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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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Mike Mitchell:

    @Jay Hinrichs 

    @Curt Davis 

    Why cant a out of state investor win in such markets, even with good property management?

    Originally posted by @Curt Davis:

    I can vouch and say with certainty that no out of state investor will win long term on homes in the $35k range. It's hard enough for locals to make it work. 

    If you substitute "houses in rough, low-income areas" with "homes in the $35K range," I completely agree.  First, I don't agree with the arbitrary $35K number -- I've purchased $35K houses in areas where I'd be fine with my family living. 

    But, it's reasonable that in most of the country, $35K houses are in rougher areas, and those areas are very difficult to make money long-term if you're not hands-on.  This is because in those areas, you're going to see a lot of turnover, a lot of tenant-inflicted damage to your house, vandalism, theft and other issues that make property management and rent collection difficult.  

    For that reason, you're going to be hard-pressed to find a good property manager in those areas.  And if you're long-distance, the property manager is your front line -- without a good one, you won't succeed.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Mike Mitchell 

      As J scott Points out not all sub 35k deals are created equal.. When Curt Davis mentions it he is talking about his market in Memphis.. and really any of the large metro areas were on its face sub 35k is the Very low income housing that is management intensive for all the reasons every one talks about.. finding a manager that wants to knowingly manage for a fee those types of units can be difficult ...

  • Jersey City, NJ · Member since 2015 · 280 posts · 98 votes
    11y

    No rental income is going to beat the astronomical gain when you catch the appreciation ride.  True story, there are cities where a house tripled in value (from 1.5mm to around 4.5mm in 10 years).  How many years of rental do you need to make 3mm?

    The big assumption, is of course, the city you invest in catches the appreciation ride.  How will you ever be able to predict with good certainty that appreciation will ever happen?  It's everyone's guess.  

    Good thing is that it's not just appreciation-vs-cashflow.  There are other options.  A good strategy to consider is to identify a market where currently it still cashflows properly, with a potential (far from fact) to go skyrocket.  So worst case, you make money from cashflow.  Best case, you know what it is.  Just ask the investors in Oakland, CA. =)

  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    11y
    Originally posted by @Che Chiu Wong:

    No rental income is going to beat the astronomical gain when you catch the appreciation ride.  True story, there are cities where a house tripled in value (from 1.5mm to around 4.5mm in 10 years).  How many years of rental do you need to make 3mm?


     Not everyone can afford to buy a $1.5m property.

  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Dawn Anastasi:
    Originally posted by @Che Chiu Wong:

    No rental income is going to beat the astronomical gain when you catch the appreciation ride.  True story, there are cities where a house tripled in value (from 1.5mm to around 4.5mm in 10 years).  How many years of rental do you need to make 3mm?

     Not everyone can afford to buy a $1.5m property.

    The point is valid though.

    So many investors ignore the potential that comes with "value add" and "right place/right time". 

    In the properties that I have purchased during the past few years, the only reason for looking at the cashflow projections was to see what the value would increase to.  The actual cashflow was in the noise level of the returns.  Not enough to care about.

  • Greensboro, NC · Member since 2014 · 212 posts · 143 votes
    11y
    Originally posted by @Che Chiu Wong:

    True story, there are cities where a house tripled in value (from 1.5mm to around 4.5mm in 10 years).  

    True story, there are cities where a house has lost 2/3 of its value in much less than 10 years.

  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Derek B.:
    Originally posted by @Che Chiu Wong:

    True story, there are cities where a house tripled in value (from 1.5mm to around 4.5mm in 10 years).  

    True story, there are cities where a house has lost 2/3 of its value in much less than 10 years.

     Man.... What pessimists there are around here!  Of course you can get caught but why would you not look for gains?

  • Greensboro, NC · Member since 2014 · 212 posts · 143 votes
    11y
    Originally posted by @Steve Olafson:
    Originally posted by @Derek B.:
    Originally posted by @Che Chiu Wong:

    True story, there are cities where a house tripled in value (from 1.5mm to around 4.5mm in 10 years).  

    True story, there are cities where a house has lost 2/3 of its value in much less than 10 years.

     Man.... What pessimists there are around here!  Of course you can get caught but why would you not look for gains?

     Its a balance and I'm not a pessimist.  I was only pointing out what is quite obvious.  The given example of $1.5 to $4.5mm in 10 years is over 11% compounded annually.  Those gains did happen, but not consistently over that 10 year period.  They spiked and likely corrected.  I am all for appreciation supported by market fundamentals.  Maybe I just haven't been around long enough to find the market that gives back 11% each year, every year, consistently.

  • Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    11y
    Originally posted by @Steve Olafson:
    Originally posted by @Derek B.:
    Originally posted by @Che Chiu Wong:

    True story, there are cities where a house tripled in value (from 1.5mm to around 4.5mm in 10 years).  

    True story, there are cities where a house has lost 2/3 of its value in much less than 10 years.

     Man.... What pessimists there are around here!  Of course you can get caught but why would you not look for gains?

    I don't think anyone is against looking for places that have good potential for long term appreciation.  I think most just don't think people should be stupid about it, which means ignoring cash flow all together.

    As you said you can get caught and a lot of people did not so many years ago.  If you buy in a hot market and figure you can sit on it for just a few years and make a nice gain and are willing to feed the alligator during that time you are taking a big risk.  If the market goes down when you planned on selling you either take a loss or have to hold it while bleeding a little (or maybe a lot) of money each month until you can at least break even, or until you can't swing it anymore and the crash could be Epic.

    Invest for appreciation if that is your goal, not a bad idea at all.  Just be smart about it and work to find places that will at least have a minimal cash flow so you can hold it as long as is needed to see the gains you are hoping for.  It might suck but you can weather any downturn if you don't have to pay for the privilege of owning a place.

    Just look at your own hood.  Investor buying a median priced house in Scottsdale in Jan of 2008 to try to cash in on a market that has been going up and up for years takes on a couple hundred bucks of negative cashflow hoping to sell for a nice gain in 3-4 years.  Market almost immediately crashes hard and is down about $100K by the summer.  Market totally bottoms out in his selling timeframe in Sep of 2011.  His $550K investment is now only worth a little over $300K.  If he can continue to maintain paying the negative cashflow each month if he kept it it definitely starting recovering and would be rewarded with his patience... Sort of...  Right now, almost 7.5 years later, he would "only" be $100K in the hole.

    http://archive.azcentral.com/community/scottsdale/...

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Derek B.

      that's because there are not many markets that have done that.

    silicon valley/ SF penninsula comes to mind  but why... well its the tech center of the world and huge labor force that makes huge money... lack of land.. total shortage of housing etc.

    Parts of LA basin... select areas of seattle.. here in PDX it took 20 to 30 years to see those rises.. better parts of N. Chicago... NYC  of course Boston... And your having a pretty nice run in Charleston right now... I know of many homes there that have tripled in 10 years... I just found this market 18 months ago but wow is all I can say... but its not a real BP type market as the cash flow is more west coast .. so they there is little worry of getting run over by low end rentals... its a retail play.

    Also if you bought at the very bottom in FLA ( select parts ) and Atlanta many properties there have 3X in the last 5 years... I was buying foreclosure in ft myers for 30 to 40k a door in 09 and they are over 100k today.. and a long way to go to the high of 250k.. same with Atlanta I bought 55 there in the 35 to 50k range and they are pushing 100 to 125k we sold when we could double our money we like to actually take profit and make it into cash.

    and there are many other areas even Detroit  when prices got to 5k a house or are still there you can get instant triple your money as someone will pay 15 to 20k for them that still thinks that's a great deal.

  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y

    Ok. Fair enough.

    Most people on this forum invest in houses.  I like apartments and retail centers.  I also feel that the data for apartments and single family homes and the valuations do not track together.  They may at times but they are usually on different development tracks.  Apartment data is relatively straight forward to track. The wild card is the overall macro economy that is a bit tougher to track. 

    I could not easily explain it in a post but it is trackable.  But I strongly feel that the best time to buy aggressively is when the macro and micro cycles are coming out of a downturn.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Shaun Reilly

      your exactly right  those that bought in 07 and 08 peaks  many to most are still underwater.. those that bought in the best markets have gotten back to parity basically and even made gains... its this new crop of investor that jumped in 2010 ish that are going to benefit on the rebound...

    I was one of those I bought a house that had 2 lots I bulldozed the house to do my lot split with the intention of building my personal resi and building a spec.. well the market crashed now my rental is no longer a rental as its at the dump... my mortgage is 2k a month with no income... now 7 years later we rebounded Thank god and finally .. I built the spec home and sold it and got some of my 175k of negative cash flow back.. then built the home in am in.. and its worth a substantial sum so if I was to sell today I would break even or make 100k or so. but if I would have cut and run I would have lost 250k or more.

  • Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
    11y
    My day job as an insurance agent brings me into contact with over a thousand investors large and small. By far the most successful among the mom and pop investors that farm a relatively small area (approx 100 mile radius) within CA. Some of them in major cities farm much smaller areas. As they say, "all real estate is local" and the locals get the best deals. I say mom and pop but a bunch of them have $50+M on their statement of values. I have seen a lot of people try to dip into NV, AZ, TX and FL from CA with results that are mixed at best. From what I see, the home field advantage in RE investing is huge. I have seen the perfect storm that happens in CA when you make wise purchases in a good location, have good management and mix that with time. I have seen regular people in SF, Napa, Carmel/Monterey, Santa Barbara, LA and Orange County build immense wealth using that formula. As an investor my best results have come from equity and appreciation. If you had cash or reasonable financing in 2008/2009, it was like shooting fish in a barrel. Rehabs were cheap, cash flow was great and values have doubled. I wish I had a time machine and was even more aggressive. Now the deals are thinner and they are harder to come by but there are still great deals to be had. I don't see the appeal in buying cheap houses in the Midwest that can kick off a few hundred a month in a perfect world. I have a career and do not need to take home money from my RE investments until retirement so I may take a different approach than somebody that needs that monthly income to keep the lights on and feed their family.
  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Shaun Reilly:

    I don't think anyone is against looking for places that have good potential for long term appreciation.  I think most just don't think people should be stupid about it, which means ignoring cash flow all together.

     Nobody said ignore cashflow.  I personally said that I buy negative cashflow properties.  I also said that I use the cashflow projections to define the value of the property after it is back to a strong operating position.

    I just don't see the small cashflows from a few houses as being something that will project you into wealth in a rapid fashion.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Joe Bertolino

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

    GET YOURSELF STARTED IN REAL ESTATE syndrome... and people want to do that with no money or less and less money every day... so we know on the west coast that is tough but the mid west and other markets its not.. so instead of not partaking they jump in, not really understanding or knowing what they are doing.. .many have little to no experience as its their first rental ever.. and many ( especially pre 08) were woefully under capitalized. 

    Ergo the advent of the turn key companies that cater to CA investors  they bring the product to the CA investor... and there is a reason this happens... You don't see CA brokers or owners having to go to Detroit or Memphis and advertise a rental in Sacramento.

    You also have a great transference of RE ownership in these heavy rental markets the low end SFR markets are really just rental areas like buying one apartment door at a time. the home owner has fleed the scene and is not coming back... now you can get gentrification like what is happening in downtown sac and almost every major metro area but those are small pockets... you have a class of owner that has just moved to being a life long renter and you have markets were ownership was not the most important thing in the world like it is on the west coast... so there is not that great drive to own and to many owning is a burden.. if your properties really never appreciate like most of these markets then why own its easier to rent.. I think that is a prevailing attitude.. now with finance's and loans the way they are you have a whole section of these populations that will never get into a house.

  • Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes
    11y
    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?

  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Richard Dunlop:

    Appreciation OR Cash Flow?

    Why not BOTH?

    That is a great story.  It sounds like you have done really well with this.  I made a few million in Phoenix during the same time frame buying apartments at 18K/unit and selling them between 48 and 80K/unit. 

    There is nothing wrong with the cashflow.  I would not give it away.  The point is that there is much more money to be made out there.  The OP wanted to make a point. 

    There are people out there that have generated a decent living buying for cashflow.  But the ones that I have met that become mega rich, do so by generating chunks of money.

    There is a guy on my softball team that owns over 10 thousand acres of land.  He started off buying a couple of houses.  Then he moved to apartments.  At one point he bought some land, split it up, and sold in in pieces.  He was hooked.  No cashflow but he is a mega millionaire.  I made mention to him that he must have over a couple hundred million to do some of these transactions.  He kinda laughed and said one transaction made him 180M.

    I know what his answer would be to the cashflow question.

  • Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    11y

    "At one point he bought some land, split it up, and sold in in pieces. He was hooked. No cashflow"

    I'm working on a deal like this for the first time.  Not only no income or cash flow, but also no tenants, houses or buildings.  Just forced appreciation.  

  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    11y

    I have two portfolios, one with ok cash flow in an appreciation market and one that is all cash flow focused.  I like having both and think they both have pros and cons.  

    The appreciation portfolio has allowed me to pull out money to grow the cash flow portfolio.  Long term I think it will provide the most wealth accumulation, but I would need a lot of money to live off that portfolio.

    The cash flow market allows me (and soon my husband) to "retire" and to live off of our investments much quicker and with less capital than having only an appreciation portfolio.  

  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Jon Klaus:

    "At one point he bought some land, split it up, and sold in in pieces. He was hooked. No cashflow"

    I'm working on a deal like this for the first time.  Not only no income or cash flow, but also no tenants, houses or buildings.  Just forced appreciation.  

    I am considering this myself under this guy's mentorship.  I invited him to lunch a few weeks ago and asked him for a strategy.  He filled two pages of paper with sketches and information about how to get started. 

    The main points that he made were to buy urban land in the path of growth, do a partial split, sell to a builder/developer, have them split the lot even more, carry the paper, do a joint venture or fixed percentage as they build each house.  Repeat with a larger lot.

    Of course this takes capital to start but that is what keeps most people out of the game.

  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y
    Originally posted by @Brie Schmidt:

    I have two portfolios, one with ok cash flow in an appreciation market and one that is all cash flow focused.  I like having both and think they both have pros and cons.  

    The appreciation portfolio has allowed me to pull out money to grow the cash flow portfolio.  Long term I think it will provide the most wealth accumulation, but I would need a lot of money to live off that portfolio.

    The cash flow market allows me (and soon my husband) to "retire" and to live off of our investments much quicker and with less capital than having only an appreciation portfolio.  

    I can certainly appreciate that.  :)

    I have read your story and you have done well.

    Somehow I have managed to take chunks of money out at a time to live off of.  If I can make 300K off of one transaction and have a few of these going on at a time, then I don't need to rely on the cashflow. 

    Once a few million is made, that money can go into reasonable sized apartments and commercial buildings where the real cashflow can be made.

    I recently bought a strip center for 1.8M that is now kicking off 100K (soon to be 130K) per year.  That is decent cashflow but the great thing about it is that in less than a year, the value is up to 2.9M.  It will be more when I fill the last space that is now under negotiation.

    This is not so much from sit back and let it appreciate, it is from adding value which drives the appreciation.  I have been doing the same process with apartments for a while.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Richard Dunlop

    had not thought of returning to Detroit but your probably right, we did very well there before the epic melt down and got out before that happened. I really liked the little sfr bungalows... before I ventured back I would only do it though with those that are total experts in the market place... in the day when I lent in Detroit I was doing the HML with rate and term refi exit... I would not be comfortable with that model in that market yet.

    But to local players I would revisit it again.. PM me and let me know exactly what your doing

  • Greensboro, NC · Member since 2014 · 212 posts · 143 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Derek B.

      that's because there are not many markets that have done that.

    silicon valley/ SF penninsula comes to mind  but why... well its the tech center of the world and huge labor force that makes huge money... lack of land.. total shortage of housing etc.

    Parts of LA basin... select areas of seattle.. here in PDX it took 20 to 30 years to see those rises.. better parts of N. Chicago... NYC  of course Boston... And your having a pretty nice run in Charleston right now... I know of many homes there that have tripled in 10 years... I just found this market 18 months ago but wow is all I can say... but its not a real BP type market as the cash flow is more west coast .. so they there is little worry of getting run over by low end rentals... its a retail play.

    Also if you bought at the very bottom in FLA ( select parts ) and Atlanta many properties there have 3X in the last 5 years... I was buying foreclosure in ft myers for 30 to 40k a door in 09 and they are over 100k today.. and a long way to go to the high of 250k.. same with Atlanta I bought 55 there in the 35 to 50k range and they are pushing 100 to 125k we sold when we could double our money we like to actually take profit and make it into cash.

    and there are many other areas even Detroit  when prices got to 5k a house or are still there you can get instant triple your money as someone will pay 15 to 20k for them that still thinks that's a great deal.

     No doubt Charleston is impressive.  For an east coast city, it has everything one could ask for.    Some of those neighborhoods on the fringes of downtown would make me cringe a few years ago, some still today. Yet you and others command top $ for a tear down or infill.  Those neighborhoods will slowly (or rapidly) change and be completely different in a few years.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Derek B.

      yup   and if I can do it from Portland Oregon   well enough said right ?

  • Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    good quality discussions here on appreciation and cash flow. Nice to hear the varied success stories.  For me, the driver is appreciation and equity gain, but I also balance cash flow for the day to day, as I don't have a w2 job and live off the RE assets. 

    When I first started to leverage and invest, in 2003, the market dynamics were a lot different in my market, San Francisco.  Then it was harder to cash flow because prices were pretty high, interest rates were higher, and rents were a lot lower.  so then my goal was to buy, add value via development/expansion/property repositioning, and then plan to break even with the new rents. I was also more willing to take on developments that needed difficult to obtain city entitlements, so carrying the project became a major cash drain. In 2008-9, that became an issue on a project, and I had to scramble to save the deal, so I can get the cash flow going.  It was a tough two years, but you really learn a lot during difficult times!

    So forward to 2013, when I was finally able to refi and pull out the massive equity that I previously could not access.  In this market it is much easier to get cash flow, even in San Fran.  The hoods I'm investing in are still lower than 2008 highs, interest rates are super low, and the rents have sky rocketed.  I still only buy projects were I can add significant development or property repositioning, as the large pops in equity are my key drivers.  BUT, I can also get near term cashflow now as well. And, I learned from the last cycle to focus on faster developments, so I can close the loop between cash negative to positive faster.  So one project has a 1 year cycle to positive cash flow, with significant rehab work.  And incredibly, I recently purchased a newer construction building, where there will be little physical development; it will be mostly work with the city to reposition use, and also to legalize another unit.  This one makes me cash flow in 2-3 months!  And while overall it will have a tad less equity upside than the other project, it has such low risk, and I locked in a great low fixed rate, that I'd actually prefer doing this type of deal again!  It's an uncommon situation that needs several San Fran specific factors to line up to work, but man I'd just love to have lightning strike twice, as this one was so frickin easy!

    I'm now in the midst of refying again, so I can get a new HELOC for potentially another deal, but now the bar is raised, as I'm working on my two current projects and the market is even more expensive. (I'm not too keen on diminishing returns.). Plus I just doubled my amount of tenants, so I'd like to adjust to that to see when I've hit my limit. We can actually fully retire when the two current projects are completed and call it a day. We will own properties in a class A neighborhood and an upcoming class B, so future appreciation will be there, as well as rent growth. Guess I'll have to figure out what to do with myself if I don't get seducted into a 3rd project later this year :)

    But to reiterate the cashflow vs appreciation question, the appreciation was the driving factor in my investment strategy.  And it was obtained by development/property repositioning, as well as external market growth. Cashflow though remains a critical component that must be managed, especially during a downturn...so you don't loose your marbles.

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