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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  • Las Vegas, NV · Member since 2015 · 4 posts · 1 vote
    9y
    Originally posted by @Amit M.:

    now that's appreciation, kids!

    In a Manhattan Milestone, a $1 Million Parking Space

    By MICHELLE HIGGINS 1:53 PM ET

    Sick of dents, dings and parking musical chairs? Parking spaces in a SoHo condo are selling for $1 million apiece.

    $1 Million for a parking space?  I believe the craziness with it being Manhattan but couldn't you buy Uber for life for that price? lol

  • Real Estate Investor · Mukwonago, WI · Member since 2017 · 76 posts · 16 votes
    9y

    OK, so not to change the subject here, but I'm a new investor, and I get why to invest near the best grade/high schools, but I'm not seeing exactly what it is about universities other than student rentals.  Could you please enlighten me?  I've been hearing this a lot lately, and I'm curious.  I have several universities near me in the SE Wisconsin area, and I'm wondering if I should consider going that route at some point.  Thank you!

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    9y
    Originally posted by @Justin Schaefer:

    OK, so not to change the subject here, but I'm a new investor, and I get why to invest near the best grade/high schools, but I'm not seeing exactly what it is about universities other than student rentals.  Could you please enlighten me?  I've been hearing this a lot lately, and I'm curious.  I have several universities near me in the SE Wisconsin area, and I'm wondering if I should consider going that route at some point.  Thank you!

     Universities have lots of students who require rental housing.  

  • Real Estate Investor · Mukwonago, WI · Member since 2017 · 76 posts · 16 votes
    9y

    And so that is the only reason?  People don't view that as very overly high risk?  Thank you!

  • Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes
    9y

    Cash flow is King in my book... If you have cashflow appreciation should hopefully follow.... If you have appreciation but no cash flow you aren't maximizing gains....

    Cash flow allows you to take money off the table every month similar to a dividend being paid out.. Every month of cash flow you receive you are reducing your risk as you are pulling money out....

    Appreciation is a bit harder to control (not talking about forced appreciation here) just market appreciation which comes and goes with cycles.

    I always look at it from a cash flow perspective first  and foremost  and appreciation and equity generally follow closely behind... If you look at it from an appreciation standpoint first it is tougher to get cash flow to follow easily...

    Just my opinion,

    Chris

  • Real Estate Consultant · Cleveland, OH · Member since 2016 · 511 posts · 345 votes
    9y

    In my opinion the ONLY appreciation is forced appreciation. Long term buy and hold (more than 7 years) begins to cost you more than you invest, unless your NOI can cover you initial investment in less than 7 years. At that 7 year mark, cap ex items (assuming everything was new when you bought it) will begin to eat away at your profits.

    When I buy for "cash flow" I never hold longer than 7 years 

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Chris Masons:

    Cash flow is King in my book... If you have cashflow appreciation should hopefully follow.... If you have appreciation but no cash flow you aren't maximizing gains....

    Cash flow allows you to take money off the table every month similar to a dividend being paid out.. Every month of cash flow you receive you are reducing your risk as you are pulling money out....

    Appreciation is a bit harder to control (not talking about forced appreciation here) just market appreciation which comes and goes with cycles.

    I always look at it from a cash flow perspective first  and foremost  and appreciation and equity generally follow closely behind... If you look at it from an appreciation standpoint first it is tougher to get cash flow to follow easily...

    Just my opinion,

    Chris

     I like cash flow and I like appreciation but do not depend solely on either for my returns but rather a combination of them. Total return is what counts. 

    I look at it in the complete opposite way as you Chris. In my experience, appreciation does NOT follow cash flow. Just the opposite; cash flow follows appreciation. Price increases and rent increases go hand in hand, but most expenses do not scale as such. So, if you bet on appreciation and you are right, you get BOTH appreciation AND cash flow in the long run. As I said, though, I don't JUST bet on market appreciation and I don't just bet for the long term; I have short term forced appreciation and positive cash flow to hedge my bets and boost my short term return.

    On the other hand, appreciation rarely follows cash flow. Properties that cash flow very well on day 1 tend to be the cheaper properties, and in a vast majority of cases they are cheaper precisely because they don't appreciate. It is not realistic to think that a cheap property with no long term history of appreciation will turn the corner and start appreciating rapidly the day after you close escrow. You could get lucky, but not likely. The more likely scenario is that cheap property stays cheap, and in fact if the price does not change at all you are actually losing purchasing power after inflation (negative appreciation), and yet your CapEx keeps up with inflation, so your precious cash flow would actually decline year after year in this case ... cash faux. This is market appreciation I'm talking about ... forced appreciation is another thing and it is a great thing but you can only do it once per property. So, if you bet on cash flow and you are right, you get cash flow but not typically market appreciation over the long haul.

    Also, I'd like to make the distinction between short term and long term market appreciation. Sure, the market fluctuates and short term market appreciation is very difficult if not impossible to predict, however there is a long term historical trend that is fairly consistent at least in some markets (and this can be confirmed or not by studying historical pricing data) ... for multi-decade hold periods (spanning several RE cycles) in these type of markets, long term average (over the hold period) is not really that difficult to predict.

  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    Great post!

  • Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y
    Originally posted by @Aaron Mazzrillo:

    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.

     Hey what's up man you should check out my commercial property in corona sometime. Maybe we can connect and I can take some notes from you about beginning my land lording business thank you.  Nicely done on your investments I would like to see myself doing the same thing!

  • Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y
    Originally posted by @Christopher Blanco:

    In my opinion the ONLY appreciation is forced appreciation. Long term buy and hold (more than 7 years) begins to cost you more than you invest, unless your NOI can cover you initial investment in less than 7 years. At that 7 year mark, cap ex items (assuming everything was new when you bought it) will begin to eat away at your profits.

    When I buy for "cash flow" I never hold longer than 7 years 

     What's the reason for the 7 years? 

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Richard Dunlop:
    Originally posted by @Jay Hinrichs:

    @Joe Bertolino

      What happens with this out of state buying phenom is the what I call

    GET YOURSELF STARTED IN REAL ESTATE syndrome....

    Jay I agree with all of your assessment and this thread is debating: "is cash flow or appreciation more important."

    My question is why not both? 

    You refer to the gentrification of downtown Sacramento, have you looked at the gentrification of downtown Detroit? 

    My personal opinion is Detroit reached the very bottom in 2010 and is coming back way too fast! 

    Downtown has 98-99% occupancy rate. Dan Gilbert has invested about $2 Billion in the past 5 years.

    When I was in school in Santa Clara (San Jose) lots of areas of Oakland scared me more than Detroit does today. I've not seen it but I'm told it's coming back.

    You refer to out of state want to be investors and when people approach me on BP and other contacts I insist they have to come up here and actually see what is happening. But there are many many properties where they could give away 80% of the deal and still make a fortune.

    People in this thread talk about 11% gains for year over year for long spans of time. My neighborhood has done way better and I expect it to continue for years to come. Bought my house for $16,000 when it was worth $75,000. Six years on it is worth $225-$250,000 today.

    1800 Sq ft Wood frame house in my neighborhood just sold for $219,900. Mine is 4700 Sq ft built out of 500lb quarried stones. But people laugh at my valuation because it's Detroit. (Over built? yes but still a great value) 

    Metro Detroit has problems, Yes, But it also has SF homes that would sell for $10,000,000.00 in today's down market.

    Detroit was about 60% auto industry now is rebuilding as about 9-10% dependant on auto. Like Pittsburg shed its dependance on the steel industry.

    My personal prediction (I'm no expert) is Detroit will see double digit appreciation for the forseeable future. Much better than most other markets.

    Detroit needs the the money changers /HML to come back.

    I started with $150 (I had good credit) and now have $750,000 in Equity.

    Appreciation OR Cash Flow?

    Why not BOTH?

    The question in my mind, and we can use Detroit as an example, is whether that is a local bottom or global bottom, local and global in the mathematical sense, not geographic. In other words, is that bottom of which you speak because prices overshot to the downside and now are reverting to mean, a local bottom. Or alternatively, is that bottom a bottoming of the long term trend of prices staying stagnant or declining over decades, and something in the underlying supply and demand fundamentals that have caused this in the past have changed making the previous long established trend irrelevant going forward, a global bottom. 

    You can make money either way, but gains from a local bottom are short lived and best strategy if that be the case in a historically stagnant market would be sell out once prices recover and overshoot to the upside towards the end of the current cycle before they revert back down to the mean again. I did this in Phoenix for a nice little 3x appreciation rocket ride between 2009-2016, so I'm not knocking it, but I definitely sold out in 2016 (a bit early in retrospect, but better a bit too early than too late) to avoid riding the elevator back down to the basement.

    Global bottoms are much much more difficult to call ... they are exceedingly rare ... I've never once met an investor in all my years who has successfully called a global bottom and put their money in to monetize it ... I have however met plenty who bought into a local bottom thinking it was a global bottom and proclaiming that "this time it is different", only to watch most of their gains evaporate as the stubbornly held while the market showed them that this time it was no different and that the underlying fundamentals that drove the market over the past decades had not really changed much. It can happen the other way too ... my parents sold a 4-plex in Manhattan Beach, CA in the '70s for something like $125k because they thought the market had peaked and could not go higher, and they were right in the short term, they called the local peak, but not the global one.

    If you are betting on a global bottom in Detroit, I sure hope you are right, and I'm not expert enough in that market to argue otherwise except for the comments above that the odds do not seem to be in your favor. So, if this is the case, what do you think has fundamentally changed in that market that has/is going to reverse that long term trend in a sustainable manner going forward?

  • Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Robin Boyer:
    Originally posted by @Aaron Mazzrillo:

    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.

     Hey what's up man you should check out my commercial property in corona sometime. Maybe we can connect and I can take some notes from you about beginning my land lording business thank you.  Nicely done on your investments I would like to see myself doing the same thing!

     Is your commercial building a warehouse? Are you selling it or buying it?

  • Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    Selling. One unit makes teeth one unit is a office with a warehouse one unit is a software company. I'm working on putting together a open office one day so that all the investors and bigger pocket numbers and check out our building.  Would like for you to see it and run by you my ideas and what I have learned last few days.

  • Real Estate Consultant · Cleveland, OH · Member since 2016 · 511 posts · 345 votes
    9y

    @Robin Boyer I use 7 as my max, because that is about the limit that CapEx items start to go (Hot water heaters, etc).

  • Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    @Christopher Blanco thanks that makes sense.  We are about to invest about 400k to 500k in our local market i had a few questions do you have a contact email on your page.

  • Real Estate Consultant · Cleveland, OH · Member since 2016 · 511 posts · 345 votes
    9y

    Send me a PM here.

  • Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y
    Originally posted by @Jesse B.:

    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.

      Wonder what Aaron would think of this statement.  I am trying to learn how to invest 500k for the very first time and cash flow and appreciation sound very nice. So do you split and invest the first time your money in California take your money from those finished projects and go back east Arizona? Trying to figure it out hoping to meet Aaron sometime and go over what he thinks. Obviously he made a lot of money investing in California like so many others have but sure that took time to make that kinda money!

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