Cash out VS Cash Flow?

3 Replies

Every few years I cash out refinance and I am getting used to using this as a way of generating cash flow. Class A neighborhood, so far its been great with very high appreciations in last 13 years and am lucky to do this! I have a chance now to purchase a higher cash  flowing mulit in a Class B/C BUT am now  realizing my chances of  being able to Cash Out go waaay waay way down, I will have to rely on montly cash flow and with it being only 1000k or so a month I feel my self stepping back knowing one big repair will bring my cash flow for the year down to nothing. I realize its not set in stone Class A will always rise but IMO when there is a crash the Big insulated major US cities are rock solid. Outside them , you can feel it

curious others thoughts on this....

@Mike S.  Frankly, I think you have it backward.  Here is how I view the options:

Relying on appreciation is the risky game.   Just look back to 2007 and you can see how tragic that assumption was to thousands of people.   What do you do if your furnace goes out in your Class A at the same time the market pulls back and there is no excess equity to tap?  You have no source of cash at exactly the moment you need it.

Cashflowing properties are low risk.   If the furnace goes out in your Class B, you buy a new one out of cash flow.  Yes, you may lose a few months cash flow, but you can do that and it doesn't matter whether the market goes up or down.     If you include repair assumptions in your purchase criteria you already planned for the furnace to break.  If it doesn't, you get bonus cash.

Those that rely on appreciation may look brilliant for short periods but those that rely on cash flow are the ones that are able to stick around in the long-run.

@Mike S.

Greetings again!

Just my perspective here :)  I think it may help to adjust your expectations a little - hear me out ---  while you may find what you're looking for, I think it will be harder to come by because of recent policy changes and the big picture of the policy landscape currently..

There are cash flow properties, and there are equity properties.  When you can get both in one property, great!  I got that 'breakdown' when talking to someone and hadn't been thinking of things that way.  We have a couple properties that we currently think of as cash flow properties with limited prospects for appreciation, and we have some that I think we can reasonably hope/expect some decent appreciation over time.  It sounds though like you are talking about something different when you speak of appreciation.  When you are talking about a Boston, my assumption is that in certain areas there will be 200-500% appreciation when you look back over the last 20-40 years.  My guess is that the combination of a lot of the drivers I listed in my other email, coupled with land scarcity, drives some crazy appreciation.  San Fran and NYC I think fall under this.  If this is what you are looking for I'd suggest looking for those combinations.  But here's what I believe to be the macro drivers that are working against what you're saying you want.

My view and the WSJ view is that the property tax deduction will have a negative effect of 'top end' (ie: top quartile) type properties in MAJOR metros.  Not a crazy effect but a solid effect, when we're talking for instance about the average 750k-1.5m USD home in say, Washington DC.

I'm hoping that same change in policy will have a dramatic effect on the 'bottom end' type properties in certain metros as well.  As an example, the multitude of $30-50k properties in perceived bad areas of Chicago will hopefully get a new lease on life and attract capital given that literally those kinds of properties often have an effective tax rate currently of 10-20%.  It's just silly and when you have a $5,000 property tax due every year eating into your bottom line, there's no justification for investing in those areas.

I think the key question on the 2 above points is going to be how the local policy makers adjust and if they make the RIGHT decisions.  Local property taxes in say Chicago will not just suddenly and magicly change - there would need to be conscious choices by policy makers to do the right thing by operating more efficiently.

Effectively the property tax deduction has been a massive subsidy from the federal government to the local governments and SOME residents of these local markets.  Inherent in this subsidy is a distortion of economic incentives and unfortunately there will be some corruption mixed in as well.

On balance these local markets were positively affected by the prop tax deduction however it came as the cost of the 'meat and potatoes' homes and homeowners being 'crowded out' by CRAZY high property taxes.  Again, the 30-40k home in Chi town with an 15-20% effective prop tax rate is a good example.  And there are probably HUNDREDS of THOUSANDS of these properties out there/available. 

This is only possible in markets that have those $500k - 1.5m USD homes, and have quite a few of them.  I can only think of maybe 5-8 markets like that around the US.  It's unfortunate that there are often follow on consequences of well intended policies (which I assume the prop tax deduction was)

I guess you and others can draw your own conclusions from this but all this leads me to a possible investment strategy.

And hopefully, good things for the 'bottom end' of these major metros if the local policy makers make the right decisions.

Originally posted by @Greg Scott :

@Mike S.  Frankly, I think you have it backward.  Here is how I view the options:

Relying on appreciation is the risky game.   Just look back to 2007 and you can see how tragic that assumption was to thousands of people.   What do you do if your furnace goes out in your Class A at the same time the market pulls back and there is no excess equity to tap?  You have no source of cash at exactly the moment you need it.

When I look back to 2007 I felt so bad for all my friends who had to give away their properties just 20 min outside the city when my property flattened then was up within a coupe years...maybe I was just lucky, as I cant speak for the other Major US cities but still feel safer than to go outside these areas. I think I need to find an area where there may have a shot at appreciation as in my experience when the market drops the outsiders get hit 1st with price drops?  I wonder if the other Class A have gone down as much as B,and C during a market hit? im guessing no but could be wrong and lucky in Boston

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