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)!

6Reply
957 views

Most Popular Reply

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.

See this reply in the discussion

245 Replies

Jump to latestLatest
  • Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    Just remember that CA is a hot bed of cycles.  Sure, there is insane appreciation again.  Note the word "insane".  It's cyclical.  Just like with the subprime crisis, you can loose 50%+ of your value over the course of a few months.  Will it go back up?  Yes, probably, because of the same factors that drove the crazy appreciation in the first place.  But, you're going to be underwater for the next X years, while you wait for the value to be regained. 

    Of course, if you base your model on Cash Flow, the loss of value is no big deal, because rent in those high appreciation areas rarely follows the same cycle.  Rental rates don't cycle like property values.  The problem with the high appreciation markets is that rental rates also don't follow property values, so it's difficult to cash flow anything.

    Personally, I prefer areas like Texas that are fairly cycle proof. 

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

    You can set up multifamily to be hands off.

    If the 100 units are a bunch of smaller buildings spread out then keeping it passive can be more difficult.

    I know one investor who only goes to the properties every few years. He has  4 larger ones of 75 units to over 100 units per place.

    There is one property manager at each complex and then a regional manager over all the complexes.

    There is a separate parent property management company that audits each complex and can have a manager or repair person step in if the normal ones at that site can't be there. That removes the owner from having to step in and they just review reports every month with an occasional phone call.

    I know what some are thinking in that all of that oversight comes at an additional cost. Sure it does but if you factor it in on the buy side then you are okay. This particular investor is very wealthy and doesn't need every cent from his properties. He will get what he wants out of the properties and then wait for the right time for his next move. I am trying to get him to sell one of them locally as it's a good location but it is performing well for him so he does not have plans right now to let go of it. He is focusing more on commercial development deals right now rather than divesting holdings unless he needs to free up some cash for a specific project.

    So my point is you can get passive with the right structure in place on multifamily. If you are talking just  a low number of units the scale really isn't there to build in the numbers to be very passive. 

  • Real Estate Investor · Minneapolis , MN · Member since 2014 · 169 posts · 33 votes
    12y
    It's depends on your goals. For me, Steady cash flow is imp for financial freedom. Building a steady cash flow over a period of time is the approach I follows. It pays my bills and over a period builds equity - for refinancing and further investment.
  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    @Jay Hinrichs 

    which was my point, for beginning investors or those with personal debt $200 a month can go to clear up credit cards, car payments, installment loans, education loans, probably the highest yield as a return they can get with that kind of additional income. Then contributions to IRAs or retirement plans. When there is 5 to 10K above reserves, they can begin operating again, another property, a short term loan or partner.

    Then start thinking about the velocity of your money, the faster you can turn the money around the more you'll be making, partnership, be it rehab sales or loans. 10% made on your money 4 times a year is 40%. What ever you get while money sits idle is gravy over that as interest income.

    Churn your inventory (back to that 7-10 year window) but you could sell every 3 years if the market allows and move up to another property, these shorter periods have less of an impact on taxes recapturing the depreciation for a short period. 36 months of rents plus the equity gained.

    As Jay mentioned, there isn't much you can do with a few hundred dollars, your opportunity costs are high and limited.

    If you think flipping immediately makes money, get a good property, rent it and sell in 3 or 4 years your profits will be even greater annualized and taxes won't kill you. That's why those successful in RE don't put all the eggs in one basket and sit and wait, you need to build inventory and move it, rinse and repeat.

    Not until you get to larger properties in commercial can you sit and wait longer, it's the nature of the beast of the market. You may hold a 24 unit apt. bldg. 25 years before considering a sale, might hold it longer.  :)

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

    @Joel Owens 

      That is the difference between asset class's... If one is to buy a nice A or strong B building that has on site management and a property manager visits are rare and its all about looking at your statements monthly quarterly etc.  Our Portlandia market is exactly that highly sought after low cap rate 4 to 6%  but highly stable market... Vacancy rates in PDX are either the lowest in the country or second lowest and the big investors know it... I think San Jose is number one and we are number two.

    ONe of my business partners  We met as I sold him a 80 unit when he was rolling out of a Vegas 1031 ( impeccable timing on his part) He comes to PDX 2 times a year and spends maybe 90 minutes each trip with the PM and at the property. He is know buying the 40 unit right next store so he is in a pretty good spot there.

    Segway that to buying a C or D class 15 cap in the mid west and you need an army and are going to be involved or your going to lose your butt...

    And its the same with the low end rental houses its not very realistic to think you can buy them and its set it and forget your PM will do everything for you... Just not the real world , its how the product is marketed and some may go that smooth but many need constant attention and interaction.

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

    @Hattie Dizmond 

      Ah what short memories we have.. Texas has certainly seen its boom and bust cycles as well... think mid 80S to mid 90's  people were upside down all over the place with there homes. I was Selling RE in CA and I would get many people moving from Texas to ca that just could not sell their home because they were upside down. In  addition Texas banks and lenders will go after deficiency judgments on owner occ.. Unlike CA were the law precludes a deficiency judgment on purchase money.. Along with that Multi family got killed I worked in the middles 80s for a Bay Area syndicator the company had about 1 billion in bay area and Sacramento apartments.  They like many got lured into the cap rates and cheap Texas units only to have them go totally under then get in a huge lawsuit with the bank that came after them for deficiency judgments.. I new another syndicator in Oakland who lost 2 buildings in 91 in Dallas...

    So like all things and in many markets its all cycles to think that Texas has been and will always be a safe haven well that's wishful thinking I think

    Seattle prior to Microsoft went as Boing went.. I remember early 80's clients trying to buy in SF area and could not sell those houses... Now with tech and Microsoft its a long forgotten

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

    @Shane Pearlman 

    @Albert Bui 

    The major difference between west coast  IE La bay area PDX Seattle compared to mid west is your collections and cost of ownership ( weather related) will be drastically different. there is a reason mid west properties need to sell for higher returns... One can proforma but one needs to see actuals.. Mid west actuals rarely come close to performa

    I had a very close friend sell her 80 unit in PDX and buy a 300 unit in Oaklahoma city. she got lured to the 10 cap.. Well it just about broker her.. she had to pull up stakes and move there and lived there for 5 years before she could finally get the property stabilized enough to sell it for what she had in it... It was a painful expeirnce for her... You go from extremely stable market and tenant base to the opposite and you just take your west coast experinces and think it will be the same and then you get an education.

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

    I don't know who can say who has the lowest vacancy rate, since all projects are not reported, people wait 2 years+ to get into Fox Grape here.  Some places you have to wait until someone dies to get in, no they aren't cemeteries.

    BP is no t responding having posting issues  Later :(

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

    @Bill Gulley 

      vacancy rates in these markets are for the whole metro area not just prime properties and every city in the US has some prime properties some just have more than others :)

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

    @Shane Pearlman 

    @Albert Bui 

    The major difference between west coast  IE La bay area PDX Seattle compared to mid west is your collections and cost of ownership ( weather related) will be drastically different. there is a reason mid west properties need to sell for higher returns... One can proforma but one needs to see actuals.. Mid west actuals rarely come close to performa

    I had a very close friend sell her 80 unit in PDX and buy a 300 unit in Oaklahoma city. she got lured to the 10 cap.. Well it just about broker her.. she had to pull up stakes and move there and lived there for 5 years before she could finally get the property stabilized enough to sell it for what she had in it... It was a painful expeirnce for her... You go from extremely stable market and tenant base to the opposite and you just take your west coast experinces and think it will be the same and then you get an education.

     Yeah mid west properties sell at performa a lot of the times and careful considerations need to be taken with respect to actual cost of managing the particular property since the agent and their sales copy or sales memorandum always paints the picture as the rosiest outcome is what I've noticed.

    I find that if one does all their due diligence on the costs and check in with local multi family property management companies to view how actual buildings are operating it really helps to make adjustments to your projections.

    Mid west does sell for a higher cap or higher return right.

  • Madison Heights, MI · Member since 2014 · 471 posts · 132 votes
    12y

    Cash flow certainly can build wealth, especially if one is earning 30%+ COC returns. But there isn't any reason that one can't get both cash flow and appreciation. Even in a market that is not appreciating or appreciating slowly, properties can sometimes be purchased at a steep discount, creating an equity position of 25% or more after some repairs. "There is more than one way to skin a cat."

  • Investor · Dallas, TX · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    @Jay Hinrichs 

    I probably shouldn't have been as broad in my categorization.  You are correct about the 80's & very early 90's.  However, the problem was centered in the Houston market and tied to the oil bust and S&L crisis.  It's how I bought my first home...RTC baby!

    A lot of people in Texas learned big lessons from that.  Houston became very intentional about diversifying its economy.  Regardless...that was 30-years ago.  You don't see 7 year cycles here.

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

    I like to look at "Appreciation vs Cash Flow" from another angle. To me, it's more "Cash flow now vs cash flow later". 

    In costal appreciation markets, rent tends to go up along with property value. That's just basic supply and demand economics. The cost of holding an appreciating asset is fixed if you do 30-year fixed. But rent and thus your cash flow will slowly kick in. The real kicker is of course the appreciation. That's the main entree not some icing on the cake, unless you like cake that's all icing.

    Let's do an what-if analysis. A small house in Bay Area sells for 500K today, and fetches $2,500 rent a month. These are ballpark realistic numbers. You put in $100K as downpayment, and hold $400K fixed rate mortgage at 4.5 or 5% rate. So you are about cash flow neutral at Year 0.

    At 5% annual growth rate the house will double in value at Year 15. So appreciation alone gives you half a million without you lifting a finger. And let's play conservative and say rent doesn't double to 5K, but instead only goes to 4k a month. And now you have a property that gives you $1,500 cash flow as well.

    It's a much-simplified calculation. Play with different assumptions in your spreadsheet. I think the main stumbling block for people is they don't believe in the future. They look at charts that goes back 50 or 100 years and say "Nah, that can't continue." What's so funny about the last "appreciation vs cash flow" thread is that it's started by a guy in NEW YORK CITY! The mecca of appreciation. And yet he refuses to acknowledge it.

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

    @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

     Thats True Jay if you assume only the use of incremental rents from the rentals to be accumulated to purchase another rental it would take a long time but that assumes the investor also buys the property at retail with out realizing any market equity, forced equity, or other.

    If I buy a home at 75% of market value from a wholesaler who charges 3% fee  with title/recording/escrow/closing at 1 pt cost I would be in deal 79% cost to market value/after repair value.

    With a good track record I would be able to cash out up to 75% (portfolio/conv.) and take out most of my money with 4% still remaining in the property along with rehab costs only. This way I can re-cooperate a significant portion of my original contributions and leave only market equity within the property which keeps the bank happy and willing to lend.

    The goal would also be to make sure the property cash flows as well to your personal preferences before you roll your cash out proceeds into the next deal. I've experience this strategy creating a significant amount of equity and cash flow.

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Manch Hon:

    Let's do an what-if analysis. A small house in Bay Area sells for 500K today, and fetches $2,500 rent a month. These are ballpark realistic numbers. You put in $100K as downpayment, and hold $400K fixed rate mortgage at 4.5 or 5% rate. So you are about cash flow neutral at Year 0.

    At 5% annual growth rate the house will double in value at Year 15. So appreciation alone gives you half a million without you lifting a finger. And let's play conservative and say rent doesn't double to 5K, but instead only goes to 4k a month. And now you have a property that gives you $1,500 cash flow as well.

    In your scenario, over 15 years, you received $500K in equity through appreciation and an average of $750/month in cash flow (assuming linear rental rate increases).  Let's further assume that the $750/month starts in Year 1, and you plow that cash flow back into assets that generate 5%.  A $9000 annual contribution over 15 years at 15% is another $203K.  

    So, without doing any differential equations of how that secondary cash flow is used, you can assume your $100K has earned you $500K in equity and $203K in reinvested cashflow -- for a total gain of about $700K.

    Let's say someone in my area takes that same $100K and leverages it across multiple properties in an area where he can get 15% leveraged COC return, but only 2% appreciation (assume it holds steady with typical inflation). The $100K invested at 15% COC -- and assuming the cashflow can be reinvested at the same rate, just like your scenario -- will be worth about $813K in 15 years -- for a gain of $713K.

    Assuming a 20% LTV, the $500K in assets have appreciated a total of about $172K in those 15 years (again, assuming 2%). And we can ignore the increase in rental rates for this hypothetical.

    In this second scenario, the investor has generated about $885K in gains.  Compared to the $700K in gains with your scenario.  Even if you assume NO appreciation in my scenario, the gains are about equal.

    These numbers are far from perfect, as they make a lot of assumptions about the ability to reinvest, etc. (and hopefully I didn't make any mistakes in my math)  

    Based on that, it's not clear that your hypothetical situation is any better than mine -- both of which are probably pretty realistic.

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

    @J Scott My 500K house scenario is fairly realistic. Just the other day someone asked on BP about buying a condo in the Bayview area of San Francisco. That little dinky 2-BR condo can rent for 3k and costs about 550K retail. Throw in the 300 or so a month HOA and that's in the same ballpark as my numbers. Some smaller houses in San Jose you can find these deals any day, not to mention the East Bay.

    I did not assume you re-invest any of the cash flow. If you do more power to you. To me that's another plus for the appreciation model. Even if you are eager to plow back every dollar you need to find the opportunity to do so. I am not aware of any houses that sell for $200. :) So you may need to wait 2 or 3 years for the cash flow to accumulate before you buy another 15%-return deal.

    I'd like to know where you find the 15% leveraged CoC deals though. If that's real I sure am interested. Math is math and I am not religious about anything.

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

    @Ben Leybovich  "Cash Flow = financial freedom

    Net Worth = wealth

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

    Why, for the live of god, are these two mutually exclusive?  The whole point of gaining the net worth is to also derive income from it. That's the argument us costal CA investors are making- basically you can have your cake and eat it too :)  Meaning, you don't need to own a lot of "doors" in fly over states to have a strong cashflow. And that usually entails you having a full time job managing 50-100 lower end units- and frankly a job I sure as hell would not want.  As @Joel Owens discusses, yes you can have all that managed, but you're probably going to be pretty established (and wealthy) to achieve that- lots of units in B+ or better buildings for reliable management w/o disasters- again net worth. 

    Contrast that with owning a few units in expensive CA metros. After a few years there is loads of equity and cash flow, from the reasons that the OP mentioned- high end jobs, gentrification, little/no new construction.  Yes it's hard "getting in", but once you manage that the ride is pretty sweet. 

    Oh, and as for boom/bust- those are more pronounced in inland CA, AZ, NV, etc. In the most prime Bay Area cities the booms are big and long, and the busts are a blip. Take San Francisco. Prime SF fell 10-20% from 09-11. Last year it already surpassed 08 heights. It's like recession?  What recession? And rents went up on average 30% (mine are up 50%!  The Mission district in SF totally blew up with the hipster-techies invasion) in the last 3 years.  Needless to say, cash flow is very good. 

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

    @Amit M. - this is like splitting hair.  But, I'll tell you this - I know lots of people with very significant Net Worth and no Freedom.  Still tied into 9-5 for cash flow.

    I am not against big checks.  but, I am opposed to substituting those for cash flow.  It's a lot easier to managed established CF than it is to continually drive big checks :)

  • Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    12y
    Originally posted by @Ben Leybovich:

    @Amit M. - this is like splitting hair.  But, I'll tell you this - I know lots of people with very significant Net Worth and no Freedom.  Still tied into 9-5 for cash flow.

    I am not against big checks.  but, I am opposed to substituting those for cash flow.  It's a lot easier to managed established CF than it is to continually drive big checks :)

     Still, with substantial net worth and little scheduled income, you could periodically sell off or borrow against assets for cash. I don't know that that's harder than managing a rental portfolio, especially if the big net worth assets are liquid, like securities. 

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    12y
    Originally posted by @Manch Hon:

    @J Scott My 500K house scenario is fairly realistic. 

    ....

    I'd like to know where you find the 15% leveraged CoC deals though. If that's real I sure am interested. Math is math and I am not religious about anything.

    My 15% COC is perfectly realistic in the areas where I invest (though I do agree that reinvestment at 15% COC can't always be achieved in real time)...

    Over the past six years, I've bought several deals in three different states that exceed this criteria, despite the fact that I wasn't looking for them, and the fact that I later sold most of them (after one year holding as a rental) because I'd rather have the lump sum cash.  All three areas were very decent blue-collar suburbs where I'd be comfortable with my family living.

    In terms of the numbers, consider that a deal that meets the 2% rule and the 50% rule will -- by definition -- have a COC of 12%. Add in a reasonable amount of leverage from a portfolio lender (80% LTV, 6% interest, 15 yr amortization), and it's easy to get those deals to closer to 19% COC.

    I've lived in the Bay Area and I've lived outside the Bay Area.  When it comes to where I would choose to invest to build long-term wealth through rentals, I'd be much more comfortable investing outside the Bay Area.  Not to say that everyone needs to feel that way, but that's my opinion, and it's based on first-hand knowledge of both markets (inside and outside Bay Area).

    Btw, for full disclosure, I do sort of invest in the Bay Area (partnerships), but so far, only flip deals, not buy and hold.  I don't expect that to change any time soon...

  • Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    12y
  • Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes
    12y

    @Jon Klaus, Awesome link and article. I totally agree and enjoyed reading the article on "Focus On Building Net Worth Even More Than Growing Income" 

    Here are some additional information that matches the top % of income and networth.

                                                                                                Pecentile:

    Top 20% income : $108k         net worth $416,000           80%
    Top 10% income : $150k         net worth $952,000           90%
    Top 5% income : $210k           net worth $1,820,000        95%
    Top 1% income : $520k           net worth $6,820,000        99%

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

    @Jon Klaus, Awesome link and article. I totally agree and enjoyed reading the article on "Focus On Building Net Worth Even More Than Growing Income" 

    Here are some additional information that matches the top % of income and networth.

                                                                                                Pecentile:

    Top 20% income : $108k         net worth $416,000           80%
    Top 10% income : $150k         net worth $952,000           90%
    Top 5% income : $210k           net worth $1,820,000        95%
    Top 1% income : $520k           net worth $6,820,000        99%

     HI James,

    Is this for the US as a whole ?

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

    @Amit M. - this is like splitting hair.  But, I'll tell you this - I know lots of people with very significant Net Worth and no Freedom.  Still tied into 9-5 for cash flow.

    I am not against big checks.  but, I am opposed to substituting those for cash flow.  It's a lot easier to managed established CF than it is to continually drive big checks :)

     I too, have seen many people with multi millions in networth that are very cash poor that complain about not being able to qualify for a financing. I frequently hear... "But Albert I am a millionaire for god sakes..."

    I think the issues of equity/appreciation vs. cash flow plays, as if they were mutually exclusive, seems to thrive in residential real estate camp. In business & commercial RE cash flow "is," equity growth/forced appreciation.

    When I go back and forth with commercial underwriters on files the resounding theme is "cash flow," and the ability of the borrower to manage, create, and maintain it. I have borrowers with proven track records that will get loans with much better terms, higher leverage, and lower rates just because they can and have documented a track record of being able to create money with money.

  • Investor · Bay Area, CA · Member since 2014 · 63 posts · 77 votes
    12y

    @J Scott  said:

    Let's say someone in my area takes that same $100K and leverages it across multiple properties in an area where he can get 15% leveraged COC return, but only 2% appreciation (assume it holds steady with typical inflation). The $100K invested at 15% COC -- and assuming the cashflow can be reinvested at the same rate, just like your scenario -- will be worth about $813K in 15 years -- for a gain of $713K.

    Hi J. Scott,

    Do you know of a work around for CA investors who lose up to 50% (a little more) on rent re-investment for your second scenario? Whereas appreciation gains stays untaxed until sale (possibly never if held until death).

Join the conversationCreate a free account to reply, vote on answers and follow this thread.