Cash Flow vs. Equity

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Tesho Akindele I see! I need to stop looking at one or the other and begin to look at both being equally important. With good cash flow, the equity will come with time. Thank you so much for your response!

3 Reply

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Brian Garrett I see I've been looking at it totally wrong, I thought focusing on one could help us scale faster and ultimately grow that portfolio quicker. Thank you for opening my eyes that both are doable! Appreciate your help :D

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Twana Rasoul thank you so much for taking the time to reply! Appreciate your insight! You're right, more doors/roofs is a double edged sword and I should be looking at both equity and cash flow being equally attainable. I thought areas such as San Diego, San Francisco, and LA were closed off to us due to how much it costs to get into the market here but I think I need to start taking a deeper dive into my own backyard! All of you who have responded are rock stars thank you!

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Brandon Goldsmith definitely! I think being flexible with our strategy and focusing on the type of deal we are looking at is such great advice! Thank you for your insight it means a lot! I'll have to get together with my partner and analyze a few different deals and see which deal works best for which strategy. Cheers to you! :D

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

5y

Total profits include both cash flow and appreciation as if you were going to sell YOY. These are not magically seperated for the accounting in terms of bottom line. For most it is circumstantial and mostly exact location based. Good news is SD is strong for those exact location circumstances.

Good luck!

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Matt R. I hear you. Rookie mistake by me trying to separate the two, but thats why I'm here! I think we looked at our budget and completely threw out looking in our own backyard due to how expensive it is, but now I think we need to look at creative ways to try and get into the market through various was of financing that works with our budget and fits our criteria. Thank you so much for your input, appreciate you!

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

5y

Originally posted by @Charles Masten:

@Matt R. I hear you. Rookie mistake by me trying to separate the two, but thats why I'm here! I think we looked at our budget and completely threw out looking in our own backyard due to how expensive it is, but now I think we need to look at creative ways to try and get into the market through various was of financing that works with our budget and fits our criteria. Thank you so much for your input, appreciate you!

I think it is a veteran mistake too. Right now you could throw a dart in many areas and be ok. I know from second hand SD is easy to manage compared to some other options and maybe consider this management part of the equation as much as any other hurdle at this time. Good luck!

Tucker Cummings

Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes

5y

Probably the best option here is to find distressed properties and force the equity into them, where you'll still cash flow at the end. You could do that either by flipping and holding the property (BRRRR), you could acquire an under market multi family and raise the rent, or both.

Once you’ve stabilized you can refinance the property and do it again. You’ll capture the equity you’re looking for and still have your cash flow.

Danny RandazzoPro Member

Apartment Syndicator · Charleston, SC · Member since 2016 · 973 posts · 728 votes

5y

@Charles Masten if you don’t need the cash flow then focus on creating equity so you can refi properties to get your capital out and acquire another deal. You should also consider partnering with others to grow the portfolio faster.

Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

5y

@Charles Masten, as mentioned, you can have both, and should look for both. I agree appreciation will often times outpace cash flow in overall returns. BUT, if you are not cash flowing, you are sinking money into the deal each month HOPING to one day sell and recoup your losses.

Additionally, when you get into larger scale properties, your income, and therefore cash flow will be used to value the asset. So, even the equity play is directly correlated to cash flow. I do acknowledge that cap rates move, and those movements are typically in line with interest rates, which also influence demand.

If you are talking smaller multi-family, the appreciation is more driven by interest rates, just like single family properties. People can afford more on the same income when rates are less than 3% and therefore you have more buyers, more demand, and higher prices.

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Tucker Cummings what a great idea! Currently finishing up reading Long Distance Real Estate Investing by David Greene and have his BRRRR book slated next. Definitely like the strategy and want to dive deeper into it, looks like a great way to build both! Thank you so much for your time!

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Danny Randazzo gives me something to think about thank you so much for responding! Currently have one partner, but for markets that are much more expensive to get into such as San Francisco, San Diego, and LA; how many partners do you think are too many? For example if I could get 4 like minded individuals who all live in the same area with the same REI goals to go in on a property in one of those areas, is it still a good investment? Splitting 4 ways is not ideal and can come with more risk, but with much higher cash flow and appreciation in areas like those is it worth it in the long run?

OP

San Diego · Member since 2021 · 27 posts · 20 votes

5y

@Evan Polaski wow that really puts the big picture into perspective with how different sized properties appreciate. My partner and I are looking for properties that will cash flow at least $200 a month (among other things of course) but keeping an eye on the interest rates is not something I had in mind. Thank you so much for your insight that is really helpful!

Investor · Saint Johns · Member since 2021 · 34 posts · 16 votes

5y

I don't think you'll get much cash flow from the San Diego market, unless you go to more remote places like Ramona, or rehab/flip distress house. I have properties from 2010 prices, and the CoC return still isn't that great after all these years.

But since you don't need the cash flow, it's should be a good place to build equity, as I think the appreciation will continue over the long term.

Wai Chan

Rental Property Investor · San Diego, CA · Member since 2014 · 80 posts · 44 votes

5y

@Chris Ng

That is interesting...All the properties I purchaesd in San Diego cash flow very well. (I only charge below market rate rent btw....) I purchased those triplex in City Heights from late 2015 to mid 2018. I would think any investment properties purchased in 2010 can cash flow.....unless you have only purchased luxury houses in 2010 but those should not be considered as investment properties anyways.....

Investor · Saint Johns · Member since 2021 · 34 posts · 16 votes

5y

Originally posted by @Wai Chan:

@Chris Ng

That is interesting...All the properties I purchaesd in San Diego cash flow very well. (I only charge below market rate rent btw....) I purchased those triplex in City Heights from late 2015 to mid 2018. I would think any investment properties purchased in 2010 can cash flow.....unless you have only purchased luxury houses in 2010 but those should not be considered as investment properties anyways.....

My properties do have cash flow, but they are relatively low. Using 2010 prices, it's only about 6%, and much lower with today's market value. On the bright side, I have very little vacancies.

https://www.sandiegouniontribu...

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

5y

Originally posted by @Chris Ng:

Originally posted by @Wai Chan:

@Chris Ng

That is interesting...All the properties I purchaesd in San Diego cash flow very well. (I only charge below market rate rent btw....) I purchased those triplex in City Heights from late 2015 to mid 2018. I would think any investment properties purchased in 2010 can cash flow.....unless you have only purchased luxury houses in 2010 but those should not be considered as investment properties anyways.....

My properties do have cash flow, but they are relatively low. Using 2010 prices, it's only about 6%, and much lower with today's market value. On the bright side, I have very little vacancies.

I find it shocking that you do not have huge cash flow on properties purchased in 2010. Average rent has increased 53.6% between Jan 2010 and Dec 2019. It went up almost $600 per unit. I have cash out refinanced everyone of our properties in December and using a 40% expense ratio we still have significant cash flow. It was significantly higher prior to the cash out refinance.

Justin R.

Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes

5y

@Charles Masten I generally echo what Twana and Matt have offered you, though I would add one thing: especially when you're starting out, you want to make sure you can get attractive FNMA financing on your first properties. Make sure that property #1 and property #2 still allow you to get FNMA financed for properties #3 and #4. This can mean prioritizing cash flow to help your DTI.

If your non-REI income is high enough, or once you've got a track record, there's really no reason to focus on anything other than total return if you're trying to build wealth.

Wai Chan

Rental Property Investor · San Diego, CA · Member since 2014 · 80 posts · 44 votes

5y

Originally posted by @Chris Ng:

Originally posted by @Wai Chan:

@Chris Ng

That is interesting...All the properties I purchaesd in San Diego cash flow very well. (I only charge below market rate rent btw....) I purchased those triplex in City Heights from late 2015 to mid 2018. I would think any investment properties purchased in 2010 can cash flow.....unless you have only purchased luxury houses in 2010 but those should not be considered as investment properties anyways.....

My properties do have cash flow, but they are relatively low. Using 2010 prices, it's only about 6%, and much lower with today's market value. On the bright side, I have very little vacancies.

Yes that's right. That's the beauty of the San Diego market. I also has almost zero vacancy (maybe a 2-3 weeks because of the make ready time) for the past 5 years. 6% is not great but it's not bad either especially you get a huge amount of appreciation for the past 10 years (i would assum you already have at least 80 or 100% appreciation....)

I also have some properties in DFW area but if I would do it again 5 years ago I will buy a few 2-4 units in San Diego vs 8 SFRs out of state....

Investor · Saint Johns · Member since 2021 · 34 posts · 16 votes

5y

@Dan H. Depends on what you mean by "huge". Like I said 6% based on 2010 prices... and about 2-3% at today's market value. I should be able to get significantly higher return moving to another market, which I'm seriously considering right now.

On the other hand, I wasn't quite active in those properties. Perhaps if I spent some capital improving those units, they would cash flow higher. I live quite close to Poway, BTW (RB). Good to see people nearby here.

Investor · Saint Johns · Member since 2021 · 34 posts · 16 votes

5y

@Wai Chan Well, 6% is based on 2010 prices, with today's value it's about 2-3%. I did have quite a bit of gain. My current goal is higher cash flow. Good thing there is the 1031 exchange, so I can defer taxes on those gain, and hopefully move to another market with higher cash flow.