What's wrong with just cash flow?

57 Replies

BP, 

Minimal or no appreciation, lower overall values, hit or miss area but constant cash flow.  Is there a problem with this? My strategy is to replace my income with rental properties.

Slice and dice it!

Matt

I sold a couple of these last year to owner-occs (thankfully) after holding for 10 years.  Mine did appreciate nicely just because everything else was so expensive. 

Good riddance to the drama and problems.  When they were vacant and staged for sale, even the cats and birds knew it was a bad area.  They squatted in and I had to go over and deal with yet another issue with these stupid houses.

2 major problems.  Major mechanicals, roofs and foundation work is not cheaper because of the value of the house.  Mine were built in the 1920s. A new roof still costs $6-9k, HVAC guys are still $90 an hr.  Cap ex as a % was insane and I do most work myself.

Another big problem, even with tight screening criteria is the mindset and friends of this neighborhood class.  Broken down vehicles, shady visitors, animals appearing, notices from city code enforcement, smoking. partying, domestic disturbances, on and on.

Without appreciation, I would have netted nothing really for my 10 yrs of pain and suffering.  I'd stick to b class. Appreciation and resident quality in those has allowed me to stay in the game and grow wealth much better than cf pigs. 

Just my experience.  Cool to see someone on here from Spokane!

Everyones strategy is different. Like Ive said many times...cash flow is how I pay my bills...but appreciation is how I really build wealth.

Stay with urban.   Few realize one can get ~12% return with RE notes lending. If there is a mishap from your borrower you own the property. Hassle free and min risk.


@Matt Gilroy Usually these areas are really management intensive and the numbers on paper look a lot better than reality . I agree with @Sam Shueh , if you just want consistent cash flow why not look into more investing ? No dealing with tenants , toilets , etc . What kind of return would you expect in these areas ?

@Matt Gilroy Absolutely nothing wrong with "just" cash flow. Cash flow is of primary importance and appreciation should always be considered a gift. Even in the areas that see amazing appreciation, they also see amazing declines when the market shifts.

Go for your cash flow, though I would think you'd ultimately see appreciation over time. Isn't the house you grew up in worth more today than when your parents bought it?

Good luck!

@Matt Gilroy

Diversify would be my advice.  Don't just stick to cash flow properties.  Mix in some more 'top of the market' properties with better chances to appreciate.

Main longer term strategic justification here, to me, is ability/options to use access to financing.  If you have ONLY properties that are worth nothing but producing a lot of income, you have no collateral to offer a bank.  So, you are fully dependent on your cash/cash flow to get you in a position to buy.

@Sam Shueh   I just listened to one of the BP Podcasts from a while back that went into note investing.  I don't recall what one it was but everything was explained very well.  Do you invest in notes?  I'd love to learn more about that.

@Karen Rittenhouse The area I've been looking into is Fayetteville, NC with hopes to have steady cash flow from military renters.  I've been told that there isn't much, if any, appreciation in the Fay area but based on home prices/rent prices, it makes sense.  Since you're not too far from Fay, do you have the same experience?

@Jim Goebel I definitely have a fear of not having much collateral in order to diversify and scale up.  If I have 15 rentals that cash flow nicely, maybe I wouldn't care as much though.  Ultimately, I'd like to get into larger multi-family and look for good ways to force equity. 

Originally posted by @Steve Vaughan :

2 major problems.  Major mechanicals, roofs and foundation work is not cheaper because of the value of the house.  Mine were built in the 1920s. A new roof still costs $6-9k, HVAC guys are still $90 an hr.  Cap ex as a % was insane and I do most work myself.

That right there says it all

This post has been removed.

@Matt Gilroy  

Careful in Fayetteville. Most of it was under water 2 weeks ago because of the hurricanes (yes multiple) and it's prone to flooding. Flood insurance will be an absolute MUST whether the home shows up on a flood map or not. Be prepared to renovate every time a storm comes through which will cost you time and money. 

Not saying the area is a bad investment, just know what you are getting into and build it into your numbers. 

@Matt Gilroy - Not truly any appreciation in most of North Carolina - Asheville being the exception. 

We usually see 1-3% growth but nothing to make you rich quickly. I'm perfectly happy with our slow steady pace because we also didn't see much crash in 2008-2010. I go for cash flow.

Fayetteville is a hot market for landlords.

@Dave DeMarco I've done some digging on where Florence caused flooding.  I've heard from several people that most of the flooding was NW of downtown in the Spring Lake, Lumberton and around the Cape Fear river.  I am curious how many investors buy flood insurance for their NC properties.  A few that I've asked do not, including a friend who owns a couple of SFRs.  Do you buy flood insurance in Pittsboro?  

@Karen Rittenhouse I like that the downside "crash" is less risky but not a huge fan of 1-3%.  I'm not sure that it would make me not invest in Fay but it is a downside.  

@Matt Gilroy

I invest OOS. I’ve been looking to get property closer to home which led me to Fayetteville. I haven’t pulled the trigger mainly because of the flooding issues. Too many other similar markets without the risk IMO. I do not carry flood insurance in Pittsboro where my primary residence is. 

You can't buy groceries with appreciation unless you refinance and pull out the equity from that appreciation. Until you do you are paying higher taxes without any benefit. Your imaginary money is costing you money.

The benefits of appreciation...bragging rights and more inheritance for your kids when they sell soon after you die..

For the investor appreciation has a negative value unless/until you sell.

@Thomas S. Interesting take.  I've not thought about it like that before.  Do you prefer less/no appreciation?  I'd rather gain appreciation and pay taxes on it when I one day sell... and ideally use some of the equity as leverage for more properties.

Originally posted by @Account Closed :

I think cash flow is overrated.   You need appreciation.   Cash flow just pays the bills.   Only way flow workd is if you self manage and do majority of your own maintenance and repairs.

If people were true to themselves and includ ALL dollars spent they will realize that 9% coc return is only 2-3%

What if you bought it for $0, cash flow every month and will have a fully paid off asset after 30 years

Cash flow is great and should be your #1 thought, but without appreciation you will not gain real wealth. Generally, if you don't have appreciation, it is because you are in a declining or bad neighborhood. In the end this will result in poor cash flow and large headaches

It is the classic Vanilla vs Chocolate.  Neither is intrinsically better, only your taste.  The notion that one size fits all does not hold up.  I always recommend following the market and have a plan.  If you live in a major west coast city, cashflow is not an option.  You will need to go out of state.        

Appreciation is not my goal.  I will benefit from it as a result of inflation, but that is not really an increase in wealth.  What I focus on a is cashflow, depreciation/taxes.  I can not live off appreciation.  Getting to the equity is a difficult and expensive, I need to sell or take out a loan against the equity.  The problem is equity is a non-performing asset, it is just sitting doing nothing.  Being a paper millionaire is one thing having passive income of 6 figures is another.       

@Matt Gilroy I own apartments in Indiana which are C- class cash flow machines. I also own much more expensive apartments in Berwyn and Lyons, IL. The Chicago stuff has cash flowed ok, but has appreciated like crazy. My Indiana stuff has not appreciated, but is cash flowing really, really well. I think the big thing is to look at the mechanical structure of your cash flow rentals very carefully. For instance, we have electric baseboard heat in the Indiana properties. Electric baseboard is practically bullet proof and doesn't require a bunch of visits by your HVAC tech. In addition, these are brick buildings with newer roofs. 

As others have said, your cheaper properties still require the same amount of capex dollars. CapEx is not just a percentage!

There's nothing wrong with ANY strategy as long as it helps you achieve your persona financial goals. I see so many people here giving feedback on deals based on their own goals and financial situation. Personally, I like to sacrifice a bit of cash flow for some appreciation- a balance of both. For me, the cash flow pays the bills, but the appreciation is what allows me to leverage and scale. I work with many investors who are in a financial position where cash flow is completely irrelevant to them- if you are in a position like that, you are probably doing just fine. 

There is no "right" way to invest, don't let anyone tell you that there is. 

@Matt Gilroy

"Do you prefer less/no appreciation?"

I do not invest in SFHs so appreciation is not a consideration. I take risks, I do not gamble on appreciation. I never count any money unless it is in my hand so appreciation has zero value to me if it is sitting dead in a property. I invest in multi units where value is driven by rent. When my value rises I pull out the equity and invest it where it will earn a much higher return. Sitting dead in a property has no to very low value. My money must earn it's keep not simply sit dead or dying until some day I decide to sell. I place far too high of a value on money to allow that to happen.

"and ideally use some of the equity as leverage for more properties."

Ideally all appreciation is leveraged and redirected into a higher return investment. If a property can then not continue to produce positive cash flow it is time to sell since your value to rent is no longer meeting your minimum investment goal...1%, 2% what ever you have determined is a reasonable return.

The problem with investors that allow cash/appreciation to sit dead in a property is that they lose site of their original investment criteria and end up owning properties that are a liability where cash has gone to die. They earn a steadily  decreasing return on their cash as appreciation grows. That is a very poor investment plan, tantamount to hoarding cash as opposed to investing. Fine when you are old and have no use for money not so good when you are growing a business.

The only value to appreciation is bragging rights if it is not invested. It is nothing more than imaginary value until it is accessed and put to work. Underutilised appreciation is a liability in my business.

@Matt Gilroy . I think cash flow is more predictable than appreciation but it’s going to vary by market. Out west you may have more appreciation but higher cap rates. In the midwest the opposite, better cap rates but less appreciation. I consider equity gains from paying down mortgages to be akin to appreciation. It depends on your business model and the property. Nothing wrong with a strong cash flow property with little appreciation. Depending on the market that doesn’t necessarily relegate you to C properties. You want to gain equity at purchase by getting a good deal and executing a good value add strategy. Beyond that your equity will depend on the whims of the market.

@Matt Gilroy You have had some really experienced investors respond to your post. I hope you are taking notes from the things they are saying based on their years of experience (learned from both their mistakes and their successes).

I agree with what @Russell Brazil wrote. The majority of my wealth comes from appreciation, not cash flow. In fact a lot of it comes from buying undervalued assets and then bringing the value up to market value. Every time I buy and rehab a house my net worth goes up on average about 30k (which gets split between my partner and I).  Then over a 3-5 year period the value goes up another 30k or so and we sell it. I don’t like keeping properties past 5-7 years because the capital expenditures tend to become very costly over time like @Steve Vaughan mentioned.

I also like what @Sam Shueh mentioned about the note buying. That can be a much easier way to make a good return if it is done correctly. I have had several investors buy notes from us at the rate that Sam Shueh mentioned. So that is cash flow without needing to worry about cap-ex.

With all that being said, most of my properties cash flow on average $200 a month that gets split between my partner and I. We don’t live off of the cash flow from our properties though. The cash flow goes back into the business. Our focus right now are the 3-5 year plays where we are able to cash out about 60k on each property when it sells. So I would say our focus is more on appreciation and equity build up from mortgage pay down than it is on cash flow. However, the property has to cash flow for us to want it.

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