish to pass on this deal. If your super worried about the minimal cash flow (I would not be) then you could always sell off a couple of properties and have a nice cash cushion.
Gary
1 Reply
Peter Tomeczko
Real Estate Broker · Elmwood Park, IL · Member since 2020 · 55 posts · 32 votes
3y
@Shane Craig
Do you need the cashflow now or can you wait?
Quick thought… Can you sell off 10-12 houses to pay off the loan and keep 5 - 7? By doing this you can have a cashflow of 4000-5000+ per month and own them free and clear. Yes it may take time to sell them off but its the same equity amount (ish) but more then twice your projected cashflow…
Sounds like a decent deal if your ok with waiting on the cashflow and equity..
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Nick Rutkowski
Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
3y
@Shane Craig
What’s your exit strategy? If you’re looking to buy and hold, cash flow over equity wouldn’t hurt. If you’re looking to flip the portfolio then an equity play would be better.
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Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Peter Tomeczko:

@Shane Craig
Do you need the cashflow now or can you wait?
Quick thought… Can you sell off 10-12 houses to pay off the loan and keep 5 - 7? By doing this you can have a cashflow of 4000-5000+ per month and own them free and clear. Yes it may take time to sell them off but its the same equity amount (ish) but more then twice your projected cashflow…
Sounds like a decent deal if your ok with waiting on the cashflow and equity..
I would keep them for a year and as tenants move out I would sell them.
Not sure if I would keep a few for the equity or cash out.
0 Reply
Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Mike D'Arrigo:

@Shane Craig Normally I would say that you should have a combination of cash flow and equity but that is an awful lot of equity. The concern that comes to mind is what your exit strategy options are. Whenever you decide to sell, who is your end buyer? If there is little to no cash flow, how much can you sell these properties for? You may not be able to sell them to an investor at market value. If that's the case, how much equity will you really have. The other concern that comes to mind is that there doesn't seem to be a lot of opportunity to increase cash flow through increased rents. The data that I see shows rents fairly flat in your market. Just some things to consider but I don't think you can ignore the potential for that kind of equity if it's real.

I would have to sell them one by one. Which I'm ok with and can handle because I'm a real estate broker.
0 Reply
Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Mike D'Arrigo:

@Shane Craig Normally I would say that you should have a combination of cash flow and equity but that is an awful lot of equity. The concern that comes to mind is what your exit strategy options are. Whenever you decide to sell, who is your end buyer? If there is little to no cash flow, how much can you sell these properties for? You may not be able to sell them to an investor at market value. If that's the case, how much equity will you really have. The other concern that comes to mind is that there doesn't seem to be a lot of opportunity to increase cash flow through increased rents. The data that I see shows rents fairly flat in your market. Just some things to consider but I don't think you can ignore the potential for that kind of equity if it's real.

I would have to sell them one by one over time as the tenants move out. I'm ok with that and I'm in no rush and can handle it because I'm a real estate broker.
0 Reply
Michael Hutchinson
Lender · Fort Mill, SCinstal · Member since 2016 · 68 posts · 64 votes
3y
Quote from @Shane Craig:

I'm writing this post to get everyones opinions on a deal I'm considering.
All of my previous deals I have purchased were for cashflow. This deal I'm considering has minimal cashflow( 1K-2K a month) but has a high equity potential (500K).
Deal break down: 17 houses ( 3bedrooms/ 1 baths) that have been maintained very well by the same owners all within in a mile radius. Each house rents for $750-800 a month. The seller will sell the homes for $1,275,000( $75,000 a house). I'm a realtor and I know the market well each house is worth 105-110K. Also the seller has sold two homes for $105K each over the last two years.
This will be my biggest purchase and I'm worried on the low cash flow.
What are your opinions on cash flow vs equity ?

I would look at Michael Blank's multifamily stuff IMO. I got a sweet deal calculator from his services several years ago and it is my mini-bible in this kind of decision.
My personal thought is if it cash flows, even low, then I like equity. You just need some reserves for issues and you can take out the equity when the interest rates drop to keep on keepin on with a new property. That is my style though, both approaches can be appropriate.
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Seth Timmerman
Investor · Morgantown WV · Member since 2020 · 50 posts · 20 votes
3y
I would say that equity is only real when you sell or are able to pull out through restructuring your debt. Think of your end goal in mind
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Shane Craig
OP
Real Estate Broker · Ashland KY · Member since 2018 · 57 posts · 71 votes
3y
Quote from @Michael Hutchinson:

Quote from @Shane Craig:

I'm writing this post to get everyones opinions on a deal I'm considering.
All of my previous deals I have purchased were for cashflow. This deal I'm considering has minimal cashflow( 1K-2K a month) but has a high equity potential (500K).
Deal break down: 17 houses ( 3bedrooms/ 1 baths) that have been maintained very well by the same owners all within in a mile radius. Each house rents for $750-800 a month. The seller will sell the homes for $1,275,000( $75,000 a house). I'm a realtor and I know the market well each house is worth 105-110K. Also the seller has sold two homes for $105K each over the last two years.
This will be my biggest purchase and I'm worried on the low cash flow.
What are your opinions on cash flow vs equity ?

I would look at Michael Blank's multifamily stuff IMO. I got a sweet deal calculator from his services several years ago and it is my mini-bible in this kind of decision.
My personal thought is if it cash flows, even low, then I like equity. You just need some reserves for issues and you can take out the equity when the interest rates drop to keep on keepin on with a new property. That is my style though, both approaches can be appropriate.

Thats what I'm thinking the instant equity and the debt pay down is 4k a month at 15 years.
This is different that I'm use because I always look for cashflow but this in equity play. I also like that fact that I could sell the homes individually if needed.
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