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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Michael Hutchinson
Lender · Fort Mill, SCinstal · Member since 2016 · 68 posts · 64 votes
3y
Quote from @Shane Craig:

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.

I am a long term hold guy. I like to find undervalued, potentially rehab and hold for long run. That's my style though. Here is a little 8 plex that I bought undervalued and I needed to rehab. My strategy was to evict a bad tenant and rehab the unit. Once rehabbed, I offered next lease expiration increased rent or same rent in rehabbed unit if they moved. This helped me cycle all units and I am finally to market rent this year. I am ok with lower rent as long as I can keep vacancy to virtually zero.
I will draw off equity most likely this year on this one and buy a few more. It should be 2x or 2.5x increased value at this point and I want to look for new deals in a down economy. Below doesn't obviously include everything like tax benefit, etc. but it helps me see the general picture. Good luck.
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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
3y
Quote from @Shane Craig:

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.

Shane, that being the case, I don't see how you can pass up that much equity,
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