Cash Flow vs. Equity

Multi-Family and Apartment Investing
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Cash Flow vs. Equity

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

Hello BiggerPockets family!

My partner and I are beginning our real estate investing journey! We've been listening to endless podcasts, reading a lot of the BP books, and perusing the BP forums and blogs as much as we can to make the best decisions and educate ourselves the best we can. First and foremost, I want to thank each and every one of you for welcoming us into this community; it is truly amazing to see everybody supporting and lifting each other up we feel so lucky to be apart of it.

My question today is about cash flow vs building up equity to open more doors. We plan on using the Buy and Hold strategy for multi family properties and are looking to invest OOS (we live in San Diego and not sure we can afford to break into this market quite yet as beginners). Big picture - we want to build our portfolio sooner rather than later and I am just wondering what would help us achieve that goal of adding more doors quicker, focusing on cash flow or focusing on building our equity? We are lucky enough that we are not in need of big cash flow, although it would obviously be nice. We have identified several markets we believe look very promising based on the 6 areas we learned about from a BP blog post (job creation, population growth, buildings coming to market, government planning, affordability, and absorption/vacancy rates) and are looking to purchase our first property within 90 days. Or maybe we are being to nitpicky and getting into our first property is more important than looking at these aspects and learning by doing haha.

Thank you so much in advance for taking the time to help us out and we look forward to being apart of this great community!

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Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
5y

Similar to buying stocks, when you go to a financial advisor and you are starting out and have time, they put your money into growth stocks...when you are older and need cashflow for your bills...its maybe stocks that pay dividends.  So if you want to become wealthy you will do so through appreciation.  

As far as number of doors, I think that number is meaningless.  Someone can have 30 doors in the Midwest that would be equivalent to having a 4plex in San Francisco, Los Angeles or San Diego.  Also, more doors equal to more expenses, such as having 10 single family homes with 10 roofs vs 10 units under 1 or 2 roofs.

Appreciation is not speculation in my opinion especially in a market where you can show decades of appreciation due to macro-economics, supply/demand and inflation.  

If you ask any long term buy and hold investor in San Diego, they don't feel like they are speculating on appreciation in the long term, especially those that have owned here for decades will have proof of their investments not being speculation....those that say cashflow is not speculation and haven't received rent in months.....is assuming a tenant is going to pay rent speculation? I'll let you answer that for yourself.


Long story long, San Diego is a great market for long term appreciation and building wealth and it is actually one of the better cashflow markets in the long term as well, just not as much initially.

Welcome to the community :)

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  • Michael Ablan
    Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Charles Masten -  Cash flow gets you out of the rat race.   Equity keeps you out.

    Our strategy is to acquire $30-$40k cash flow per month and then use that to aggressively pay down the loans on our better properties

    1Reply
  • Aaron W.
    Rental Property Investor · Northern Virginia · Member since 2019 · 793 posts · 620 votes
    5y

    @Charles Masten Excited to hear you are ready to jump into real estate!

    Choosing between cash flow and equity will depend on your why in investing in real estate.  What goals do you need to accomplish your why? 

    You say that cash flow is not as important for you, then you may want to focus on appreciating markets. You'll get lower cash flow from the markets, but higher upside appreciation. As with any investment, you'll want to ensure you do proper research and be confident in the numbers.

    As with any investment, you will never truly know the outcome until you actually jump in; however, with your excellent analysis and underwriting, this will provide a confident picture of your investment. 

    Don't allow analysis paralysis stop you from taking the leap, but also make sure you are not blindly jumping into an investment. You'll find something to improve on in every deal and mistakes are part of the process. However, the great thing about real estate is most of the mistakes can be overcome by holding over time.

    Best of luck on the journey!

    1Reply
  • Bryan MitchellPro Member
    Rental Property Investor · Columbus, GA · Member since 2016 · 623 posts · 337 votes
    5y

    @Charles Masten, I read his book, but honestly I didn’t get to much from it. I’ve been investing long distance for years not really by choice but out of necessity. When you’re in the military and stationed overseas during 2014-2018 (buyers market) you have no choice. I still think you can be successful in your own back yard. You know it better than anyone else. Yet there are situations, where you have no acceptable options (see above).

    0Reply
  • Kathleen D.
    Member since 2020 · 21 posts · 28 votes
    5y

    @Charles Masten

    Is it possible to have your cake & eat it too?  Maybe within reason.  We are investing in some new builds in FL that seem to cash flow decently, but they also have immediate equity & high likelihood for future appreciation in an A area.  I think it's all a balancing act of course, but I would look for markets that best fit what you're looking to achieve.

    1Reply
  • Zachary Beach
    Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes
    5y

    @Charles Masten cashflow and  appreciation are not opposite forces. Also the idea that a higher yield must mean a more risky investment is laughable. I read recently a "financial adviser" from a big well known company saying there are no good investments at 20% return and there was a 98% chance if it's 20% return you will lose all your money. That is the type of insanity that keeps people poor. You can and unless you don't leverage should average over 20% ROI a year on real estate if it's mostly passive and a lot more if not. Create value or team up with people that create value and you can get market appreciation, forced appreciation and cashflow plus tax benefits, equity pay down, credibility, confidence, experience, enjoyment, financing freedom and more.

    1Reply
  • Chris Ng
    Investor · Saint Johns · Member since 2021 · 34 posts · 16 votes
    5y
    Originally posted by @Kathleen D.:

    @Charles Masten

    Is it possible to have your cake & eat it too?  Maybe within reason.  We are investing in some new builds in FL that seem to cash flow decently, but they also have immediate equity & high likelihood for future appreciation in an A area.  I think it's all a balancing act of course, but I would look for markets that best fit what you're looking to achieve.

    May I ask where in FL you find new builds with decent cash flow? I'm really interested in Florida. Thanks much.

    0Reply
  • Curtis Mears
    Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes
    5y

    @Charles Masten

    Lots of people thought appreciation was the way to go, until 2008 beat the crap out of them. Personally, appreciation is great and I would never purchase a house I thought would depreciate, but appreciation will not pay for you new roof or the ac that goes bad. Cash flow is money in the pocket, appreciation is the hope we all have.

    1Reply
  • Matthew Horstmyer
    Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
    5y

    I do not remember where I heard this but, “cash flow keeps you in the game, appreciation builds wealth!”

    I close on my first deal on Wednesday. So good luck with your first deal. Here’s to a long and prosperous real estate journey.

    1Reply
  • Charles Masten
    OP
    San Diego · Member since 2021 · 27 posts · 20 votes
    5y

    @Chris Ng I appreciate the insight thank you! Unfortunately the SD market just seems a bit too expensive for our budget to break into unless we found a remarkable off market deal, but one day!

    0Reply
  • Charles Masten
    OP
    San Diego · Member since 2021 · 27 posts · 20 votes
    5y

    @Justin R. thank you for taking the time to respond, very good information. I will definitely be making sure to get the best financing possible to set us up for future financing, something I hadn't thought about. Cheers Justin!

    0Reply
  • Charles Masten
    OP
    San Diego · Member since 2021 · 27 posts · 20 votes
    5y

    @Michael Ablan that's a great way to put it! Thank you so much. I think that much cash flow is a great goal and totally attainable in REI. I wish you all the best!

    0Reply
  • Charles Masten
    OP
    San Diego · Member since 2021 · 27 posts · 20 votes
    5y

    @Aaron W. thank you for your words of encouragement! My partner and I are super excited to jump into real estate as well and with such a great community, like BiggerPockets and people like you and everybody else who took time to respond, I know its only a matter of "when" not "if" we will find success. Love your advice, we have started looking in markets that are appreciating more. We don't wan't to get stuck with analysis paralysis but also want to take our time and do our due diligence and make sure we are confident in the numbers. I know we will make mistakes, but welcome the learning process! As Yoda once said "mistakes the best teachers, are" haha. You're right, one of the many appealing aspects is being able to recover from mistakes by holding over time, thank you so much again! I wish you all the success!

    0Reply
  • Charles Masten
    OP
    San Diego · Member since 2021 · 27 posts · 20 votes
    5y

    @Zachary Beach that was my mistake, thinking I couldn't have one without the other. Thank you so much for responding, I can't wait to reap all the benefits from real estate and get started on the journey! I know we will make some mistakes but look forward to the lessons it'll bring. I wish you all the success and happiness in your REI journey!

    1Reply
  • Charles Masten
    OP
    San Diego · Member since 2021 · 27 posts · 20 votes
    5y

    @Curtis Mears that is very true. I'm beginning to understand I can have both, but good cash flow can lead to great appreciation. Thank you very much for your insight, I truly appreciate it.

    0Reply
  • Charles Masten
    OP
    San Diego · Member since 2021 · 27 posts · 20 votes
    5y

    @Matthew Horstmyer whoever said that was a wise person, I've heard a lot of the same rhetoric and it is so true! Congratulations on closing your first deal that is such a gigantic first step and I am so excited for you! Wishing you all the success and prosperity in your first and future endeavors. Is it in your neighborhood or OOS? 

    0Reply
  • Tyler Gerhold
    Lender · Tempe, AZ · Member since 2020 · 26 posts · 19 votes
    5y

    Go for both! I initially thought it had to be one or the other but it doesn't have to be with a value-add strategy. If you have the ability to add value by increasing NOI or rehabbing or both you can access equity through refinance or HELOC and maintain a cash flowing property. You could do this by executing the BRRRR strategy or something like value add multifamily then 1031 into a bigger property to achieve more cash flow.

    Another metric I recently became familiar with is Return on Equity. If you buy a cash flowing property and add value or it naturally appreciates and you don't tap into the additional equity your return on the equity in the property goes down. So if you are trying to scale (in wealth or cashflow), a great way to do so is by adding value and tapping into that equity!

    0Reply
  • Tyler Gerhold
    Lender · Tempe, AZ · Member since 2020 · 26 posts · 19 votes
    5y

    Go for both! I initially thought it had to be one or the other but it doesn't have to be with a value-add strategy. If you have the ability to add value by increasing NOI or rehabbing or both you can access equity through refinance or HELOC and maintain a cash flowing property. You could do this by executing the BRRRR strategy or something like value add multifamily then 1031 into a bigger property to achieve more cash flow.

    Another metric I recently became familiar with is Return on Equity. If you buy a cash flowing property and add value or it naturally appreciates and you don't tap into the additional equity your return on the equity in the property goes down. So if you are trying to scale (in wealth or cashflow), a great way to do so is by adding value and tapping into that equity!

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    5y
    Originally posted by @Charles Masten:

    @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!

    "how many doors do you own" is the real estate equivalent of "what do you bench?"

    1500 and 320 for the record ;)

    0Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Cody L. Hahaha touché

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  • Danny RandazzoPro Member
    Apartment Syndicator · Charleston, SC · Member since 2016 · 973 posts · 728 votes
    5y

    @Charles Masten definitely. I think a team can accomplish more than an individual. 3-5 total active partners seems like a good fit and you can always have more passive investor partners too

    0Reply
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