Cashflow Doesn't Build Wealth?

Cashflow Doesn't Build Wealth?

Rental Property Investor · Las Palmas de Gran Canaria · Member since 2014 · 220 posts · 256 votes

While cashflow is key to keep the property safely under control, I seem to find that the larger returns for our portfolio to date come from strategic growth of equity. My wife and I are still fairly small in our investing business and I want to ask if the long-term seasoned investors have found the same to be true, especially in the larger multi families, where value is more closely tied.

Example: A Current Deal We Are Wrapping Up:

My partners and I bought a home in Santa Cruz, CA in May 2011 for 389k and remodeled it. After a cash out refi where we had 108k of our investment left in the deal. Rented the pre-tax profits were $6,840 annually. That is a 6.3% return cash on cash, which in our area is basically a freaking miracle of the crash. I was only expecting 2.8% in my original performa. Haven't seen any deals like that since 2012. The property is being sold and closes in 5 days. For the three+ years we owned it, we basically accumulated $22,550 in rental profits.

In those three years, we saw some serious appreciation. You could call me a speculator, but the indicators were there. A strong job market (thank you silicon valley), a major university, over 3 million tourist annually (to a town of 50k residents), major agricultural center, amazing natural resources / extreme sports meca, a world famous brand and limited room for growth. Houses in a good neighborhood were being sold below replacement cost. I'd call that a strategic acquisition with strong potential for growth. Forcing equity through a remodel provided a nice bit of padding.

We are selling the house for the equivalent of 640k. Net proceeds of the sale minus cash invested is 168k. That is 155% return on investment (37% compounded annualized return). 

Even if I had ended up with a 0% cash on cash, I would still be doing a happy dance. I don't see cashflow deals offering anything in the range of that return

I imagine there may be a day when we need to convert our equity into cashflow. At that point, we will probably pivot again. 

So What Do You Think?

Brandon / Josh often seem to call equity investors gamblers on the BP podcast (although they mostly seem to be warning newbies not to buy stupid), but for those of us looking to build wealth, who are willing to do careful homework, learn the markets, do the deal analysis and make careful strategic plays, make sure we are not upside down or outside our fiscal means, my experience to date says investing in strong equity growth markets, perhaps despite their poor cashflows, seems like the strong play.

Alright, bring on the arguments and tell me where I might be right or wrong (especially as we are moving our portfolio into the larger apartment complexes)!

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Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
12y

I have a few dozen houses at any given time. As @Account Closed stated, one pile pays my bills and puts food on the table, the other pile is for horse trading. Your experience is EXACTLY why buying California property makes the most sense to me. People brag about their $300 cash flow from their dumpy *** $60,000 house out east of the Rockies. Really? I bought a few dozen houses back in 2009-2011. I'm now selling some of them off as they go vacant. The last house I recently sold, I paid $81,000 for it 4 years ago and just sold it for $274,900. On top of that phenomenal gain (approx $150K net), I collected $1,550/month rent from the same tenant all 4 years. 

Now, the naysayers be like "Well, that was the bottom of the market. That can't be done now!" 

I just closed on a nice Riverside house out by UCR. Paid $90K for it. My private lender wired $125K to escrow. I got a $28K refund check from escrow. (Read that as nontaxable income.) Property will rent for $1,700 when I'm done fixing it up. 

Have fun on your airplane ride and staying in Motel 8 naysayers.

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  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    Shane,

    Cash-flow pays the bills. Appreciation makes you rich. Have you heard of it?

    The research done by Zillow agreed with you. 

    http://finance.yahoo.com/news/best-cities-mom-pop-...

    The fact sometimes surprises people. Like they said....figures don't lie, but liars figure. If the data is any guidance, you know where to buy for appreciation and where to buy for cash-flow. Don't forget to send me some royalties once you made it to the top. 

  • Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
    12y

    I have a few dozen houses at any given time. As @Account Closed stated, one pile pays my bills and puts food on the table, the other pile is for horse trading. Your experience is EXACTLY why buying California property makes the most sense to me. People brag about their $300 cash flow from their dumpy *** $60,000 house out east of the Rockies. Really? I bought a few dozen houses back in 2009-2011. I'm now selling some of them off as they go vacant. The last house I recently sold, I paid $81,000 for it 4 years ago and just sold it for $274,900. On top of that phenomenal gain (approx $150K net), I collected $1,550/month rent from the same tenant all 4 years. 

    Now, the naysayers be like "Well, that was the bottom of the market. That can't be done now!" 

    I just closed on a nice Riverside house out by UCR. Paid $90K for it. My private lender wired $125K to escrow. I got a $28K refund check from escrow. (Read that as nontaxable income.) Property will rent for $1,700 when I'm done fixing it up. 

    Have fun on your airplane ride and staying in Motel 8 naysayers.

  • Real Estate Investor · Cheyenne, WY · Member since 2014 · 71 posts · 37 votes
    12y

    It really depends on your goal.  If your goal is to be financially independent it takes cash flow.  What difference does your net worth make?  I live in wyoming where there are plenty of large ranch owners with multi million dollar ranches generating little cash.  It's called land rich, cash poor.  Does nothing for me, but to each his own.

  • Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    12y

    I also recommend that you do a search on this topic. Been covered heavily in the last few weeks. 

    As for appreciation in larger MF, that's really more correlated with rental income growth. SFH growth is largely driven by end user desireability, MF by rental income. Each asset could perform similarity or differently in the same market. It really depends on a host of variables- if home sales are on the rise, are there more rental vacancies? Or is there no new construction possible and thus both home sales and rents go up as that limited area gets hot. You need to analyze your particular marketplace, and YMMV on the end results.

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    My calculator is in the car, in '64 we could have bought a small farm south of town for $70,000 today that would have added $20 million to the portfolio.  Is that speculation? Not really, it would have always been worth 70K and marketable. As it turned out, the mall sits there today.

    I don't know what Josh and Brandon were saying or what others were saying, have they owned properties for 10, 15 years yet?   Let's not decide that anyone who makes a pocast is some expert. Don't put much stock in passing remarks. As to your goals, most in RE want a job, that's what cash flow is, if you don't spend it all and you reinvest  cash in increments, eventually you can build wealth. You can flip after  few year and usually end up with a workable amount of cash for the next investment, a better plan. There are other aspects to look at, taxes, market changes, interest rates and your use of cash. Generally you'll do better holding a property 7 to 10 years and then moving on, location, condition and market need to be considered  but that's the initial break point. You can hold longer but the rate of increase may not be as great as this initial holding period, looing at the bigger picture.

    You're on the right track, if you can buy property and it doesn't eat any hay, it's  deal. Not everyone needs to chase a few hundred bucks a door, the windfall can come later.  Understand how to identify maturing markets as those will become flat o returns and begin to dive. RE is as much an art as a science.

    And the saying is; figures lie and liars figure. You can make numbers lie pretty easily. :) 

  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    You can get both.

    I do not like cash flow zero plays with hopes of appreciation. Markets were down at the bottom years ago for residential.

    I am sure they will still go up some before falling again but it's just like buying a stock. I do not see these markets for residential going up like since 2009. Nobody knows for sure when it will cycle back down. 

    In commercial the value is tied to the cap and what the cash flow is. So it's possible to buy in highly desirable areas currently for commercial. You put 25% down and get cash on cash going in of 14%. Start factoring in leases rental increases, tax depreciation, cap rate compression and the cash flow is nice and so is the equity growth.

    I don't like dumpy areas that are cash flow only. The markets might be okay and caps higher but the market could drop from a neutral to  a bad area. The areas I am talking about have median incomes of 100,000 when the national average is about 54,000. Lots of growth, low unemployment, etc. 

    Everyone has a comfort level that's right for them.

  • Real Estate Investor · New York City, NY · Member since 2014 · 121 posts · 47 votes
    12y

    It really comes down to risk/reward and how you feel about your tolerance in that regard. Living in NYC it's very difficult to get property here to cash flow positive at any great percentage (if at all).  Appreciation has really been the name of the game here.  I have spoken to artists who have purchased property for 10K twenty years ago that is now worth $1.5M.  Neighborhoods change quickly and if you are in the right place at the right time you can do quite well.  The question comes down to risk.  

    In down markets if you are cash flowing you can still keep your head over water.  If you are banking on appreciation and have a lot of debt, you still have to pay the mortgage for however long it takes for property values to come back and increase to make up for your carrying costs.  Deep pockets help in these cases.  Here the best appreciation is on the fringe neighborhoods that eventually get gentrified, but those are also the neighborhoods that get slammed in a down turn.  Blue chip neighborhoods tend to be less riskier since in down turns they don't lose as much value.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Aaron Mazzrillo 

      love tax deferred refi proceeds.... You pay the piper when you sell the property but for the time you hold it those funds are tax free.. Is there no rehab in this 91k deal ?

    The lure to  the mid west is the point of entry and the absolute onslaught of marketing to LA based investors.. In many ways I think the LA investors just default to the TK mid west because it is brought to them on a platter.. Easier than driving from Santa Monica out to the Inland empire and trying to find those nuggets.. Then you have the general sentiment that cash flow is the only thing that counts and appreciation is the icing on the cake.

    Cash flow Mid west style is fine but you need to go large.. like 100 to 500 property large to make any real money at it... I look at Mid west stuff as just buying a business .  I mean these same investors with 100 to 300k could just as easily buy a McDonalds franchise or a few subways and put a manager on pay roll and cash flow far better than owning real estate in the mid west for the same investment and its the same thing they bought a job.

    There is something to be said about market timing though and there is no disputing that 09 to 11 there was some pretty incredible buys... And even in the mid west markets there were good buys but nothing on the scale of what your talking about.. The reason is those houses that are cash flow and cheap are cheap for a reason and will always be cheap because they will never sell to a home owner... And with all the 2% rule disciples out there any investor is going to back into value through these guidelines or rules ergo the values don't move because the rents done really move. 

    East of the Rockies the best market we experienced was Atlanta I bought 43 homes there ( suburbs) paying no more than 50k for any of them... all in after rehab we were about 55k for the portfolio and I sold to a hedge fund 18 months later for 83k a door net.. So nice pay day but you needed scale.. No other mid west market am I aware of did the market move like that.. I think this can be true in Vegas and Phx and certainly in your market.. Even in Portlandia we had a true 25% appreciation rise 09 to today..

    Lastly the important point is CA homes are liquid.. mid west homes at the 60k you speak of are NOT  the only ones that can sell those are marketers and Turn Key guys with heavy marketing budgets and their bird dog sale agents based in LA.

  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y

    To make a counterpoint often the money to reinvest comes from the cash flow. 

    If your expenses and lifestyle needs are covered by your cash flow, than anything you do beyond that builds your net worth very quickly.

  • Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes
    12y
    Ned Carey yes, but your assuming that your rentals are 100% occupied and that affects cash flow. Your also assumin then that your expenses aren't eating away at your cash flow. Since you have mortgages and debt then one can only predict that one may have trouble with their bills. There is no gaurentee of cash flow, only approximations.
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y
    Originally posted by @Marcus Johnson:

    Ned Carey yes, but your assuming that your rentals are 100% occupied and that affects cash flow. Your also assumin then that your expenses aren't eating away at your cash flow. Since you have mortgages and debt then one can only predict that one may have trouble with their bills. There is no gaurentee of cash flow, only approximations.

     Excuse me Marcus but I made none of those assumptions. You are the one who has made assumptions.

    True but this does not invalidate my point

  • Investor · Apple Valley, MN · Member since 2013 · 281 posts · 94 votes
    12y
    Ned Carey I'm not making any assumptions at all. You stated that your net worth would increase greatly with the cash flow from rentals and are paying the mortgages and expenses. But the truth is that if the reverse should happen and you have negative cash flow due to some unpredictable event, then your net worth will decrease.
  • Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
    12y
    Originally posted by @Ned Carey:

    To make a counterpoint often the money to reinvest comes from the cash flow. 

    If your expenses and lifestyle needs are covered by your cash flow, that anything you do beyond that builds your net worth very quickly.

     If you're net worth is in the 4-5 figure range, maybe, but only on a relative scale. To have real net worth increase just from cash flow, one is going to need a considerable amount of income translating into a very considerable portfolio of rentals. I use my cash flow to spend on lifestyle and expenses. The money I get from wholesaling and flipping is where the real cash infusions come from. I use those large paydays to acquire new rentals. I'm not too into the definancing stage right now. I still love leverage and would rather acquire 4-5 additional properties than pay off one F&C.

  • Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    12y

    @Shane Pearlman I'm more small time than most of you, but I can definitely say that it is possible to buy nice cash flow properties (usually nice due to rehab) in nice neighborhoods that will also, return 37% annualized return on cash invested.  And, in fact I know investors with nicer properties that expect much more.  But, as @Jay Hinrichs said, you need lots of them, compared to your one.

    Congrats on your success!

  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    12y

    I guess I wasn't clear and didn't make my point very well. My apologies I'll try again.

    Originally posted by @Marcus Johnson:

    Well you assumed I have debt. The bulk of my portfolio is free and clear.  You also are making an assumption that I was talking about gross cash flow. I was referring to Net Positive Cash Flow; after expenses and after debt service.  I thought the context made that clear.

    @Aaron Mazzrillo

    That is the point I was making. Once your monthly nut is covered any business you do beyond that; flipping, wholesaling, or investing in new buy and hold properties, compounds and grows very quickly.

    I also agree with you about leverage (although I am very conservative with it). As inflation kicks back in, having more properties via leverage will tremendously grow your net worth.

  • San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y

    Ah. You appreciation-vs-cash-flow debaters moved shop! Didn't we all agree to disagree? :)

    Speaking of podcast, I listened to this week's BP podcast. The guest talked about his 97 rentals in Duluth Minnesota. Not sure what his average cash flow per door is, but the number of $100/door is mentioned and that $200/door is a high aim. I was pretty impressed with the number until I sat down and punched the numbers. 

    At $100/door income is 116K. At $200/door it's 233K. Now those are pretty respectable numbers but it is a full time job managing 97 units. So people aspire to retire on cash-flow to, umm, another job? Passive income it is not. And I suppose very, very few people even get to that level.

  • Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    These are all good suggestions, like another post mentioned "to each their own." It is however nice to hear all the ideas out there as it allows me to add, correct, or take away from my own strategy as well.

    I mostly follow a good mix of properties that focuses on highly growth potential areas which tend to have lower cash flow in cyclical markets with properties in more linear cash flow markets like Midwest to balance out the income and equity growth strategy. 

    The cyclical properties are more expensive generally and I like to at least cash flow a bit (5-10% cash on cash) for the purposes of risk management and to maintain my debt coverage ratios. 

    On the cyclical growth properties, when factoring in depreciation and other write offs the property while cash flowing a bit usually shows up as a "paper loss," on the tax returns. 

    I use this paper loss to offset my other passive income to create a tax deferred shield against the properties in the linear markets (cash flow focused) that tend to make more net cash flow then all the deductions even with depreciation. The goal is to have both types of properties to achieve their specific objectives while focusing on reducing the tax foot print simultaneously.

    Currently, my focus is weighed 65% towards cash flow and 35% towards equity growth, but this changes as I review the financial statements periodically to balance things out.

  • Rental Property Investor · Las Palmas de Gran Canaria · Member since 2014 · 220 posts · 256 votes
    12y

    @everyone

    What an awesome dialog! I will address many of you individually in separate comments tomorrow / monday but wanted to see if I could consolidate my thoughts. A number of you mentioned scale. I think many of us are in agreement that in the SFR business, appreciation can be a completely independent factor from cashflow, and we can debate the merits of one or the other all day long (and we all will). Where the waters get either muddier (or perhaps clearer) is the point in which the two begin to correlate in multifamily. Its why I chose this forum. =)

    My current (and first) hunt for apartments has been quite educational. Market cap rates in the core Seattle area float about 5% +/- 1% and have stayed there for nearly 2 decades. Appreciation of the property is defined by the growth in rents. Many of the baseline key economic drivers that propel SFR appreciation should also affect rents. Jobs, availability, immigration, culture… prosperity for all (sorta). Historically, I wonder how intimately they are associated. 

    I’ve watched West Seattle (where my parents live) turn from a pleasant middle class to community to a hipster hub of happenings and the rents nearly double in recent history. New high end apartments built out, gastro pubs and a thriving economic boom near the junction.

    There is no question about the power of sitting in the path of progress. You could theoretically do nothing and by strategy or sheer dumb luck (like @Louis Leone artists) make profits well in excess of inflation. Most of the real success in our portfolio so far has been the byproduct of adding value compounded by appreciation. We have brought to life broken properties. We have repositioned properties. We have nurtured teams and systematized the business. These types of efforts happen in any and all markets and are the foundational building blocks we all work with. They don’t need appreciation. So you can buy well, make your money through improvement and careful management, then hold or repeat, and aim to put yourself in the path of progress but when you miss, the profits are there to collect.

    What is unclear to me is if this changes in the higher $ acquisitions? I am hoping this month to close on an Apt between 1.3 - 2M (leads in SF Bay or Seattle anyone) and I can easily imagine the next 2-3M purchase. My experience puts me strongly in the equity / appreciation camp, but as I start looking at the bigger complexes, does the difference between cashflow camp and the equity camp vanish? I still find myself far more attracted to a solid 10 unit apt for 1.7M @ 5cap in downtown seattle over a 50 unit apt for 1.7M @ 10cap in rural indiana. I still feel (but don’t have the numbers to prove it) that if purchased with the right timing, would lead to much stronger long-term gains with greater stability and less risk.

  • Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    12y
    Originally posted by @Shane Pearlman:

    @everyone

    What an awesome dialog! I will address many of you individually in separate comments tomorrow / monday but wanted to see if I could consolidate my thoughts. A number of you mentioned scale. I think many of us are in agreement that in the SFR business, appreciation can be a completely independent factor from cashflow, and we can debate the merits of one or the other all day long (and we all will). Where the waters get either muddier (or perhaps clearer) is the point in which the two begin to correlate in multifamily. Its why I chose this forum. =)

    My current (and first) hunt for apartments has been quite educational. Market cap rates in the core Seattle area float about 5% +/- 1% and have stayed there for nearly 2 decades. Appreciation of the property is defined by the growth in rents. Many of the baseline key economic drivers that propel SFR appreciation should also affect rents. Jobs, availability, immigration, culture… prosperity for all (sorta). Historically, I wonder how intimately they are associated. 

    I’ve watched West Seattle (where my parents live) turn from a pleasant middle class to community to a hipster hub of happenings and the rents nearly double in recent history. New high end apartments built out, gastro pubs and a thriving economic boom near the junction.

    There is no question about the power of sitting in the path of progress. You could theoretically do nothing and by strategy or sheer dumb luck (like @Louis Leone artists) make profits well in excess of inflation. Most of the real success in our portfolio so far has been the byproduct of adding value compounded by appreciation. We have brought to life broken properties. We have repositioned properties. We have nurtured teams and systematized the business. These types of efforts happen in any and all markets and are the foundational building blocks we all work with. They don’t need appreciation. So you can buy well, make your money through improvement and careful management, then hold or repeat, and aim to put yourself in the path of progress but when you miss, the profits are there to collect.

    What is unclear to me is if this changes in the higher $ acquisitions? I am hoping this month to close on an Apt between 1.3 - 2M (leads in SF Bay or Seattle anyone) and I can easily imagine the next 2-3M purchase. My experience puts me strongly in the equity / appreciation camp, but as I start looking at the bigger complexes, does the difference between cashflow camp and the equity camp vanish? I still find myself far more attracted to a solid 10 unit apt for 1.7M @ 5cap in downtown seattle over a 50 unit apt for 1.7M @ 10cap in rural indiana. I still feel (but don’t have the numbers to prove it) that if purchased with the right timing, would lead to much stronger long-term gains with greater stability and less risk.

    The 1.7M 10 unit in Seattle sells at a 5% cap which makes its NOI is 85,000 (1.7M X 5%) or about $7083 per month cash flow before debt service. With 25% down and 5 yr fixed rate/30 year amortization of 3.75% that I've found you'd cash flow about $1178.27 per month or 14,139.31 annually which is approx 3.25% cash on cash return.

    So it does not return too much cash flow from an income stand point, but by having a 5% cap rate this in essence means that every marginal dollar of NOI $1 added per month can create a multiple of 20 times in value ($1 / .05 cap = 20) or if multiplied by 12 months in a year, $240 dollars of value in equity.

    The 10% cap in rural indiana with the same terms as above would have a monthly cash flow of $8261.95 or approximately 22.8% cash on cash return with out factoring depreciation, appreciation, or amortization.

    10% cap = 10 X multiplier of Net Operating income or NOI so each dollar you can "net," per month by either increasing income or reducing expense creates $1.00 X 12 months X 10 multiplier = $120 dollars of value in equity.

    So the difference is in how the market cap affects your ability to create "equity," with the lower cap rates you dont need as much increase to create that equity while in the mid west since the cap rates are higher (lower multiplier) you'll need to have in this case double the net income creation to fabricate the same amount of equity growth as in Seattle.

    If you're trying to reposition and sell for profit, a lower cap market can be better if you find a troubled property with an opportunity to force equity in Seattle since the value multiplier is much higher, 240x.

    The rural indiana property with a higher cap rate could allow most to live financially free ($8261.95 cash flow per month) while offering a lower 120x value multiplier to create/force equity.

    So it all depends on your strategy to focus on equity or cash flow and to recognize which "play," you have in front you and whether the juice is worth the squeeze for you personally.

  • Investor · Milpitas, CA · Member since 2014 · 116 posts · 103 votes
    12y

    I feel that I am too green to say anything meaningful whenever discussions between cash-flow vs appreciation surface up. I guess, for what's it worth, I'd chime in a bit.

    I lived in Indiana for 6 years, and then in Central Pennsylvania for 2 years, before I move to the Bay Area. I've rented from both professional and incidental successful landlords.

    There is no denying that appreciation in Bay Area or other blue chip areas are wonderful, but I've also seen many property owners in Bay Area who've lost their shirts. 

    Let's just talked about my primary residence, and a few hypothetical scenarios.

    1. I bought it in 2008, and for the better part of 2009 - 2011, I was upside down. I am now holding a reasonable amount of equity in it.

    2. If I were to buy it in 2007, I would be at 0 or still small negative equity. One year too eager would make me 3 years behind.

    3. Of course if I were to buy in 2011 - 2012, I would have made a serious killing. Three year of patience would have made me 50% gain in equity doing nothing.

    It's also been said that blue chip areas are so forgiving, that even if you buy wrong, you'd be bailed up if you can hang on through the storm. I do believe it, since I did get bailed out. But you do need to make sure you can hang on to it long enough.

    Bay Area has seen soft economies too, the dot com crash was certainly obvious. But do you guys remember VC funding draught in 2005 ? My rent in Sunnyvale in 2005 was $735 a month! It was supposed to be $800 a month, but they had to give me a month free because there was no taker. The year after that Silicon Valley invented Web 2.0, my rent went up about 30%. If you were the property owner, and you had to refi when the cap rate was low, you'd certainly have a hard time. If you are buying for appreciation now, can you hang on to it in the next down time?

    So I guess what I am saying is not really that cash-flow is necessarily the better play. But more of: Can we time the market? It does feel a bit frothy isn't it? 2 more years before we soften a bit? How long would the down cycle be?  

  • Investor · McKinney, TX · Member since 2014 · 189 posts · 93 votes
    12y

    @Shane Pearlman Where you invest is a huge factor. Had you bought my house or many others in DFW when I did in 2000 and did it for appreciation, you'd have been pretty disappointed for many years. Cash flow? Depends. What are you doing with the cash? Going on vacation? Rolling it into other RE investments? That said, you are clearly in a geographic area where appreciation is strong. That is fantastic! Keep going!

    In my humble opinion, this is a "there's no right answer" situations. Personal situations, geographic areas are probably two of the big factors at play.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Ezra Nugroho 

      I think we have to look at short term horizon and long term.. I bought my very first home in Milpitas in 1976  it was a Shapel home ( nice builder) and paid 80k for it.  At the time average home prices in the US were probably more like 25 to 35k.. Bay area was a premium then as it is now. I think the point some are making is buying in CA  as you state you can time short term ( like trying to time the stock market) or you can buy your home live there for years ( you have to live somewhere) and wake up one day with a massive equity gain.. Or like most folks want to do in their goals is to own their home free and clear. Even if it does not go very far up in value you have an asset that you paid 700 and up for that 20 years down the track is paid for its got real value.. As opposed to buying lower end properties out of state that One never go up in value and are not really liquid because they are in such renter dominated markets that the exit in reality is only to another landlord.. And in another 20 years as BP ( like CA appreciation ) has 1 mil viewers and 10 million views there is a whole army that will only buy cash flow for the 2% rule   :) Ok I am being a little factious here but you get the drift.

    I am and will always be of the belief if life take you to the Bay area and we can lump Santa cruz in there as well as up to Sonoma and Napa counties. Goal number one should be to get that personal residence bought.. I know for one I would not be were I am at in my business life If I had not owned 4 Personal residences in the BAy Area over the last 30 years and made those accidental gains  and the gains with the new tax law of 500k tax free for owner occ how good is that... Even if you made money on a rental you have to pay tax when you sell or you 1031 and roll it all up and give it to the kids.. But what fun is that you want to reap some reward why your living  right ?

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    Haha - only on BP!

    I haven't had a job in 3 years - that's cash flow.

    I sell a house here and there - that's gift.

    CA is one of few places where gambling works.  Environmental regs are prohibitive to new construction.  Population growth story.  Yes - these returns are possible; in CA.  May be 2 or 3 other markets.   In most of the country they are not, and therefore building a sustainable model is not likely...

    Cash Flow = financial freedom

    Net Worth = wealth

    Any conversation relative to which is better or more important is matter of personal objectives - no?

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Ben, if you manage RE you have a job, you may love your job, but it's a job. At least, that's how the IRS sees it.

    Estimating equity values other than principal reduction is speculation, you can't hold that until you sell or refi it which will then change that matrix.

    The question is more to the present value of an annuity stream on a lower monthly basis or that of lump sums being received over time or a combination of both. From those streams you can estimate the future value, but what you'll find is that you'll need to reinvest small annuity payments at or above that is earned from the earning asset, that can be tough to do.

    Your opportunity costs will be higher with smaller amounts received, fewer opportunities to reinvest, so there needs to be consideration to allow that money or equity to sit in the walls over a period of time.

    The best solution is a combination of rents and equity established over time, as I mentioned, when all things are considered, you'll likely be in a 7 to 10 year period, generally.

    Your accumulation of wealth is a financial analysis not a real estate management exercise, while they are related they are independent to a greater degree depending on what you do. RE is your business model that produces personal income, investing your personal income is where wealth is accumulated. You may poor all your money back into your business but at some point you need to recognize other alternatives, IMO. You can't find continuous RE deals that meet your prior homeruns so to speak as timing and market conditions change. If your RE market, remains good or better throughout your business cycle then you will do fine specializing in that model. Need to think outside the box.

    Then, next question, what is wealth? Are there any intrinsic values, does owning assets produce more opportunities to increase your holdings? What's your reputation worth? It's not all math because things can get easier. Difficult to factor that in but it certainly matters.  :)  

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Bill Gulley 

    Bill, those are some very nice points... what does the small investor that buys two cash flow properties with leverage and is making 100 to 200 a month on them.. What do they do with that cash flow... if your just reinvesting your cash flow its going to take a mighty long time to build up enough cash at that rate to buy another home.. I guess one could use the cash flow to pay down debt.. so at least your making whatever your mortgage interest rate is in the form of a return... IE the Dave Ramsey approach... I know a lot of the investors we work with and their IRA's this is an issue as they can't contribute to the IRA enough in a year and the cash flow just slowly builds up. OVer time..

    So that Segway's into the Crowd funding when crowd funding allows 5k investments I can see folks getting interested in moving their cash flow 5k at a time into a crowd fund deal.

    Or putting it into the stock market  but sitting in the bank at .05% is not going to get you very far

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