Which strategy works best for the current market condition?
Real Estate Agent · Fairfax, VA · Member since 2019 · 79 posts · 68 votes
Which strategy works best for the current market condition?
Most Popular Reply
Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
4yQuote from @Jason Nguyen:
As you may have known, interest rate went up a lot recently and that forced the majority of retail buyers out of the game. Therefore, flipping takes longer to sell or may need to go down in prices if on market too long, BRRRR formula doesn't make sense anymore at nearly 6% interest rate for conventional investment loan or 7% for non-QM loan. Long term rental cash flow doesn't look too good if there's a big repair going on. What do you guys think of Airbnb? I see some Airbnb at a good location brings in more than 100k revenue a year.
Please let me know what you think.
Find the right deal, we have been refinancing into 5+ interest rates and our properties are still cashflowing, that's why I like the Columbus market!
My first BRRRRR was $300k, put $50k into it, refinanced, and got $90k back. I just refinanced again and got another $50k and it still cash flows $1800/month.
Second BRRRRR cost $160k, put $55k into it, refinanced, and got me just under $200k back and cash flows $2000/month.
Currently working on my 4th BRRRR in the city and even with 6.5% interest rate this will be a homerun!
64 Replies
- Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes4y
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours. - 4yAxel MeierhoeferPro MemberRental Property Investor · Escondido, CA · Member since 2017 · 679 posts · 550 votes
Any strategy you apply or develop has to have implementation criteria. If you can find deals that meet those criteria the strategy works.
If you look at all strategies you are comfortable using to reach your goals and you can find deals that work for one of them, you get closer to these goals. If none of the strategies you like and are willing to work anymore due to external circumstances, you can keep what you have from the time when some or all strategies worked and focus on preparation for market conditions to get back into your frame of strategies.
I agree that currently most published strategies (at least published on BP) still work if you find the right deals. Short-term rental is one of them.
- 4yAxel MeierhoeferPro MemberRental Property Investor · Escondido, CA · Member since 2017 · 679 posts · 550 votes
@Steven Foster Wilson It would be helpful if you would attach/include your definition of cash flow to avoid people getting confused. You speak about refinancing of properties and cash flow numbers that would require insane rental income. Though it's possible, it's not probable, leading to the suspicion that your definition is lacking or is not precise. I can see people using your post and telling people on BP in other posts that there is a guy who makes $1800/month and $2000/month in cash flow on BRRR deals and he keeps refiing them all the time. I am sure you want to avoid that or at least provide some background how that's possible in your case.
- Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes4y"Austin might have a bigger shiny object of distraction"? What a ridiculous oversimplification that overlooks market fundamentals. Surely you would consider these things more than a "shiny object of distraction":
Quote from @Joe Villeneuve:
Yes it is. Austin might just might have a bigger shiny object of distraction.Quote from @Eliott Elias:
Quote from @Joe Villeneuve:
Quote from @Eliott Elias:
Break even on mortgage and hope for appreciation.
That's not investing...that's speculating.
Not if your'e in Austin
Anytime there are two sentences used to describe an "investment", and the key word in each are "break even" in one and "hope" in the other, that's not investing...that's speculating.
-Extremely rapid population growth
-Extremely rapid income growth
-Growing tech sector
-Concentration of educational institutions
-High quality of life (high scores for food, weather, leisure, music, parks, etc)
-Relatively low cost of living (compared to other high-income metros)
Underwriting with appreciation and rent growth in Austin is not speculative. It is the status quo. To argue otherwise while overlooking it's strong fundamentals is frankly ridiculous. I wish everybody shared your thoughts though. Then I would be able to purchase properties in areas with incredible fundamentals without paying a premium! - Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes4y
"interest rate went up a lot recently and that forced the majority of retail buyers out of the game."
Zero retail buyers have left the game in the metro area you are located in.
District Invest Group545 Reviews - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesYou really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.
Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results. - San Jose, CA · Member since 2018 · 16 posts · 4 votes4y
Quote from @Steven Foster Wilson:
Quote from @Jason Nguyen:
As you may have known, interest rate went up a lot recently and that forced the majority of retail buyers out of the game. Therefore, flipping takes longer to sell or may need to go down in prices if on market too long, BRRRR formula doesn't make sense anymore at nearly 6% interest rate for conventional investment loan or 7% for non-QM loan. Long term rental cash flow doesn't look too good if there's a big repair going on. What do you guys think of Airbnb? I see some Airbnb at a good location brings in more than 100k revenue a year.
Please let me know what you think.
Find the right deal, we have been refinancing into 5+ interest rates and our properties are still cashflowing, that's why I like the Columbus market!
My first BRRRRR was $300k, put $50k into it, refinanced, and got $90k back. I just refinanced again and got another $50k and it still cash flows $1800/month.
Second BRRRRR cost $160k, put $55k into it, refinanced, and got me just under $200k back and cash flows $2000/month.
Currently working on my 4th BRRRR in the city and even with 6.5% interest rate this will be a homerun!
Are these multi family homes or single family homes? These are great numbers!
- Rental Property Investor · Los Angeles, CA · Member since 2020 · 141 posts · 61 votes4y
@Steven Wilson that’s amazing man! I’v been interested in the Ohio market and would like to invest there!
- 4yDave PoeppelmeierBusiness MemberRealtor · Maumee, OH · Member since 2015 · 491 posts · 722 votes
@Jason Nguyen Interest rates are simply another factor in the equation. If you're looking at AirBnb, then you plug whatever the rate you're approved for in, and there you go. I simply use the BP Calculators still, because I don't feel like recreating the wheel. Just be sure you have all your numbers: STR PM can be pretty expensive, so be sure to know what costs are there. Also, rent rates are more than keeping up with the purchase prices, so if you want to still look at LTR, just be sure you know what your updated rents are in the area, and you can still cash flow.
Keller Williams Citywide | Dave Poeppelmeier534 Reviews - Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes4y
Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.Easy there, Sparky. It was the 'hope' comment I was digging on.
I'm definitely not in a cf or high cap area. I'm ok with break-even, but I capture equity going in.
That's why I commented that sourcing / creating the deals is where the work is, especially in expensive markets. Need the equity going in to justify the break-even.
I'm doing this exact thing right now. A 5 space professional office building. Breaks-even monthly, but buying for $120k under value, with seller-financing. Off-market, no realtors involved. Why wait a year for it to appreciate? Get it up front and do both. Anywho...
- Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes4y
Quote from @Joe Villeneuve:
You really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results.I am not pretending to know your strategy. I simply categorized you as a CF investor because it seems to be a major criterion for you.
I'm a little skeptical you are getting an 80% discount on your acquisitions in this market. If you mean you are only putting 20% down that is another story. I put negative money down on my last property (0% down and I took a commission) so the cash on cash metric is useless.
Some people on here aren't in REI full-time. If I were to spend all my time trying to find heavily discounted properties I would be forgoing significant income to do so and in the time it took me to source that property I would have probably missed out on significant appreciation. Same thing goes for finding cash flow.
All I'm saying is your criteria aren't necessarily the only criteria that work. I didn't buy with cash flow going in or much equity. But it would have been nearly impossible to do so in the area I bought in. Today it is a cash cow with huge amounts of equityIn this market, the biggest mistake I see investors make is trying to find a property that meets unrealistic criteria suggested by participants in this forum that have no idea what is going on in another market. Meanwhile they miss out on appreciation, face rising interest rates, and higher purchase prices.
- Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes4y
Quote from @Steve Vaughan:
Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.Easy there, Sparky. It was the 'hope' comment I was digging on.
I'm definitely not in a cf or high cap area. I'm ok with break-even, but I capture equity going in.
That's why I commented that sourcing / creating the deals is where the work is, especially in expensive markets. Need the equity going in to justify the break-even.
I'm doing this exact thing right now. A 5 space professional office building. Breaks-even monthly, but buying for $120k under value, with seller-financing. Off-market, no realtors involved. Why wait a year for it to appreciate? Get it up front and do both. Anywho...
Just because one investor doesn't use instant equity as a criterion doesn't mean your strategy is always better, and it certainly doesn't mean you should laugh at someone for purchasing a break-even property at market prices.
I would say most participants in this forum don't have access to capital, don't have the freedom or means to pursue off-market deals full time, and simply may not be as skilled as yourself in off-market sourcing/negotiation.
In that case, they would likely be far better off acquiring property and letting the market work for them. - Real Estate Agent · Austin, TX · Member since 2016 · 96 posts · 69 votes4y
Quote from :
Break even on mortgage and hope for appreciation.
Long term buy and hold still works, depending on the area you buy, and price. I'm in Austin which used to be a cash flow city. Now investors are more likely to break even or be a little negative on cash flow, but the high appreciation makes up for it. It's still a great option to build equity for retirement and future investments. Stack equity until you have enough built up to invest in a different market with lower appreciation/purchase prices and higher cash flow.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes4y
Rates have shot up at a pace we have not seen since the 90s, but historically speaking money is still very cheap. So far the market (and our currently active buyers) seem unchanged, however there is a higher level of urgency to buy before rates go higher.
All these startegies are well and I will continue to invest, as I am cost averaging my portfolio interest rate. You can go into the STR space, just know thats a little more running a business than owning assets, but of course higher cash flow in exchange.
- Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes4y
Quote from @Axel Meierhoefer:
@Steven Foster Wilson It would be helpful if you would attach/include your definition of cash flow to avoid people getting confused. You speak about refinancing of properties and cash flow numbers that would require insane rental income. Though it's possible, it's not probable, leading to the suspicion that your definition is lacking or is not precise. I can see people using your post and telling people on BP in other posts that there is a guy who makes $1800/month and $2000/month in cash flow on BRRR deals and he keeps refiing them all the time. I am sure you want to avoid that or at least provide some background how that's possible in your case.
Hi Alex, yes thank you for the notice. Here are some pictures of before the refi and after the refi cashflow (NET CASHFLOW) after mowing, water, cappex, maintenance, etc. BEfore and After the Refi are different cashflow numbers.
- Investor · Toledo, OH · Member since 2020 · 88 posts · 101 votes4y
One of the things I see in a lot of posts is the argument that one strategy is better than another. Cash flow vs. (speculative) appreciation also seems to be a hot topic. I personally believe that appreciation is speculation and have commented elsewhere as such. It doesn't necessarily make it bad; its simply an acceptance of what it is.
The point that I see most people missing is that different markets behave differently. Here in the rust belt, home prices have risen (in percentage terms) but not nearly at the rate that we've seen in growth market. For my personal strategy in my market, cash flow is king because, historically, we've not seen the rapid appreciation of other markets (Prices are up currently, and rather dramatically, but that's the same everywhere; its a seller's market.) Too often I see OOS investors looking at the Toledo market, thinking it will behave like other markets "once it catches up." That 200K house in the Toledo area might be worth 210k in 3 years. The same house might be worth 260k in a different market.
Maybe its better to ask, "What strategy works well given a particular set of market criteria" than "which is the best strategy?" - Member since 2021 · 388 posts · 277 votes4y
Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.Completely agree. I have highly desirable A class properties in a hot market that have appreciated about 200K and 150K in the last 2 years. Basically they doubled in value. I am not planning to sell. I have cash flow and they are near my personal residence. I have long term A class tenants in them. I will buy another one and even rent at slight loss because I know it will appreciate and I will be able to get the rent up soon. I am not interested in paying property managers, having to worry about evictions, spend money on fixing them because inside and out they do not even look like rentals. My business model is different. And I do not even mind to spend time to look for the best tenant even if I have to pay for the mortgage.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesEvery comparison on returns is different because every REI has different criteria/goals for the use and return of their cash. The strategies and the markets used are locked together because of that.
Quote from @Tanner Crawley:
Quote from @Joe Villeneuve:
You really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results.I am not pretending to know your strategy. I simply categorized you as a CF investor because it seems to be a major criterion for you.
I'm a little skeptical you are getting an 80% discount on your acquisitions in this market. If you mean you are only putting 20% down that is another story. I put negative money down on my last property (0% down and I took a commission) so the cash on cash metric is useless.
Some people on here aren't in REI full-time. If I were to spend all my time trying to find heavily discounted properties I would be forgoing significant income to do so and in the time it took me to source that property I would have probably missed out on significant appreciation. Same thing goes for finding cash flow.
All I'm saying is your criteria aren't necessarily the only criteria that work. I didn't buy with cash flow going in or much equity. But it would have been nearly impossible to do so in the area I bought in. Today it is a cash cow with huge amounts of equityIn this market, the biggest mistake I see investors make is trying to find a property that meets unrealistic criteria suggested by participants in this forum that have no idea what is going on in another market. Meanwhile they miss out on appreciation, face rising interest rates, and higher purchase prices.
As far as being locked into CF, and categorizing me as a CF investor is only part true. I've never said equity was a bad thing, or not something to strive for in a deal. The facts are this, no discussion about REI should ever be a choice between one of the other. It that is your choice, in the market you are investing in, you need to find a different market. A good deal must have both. I can understand you thinking I'm focused on CF since most of my comments are on posts that start are based on NCF being somehow OK...and it isn't. So is equity and appreciation on top of that equity. The differences between the two are:
1 - CF is real, equity is virtual
2 - CF is cash that is usable now; equity must be converted to be of any use
3 - CF is the way the REI recovers their cost, since the only cost to the REI is what cash comes out of their pocket,...as in the DP; equity is the future return (hopeful) that as time passes is less and less predictable, and more and more speculative.
4 - CF can be reinvested within 5 minutes of getting it; equity takes a lot longer to get in the first place.
5 - Since CF can be reinvested instantly, and CF is acquired instantly, it has a greater return due the speed it can be rolled over, and over, and...the gains are exponential; Equity loses that value as time passes...exponentially.
6 - Both are critical to the success of the deal
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
2 - Equity growth from appreciation (free) equal to the equity bought at purchase (DP).
3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential. - Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes4y
Quote from @Joe Villeneuve:
Every comparison on returns is different because every REI has different criteria/goals for the use and return of their cash. The strategies and the markets used are locked together because of that.Quote from @Tanner Crawley:
Quote from @Joe Villeneuve:
You really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results.I am not pretending to know your strategy. I simply categorized you as a CF investor because it seems to be a major criterion for you.
I'm a little skeptical you are getting an 80% discount on your acquisitions in this market. If you mean you are only putting 20% down that is another story. I put negative money down on my last property (0% down and I took a commission) so the cash on cash metric is useless.
Some people on here aren't in REI full-time. If I were to spend all my time trying to find heavily discounted properties I would be forgoing significant income to do so and in the time it took me to source that property I would have probably missed out on significant appreciation. Same thing goes for finding cash flow.
All I'm saying is your criteria aren't necessarily the only criteria that work. I didn't buy with cash flow going in or much equity. But it would have been nearly impossible to do so in the area I bought in. Today it is a cash cow with huge amounts of equityIn this market, the biggest mistake I see investors make is trying to find a property that meets unrealistic criteria suggested by participants in this forum that have no idea what is going on in another market. Meanwhile they miss out on appreciation, face rising interest rates, and higher purchase prices.
As far as being locked into CF, and categorizing me as a CF investor is only part true. I've never said equity was a bad thing, or not something to strive for in a deal. The facts are this, no discussion about REI should ever be a choice between one of the other. It that is your choice, in the market you are investing in, you need to find a different market. A good deal must have both. I can understand you thinking I'm focused on CF since most of my comments are on posts that start are based on NCF being somehow OK...and it isn't. So is equity and appreciation on top of that equity. The differences between the two are:
1 - CF is real, equity is virtual
2 - CF is cash that is usable now; equity must be converted to be of any use
3 - CF is the way the REI recovers their cost, since the only cost to the REI is what cash comes out of their pocket,...as in the DP; equity is the future return (hopeful) that as time passes is less and less predictable, and more and more speculative.
4 - CF can be reinvested within 5 minutes of getting it; equity takes a lot longer to get in the first place.
5 - Since CF can be reinvested instantly, and CF is acquired instantly, it has a greater return due the speed it can be rolled over, and over, and...the gains are exponential; Equity loses that value as time passes...exponentially.
6 - Both are critical to the success of the deal
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
2 - Equity growth from appreciation (free) equal to the equity bought at purchase (DP).
3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Equity is real. You can use it as collateral, you can exchange it, you can refinance, and you can sell. Sure it is less liquid but it is certainly real.I also would much prefer equity growth as it is often tax-advantaged compared to cash flow.
Some questions regarding your strategy:
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
This is likely easiest with low downpayment options which often negatively impact cash flow. How do you reconcile/ think about this?3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Would you still sell if you have an extremely low interest rate locked in?
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Tanner Crawley:
Quote from @Joe Villeneuve:
Every comparison on returns is different because every REI has different criteria/goals for the use and return of their cash. The strategies and the markets used are locked together because of that.Quote from @Tanner Crawley:
Quote from @Joe Villeneuve:
You really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.Quote from @Tanner Crawley:
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results.I am not pretending to know your strategy. I simply categorized you as a CF investor because it seems to be a major criterion for you.
I'm a little skeptical you are getting an 80% discount on your acquisitions in this market. If you mean you are only putting 20% down that is another story. I put negative money down on my last property (0% down and I took a commission) so the cash on cash metric is useless.
Some people on here aren't in REI full-time. If I were to spend all my time trying to find heavily discounted properties I would be forgoing significant income to do so and in the time it took me to source that property I would have probably missed out on significant appreciation. Same thing goes for finding cash flow.
All I'm saying is your criteria aren't necessarily the only criteria that work. I didn't buy with cash flow going in or much equity. But it would have been nearly impossible to do so in the area I bought in. Today it is a cash cow with huge amounts of equityIn this market, the biggest mistake I see investors make is trying to find a property that meets unrealistic criteria suggested by participants in this forum that have no idea what is going on in another market. Meanwhile they miss out on appreciation, face rising interest rates, and higher purchase prices.
As far as being locked into CF, and categorizing me as a CF investor is only part true. I've never said equity was a bad thing, or not something to strive for in a deal. The facts are this, no discussion about REI should ever be a choice between one of the other. It that is your choice, in the market you are investing in, you need to find a different market. A good deal must have both. I can understand you thinking I'm focused on CF since most of my comments are on posts that start are based on NCF being somehow OK...and it isn't. So is equity and appreciation on top of that equity. The differences between the two are:
1 - CF is real, equity is virtual
2 - CF is cash that is usable now; equity must be converted to be of any use
3 - CF is the way the REI recovers their cost, since the only cost to the REI is what cash comes out of their pocket,...as in the DP; equity is the future return (hopeful) that as time passes is less and less predictable, and more and more speculative.
4 - CF can be reinvested within 5 minutes of getting it; equity takes a lot longer to get in the first place.
5 - Since CF can be reinvested instantly, and CF is acquired instantly, it has a greater return due the speed it can be rolled over, and over, and...the gains are exponential; Equity loses that value as time passes...exponentially.
6 - Both are critical to the success of the deal
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
2 - Equity growth from appreciation (free) equal to the equity bought at purchase (DP).
3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Equity is real. You can use it as collateral, you can exchange it, you can refinance, and you can sell. Sure it is less liquid but it is certainly real.I also would much prefer equity growth as it is often tax-advantaged compared to cash flow.
Some questions regarding your strategy:
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
This is likely easiest with low downpayment options which often negatively impact cash flow. How do you reconcile/ think about this?3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Would you still sell if you have an extremely low interest rate locked in?
First, equity isn't real until you do one of the things you mentioned which makes it real. Until then it's virtual. Also, except for selling the property, all the other "real" things you mentioned costs you money...and in the end isn't your money you end up with. If it was your's, you wouldn't have to pay for it.
Your Questions:
Question 1: The lower DP is always best since your cost is only the cash that comes out of your pocket...which should be nothing more than the DP. The lower the cost, the lower the DP. This is important because you don't make a profit until you recover your cost. The lower the cost, the faster the road to profit.Yes, this does lower your CF. The net result is still faster to profit.
Example: $100k property. 2 choices, 1 - 100% cash, 2 - 20% DP
Option 1: 100% cash
a - Cost = $100k
b - CF = $10k/year
c - years to recovery = 10
d - profit 1st 10 years = 0 = none
Option 2: 20% DP
a - Cost = $20k
b - CF = $5k/year
c - years to recovery = 4
d - profit 1st 10 years = $30k
Question 2: Yes
The increased CF on the current property due to the lower interest rate is minimal. Also, when you sell, you should be able to increase your CF with 2 properties instead of 1...and based on the criteria for selling, you should be able to buy 2 properties like the first, which means your CF should come close to doubling.The equity doesn't change...it's just split.
The equity is now buying total PV at 5 times the face value of the equity. Not selling, although the equity increases, the value of what that equity is buying, is reduced from the 5 to 1 it started with. You equity grows on a 1 to 1 increase as the PV increases. A $100k property with $20k equity where the PV increases to $120, is losing money because the equity (now $40k) is now only worth (buying) a $120k property...that's a 3 to 1 value. When sold, it goes back to a 20% DP which now buys a total PV of $200k.
The exponential loss exists when this isn't executed because these steps would be repeated when the selling criteria is achieved.
- Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes4y
Quote from :
Quote from :
Quote from :
Every comparison on returns is different because every REI has different criteria/goals for the use and return of their cash. The strategies and the markets used are locked together because of that.Quote from :
Quote from :
You really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.Quote from :
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results.I am not pretending to know your strategy. I simply categorized you as a CF investor because it seems to be a major criterion for you.
I'm a little skeptical you are getting an 80% discount on your acquisitions in this market. If you mean you are only putting 20% down that is another story. I put negative money down on my last property (0% down and I took a commission) so the cash on cash metric is useless.
Some people on here aren't in REI full-time. If I were to spend all my time trying to find heavily discounted properties I would be forgoing significant income to do so and in the time it took me to source that property I would have probably missed out on significant appreciation. Same thing goes for finding cash flow.
All I'm saying is your criteria aren't necessarily the only criteria that work. I didn't buy with cash flow going in or much equity. But it would have been nearly impossible to do so in the area I bought in. Today it is a cash cow with huge amounts of equityIn this market, the biggest mistake I see investors make is trying to find a property that meets unrealistic criteria suggested by participants in this forum that have no idea what is going on in another market. Meanwhile they miss out on appreciation, face rising interest rates, and higher purchase prices.
As far as being locked into CF, and categorizing me as a CF investor is only part true. I've never said equity was a bad thing, or not something to strive for in a deal. The facts are this, no discussion about REI should ever be a choice between one of the other. It that is your choice, in the market you are investing in, you need to find a different market. A good deal must have both. I can understand you thinking I'm focused on CF since most of my comments are on posts that start are based on NCF being somehow OK...and it isn't. So is equity and appreciation on top of that equity. The differences between the two are:
1 - CF is real, equity is virtual
2 - CF is cash that is usable now; equity must be converted to be of any use
3 - CF is the way the REI recovers their cost, since the only cost to the REI is what cash comes out of their pocket,...as in the DP; equity is the future return (hopeful) that as time passes is less and less predictable, and more and more speculative.
4 - CF can be reinvested within 5 minutes of getting it; equity takes a lot longer to get in the first place.
5 - Since CF can be reinvested instantly, and CF is acquired instantly, it has a greater return due the speed it can be rolled over, and over, and...the gains are exponential; Equity loses that value as time passes...exponentially.
6 - Both are critical to the success of the deal
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
2 - Equity growth from appreciation (free) equal to the equity bought at purchase (DP).
3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Equity is real. You can use it as collateral, you can exchange it, you can refinance, and you can sell. Sure it is less liquid but it is certainly real.I also would much prefer equity growth as it is often tax-advantaged compared to cash flow.
Some questions regarding your strategy:
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
This is likely easiest with low downpayment options which often negatively impact cash flow. How do you reconcile/ think about this?3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Would you still sell if you have an extremely low interest rate locked in?
Equity
First, equity isn't real until you do one of the things you mentioned which makes it real. Until then it's virtual. Also, except for selling the property, all the other "real" things you mentioned costs you money...and in the end isn't your money you end up with. If it was your's, you wouldn't have to pay for it.
Your Questions:
Question 1: The lower DP is always best since your cost is only the cash that comes out of your pocket...which should be nothing more than the DP. The lower the cost, the lower the DP. This is important because you don't make a profit until you recover your cost. The lower the cost, the faster the road to profit.Yes, this does lower your CF. The net result is still faster to profit.
Example: $100k property. 2 choices, 1 - 100% cash, 2 - 20% DP
Option 1: 100% cash
a - Cost = $100k
b - CF = $10k/year
c - years to recovery = 10
d - profit 1st 10 years = 0 = none
Option 2: 20% DP
a - Cost = $20k
b - CF = $5k/year
c - years to recovery = 4
d - profit 1st 10 years = $30k
Question 2: Yes
The increased CF on the current property due to the lower interest rate is minimal. Also, when you sell, you should be able to increase your CF with 2 properties instead of 1...and based on the criteria for selling, you should be able to buy 2 properties like the first, which means your CF should come close to doubling.The equity doesn't change...it's just split.
The equity is now buying total PV at 5 times the face value of the equity. Not selling, although the equity increases, the value of what that equity is buying, is reduced from the 5 to 1 it started with. You equity grows on a 1 to 1 increase as the PV increases. A $100k property with $20k equity where the PV increases to $120, is losing money because the equity (now $40k) is now only worth (buying) a $120k property...that's a 3 to 1 value. When sold, it goes back to a 20% DP which now buys a total PV of $200k.
The exponential loss exists when this isn't executed because these steps would be repeated when the selling criteria is achieved.
Equity is real. It shows on a balance sheet, can be used as collateral, can be used for credit enhancement, and can be realized pretty easily. The transaction cost of selling a property and purchasing another is also MUCH higher than any of the strategies I mentioned for realizing equity, as well as likely incurs a capital gain.
These considerations modeled out over a 20-30 year portfolio would likely be a dramatic difference.I also think the scenario you laid out with option 1 and 2 is unrealistic for 98% of investors. A 10% yield is unrealistic and heavily downplays the impact of interest rates. In most markets, the difference between a 2.9% mortgage and a mortgage at 4.5% is the difference between cash flow and negative cash flow.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesGive me numbers, in dollars, not percentages, to prove what you are saying. As far as my numbers go, they are accurate...and as far as my scenario being "unrealistic for 98% of investors", can you back up that number of "98%"?
Quote from @Tanner Crawley:
Quote from :
Quote from :
Quote from :
Every comparison on returns is different because every REI has different criteria/goals for the use and return of their cash. The strategies and the markets used are locked together because of that.Quote from :
Quote from :
You really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.Quote from :
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results.I am not pretending to know your strategy. I simply categorized you as a CF investor because it seems to be a major criterion for you.
I'm a little skeptical you are getting an 80% discount on your acquisitions in this market. If you mean you are only putting 20% down that is another story. I put negative money down on my last property (0% down and I took a commission) so the cash on cash metric is useless.
Some people on here aren't in REI full-time. If I were to spend all my time trying to find heavily discounted properties I would be forgoing significant income to do so and in the time it took me to source that property I would have probably missed out on significant appreciation. Same thing goes for finding cash flow.
All I'm saying is your criteria aren't necessarily the only criteria that work. I didn't buy with cash flow going in or much equity. But it would have been nearly impossible to do so in the area I bought in. Today it is a cash cow with huge amounts of equityIn this market, the biggest mistake I see investors make is trying to find a property that meets unrealistic criteria suggested by participants in this forum that have no idea what is going on in another market. Meanwhile they miss out on appreciation, face rising interest rates, and higher purchase prices.
As far as being locked into CF, and categorizing me as a CF investor is only part true. I've never said equity was a bad thing, or not something to strive for in a deal. The facts are this, no discussion about REI should ever be a choice between one of the other. It that is your choice, in the market you are investing in, you need to find a different market. A good deal must have both. I can understand you thinking I'm focused on CF since most of my comments are on posts that start are based on NCF being somehow OK...and it isn't. So is equity and appreciation on top of that equity. The differences between the two are:
1 - CF is real, equity is virtual
2 - CF is cash that is usable now; equity must be converted to be of any use
3 - CF is the way the REI recovers their cost, since the only cost to the REI is what cash comes out of their pocket,...as in the DP; equity is the future return (hopeful) that as time passes is less and less predictable, and more and more speculative.
4 - CF can be reinvested within 5 minutes of getting it; equity takes a lot longer to get in the first place.
5 - Since CF can be reinvested instantly, and CF is acquired instantly, it has a greater return due the speed it can be rolled over, and over, and...the gains are exponential; Equity loses that value as time passes...exponentially.
6 - Both are critical to the success of the deal
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
2 - Equity growth from appreciation (free) equal to the equity bought at purchase (DP).
3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Equity is real. You can use it as collateral, you can exchange it, you can refinance, and you can sell. Sure it is less liquid but it is certainly real.I also would much prefer equity growth as it is often tax-advantaged compared to cash flow.
Some questions regarding your strategy:
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
This is likely easiest with low downpayment options which often negatively impact cash flow. How do you reconcile/ think about this?3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Would you still sell if you have an extremely low interest rate locked in?
Equity
First, equity isn't real until you do one of the things you mentioned which makes it real. Until then it's virtual. Also, except for selling the property, all the other "real" things you mentioned costs you money...and in the end isn't your money you end up with. If it was your's, you wouldn't have to pay for it.
Your Questions:
Question 1: The lower DP is always best since your cost is only the cash that comes out of your pocket...which should be nothing more than the DP. The lower the cost, the lower the DP. This is important because you don't make a profit until you recover your cost. The lower the cost, the faster the road to profit.Yes, this does lower your CF. The net result is still faster to profit.
Example: $100k property. 2 choices, 1 - 100% cash, 2 - 20% DP
Option 1: 100% cash
a - Cost = $100k
b - CF = $10k/year
c - years to recovery = 10
d - profit 1st 10 years = 0 = none
Option 2: 20% DP
a - Cost = $20k
b - CF = $5k/year
c - years to recovery = 4
d - profit 1st 10 years = $30k
Question 2: Yes
The increased CF on the current property due to the lower interest rate is minimal. Also, when you sell, you should be able to increase your CF with 2 properties instead of 1...and based on the criteria for selling, you should be able to buy 2 properties like the first, which means your CF should come close to doubling.The equity doesn't change...it's just split.
The equity is now buying total PV at 5 times the face value of the equity. Not selling, although the equity increases, the value of what that equity is buying, is reduced from the 5 to 1 it started with. You equity grows on a 1 to 1 increase as the PV increases. A $100k property with $20k equity where the PV increases to $120, is losing money because the equity (now $40k) is now only worth (buying) a $120k property...that's a 3 to 1 value. When sold, it goes back to a 20% DP which now buys a total PV of $200k.
The exponential loss exists when this isn't executed because these steps would be repeated when the selling criteria is achieved.
Equity is real. It shows on a balance sheet, can be used as collateral, can be used for credit enhancement, and can be realized pretty easily. The transaction cost of selling a property and purchasing another is also MUCH higher than any of the strategies I mentioned for realizing equity, as well as likely incurs a capital gain.
These considerations modeled out over a 20-30 year portfolio would likely be a dramatic difference.I also think the scenario you laid out with option 1 and 2 is unrealistic for 98% of investors. A 10% yield is unrealistic and heavily downplays the impact of interest rates. In most markets, the difference between a 2.9% mortgage and a mortgage at 4.5% is the difference between cash flow and negative cash flow.
Also, I'm not down playing "...the impact of interest rates". What I speak is based on a mathematical formula where the variable for interest, when the numbers compared are both as low as you mentioned, have less impact on the cash results when compared to the doubling effect on CF that a sale of the property has.
You mentioned costs associated with sales, which is valid. I have taken that into account. The doubling of the equity, as I mentioned, comes exclusively from the property appreciation. The equity that is added from the mortgage paydown (thank you tenant) is not included in that doubling and is what is used for those costs. - Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes4yA 10% yield is unattainable in most markets. In fact, I have never seen it in my market. Sure I pulled the 98% number out of thin air but I would say it is reasonable. A typical cap rate here might be 4-5%. Finding a deal with double that yield is certainly at least 1/100. In fact I can comb the past sales and I would wager I cant find a single deal of reasonable size with that yield in the last 3 years.
Quote from @Joe Villeneuve:
Give me numbers, in dollars, not percentages, to prove what you are saying. As far as my numbers go, they are accurate...and as far as my scenario being "unrealistic for 98% of investors", can you back up that number of "98%"?Quote from @Tanner Crawley:
Quote from :
Quote from :
Quote from :
Every comparison on returns is different because every REI has different criteria/goals for the use and return of their cash. The strategies and the markets used are locked together because of that.Quote from :
Quote from :
You really don't understand my investment system. That's understandable since it isn't typical of what you are expecting it to be based on your description of me being a "cash flow investor". Equity is critical to my system, but so is cash flow...as it is yours. I've never said I invest only for CF. I've always said a deal must have both.Quote from :
I don't understand why cash flow investors are so smug and dismissive of other strategies. Not everyone lives in B or C markets and has access to high cap rate properties. I've bought two properties in class A areas that "break-even" in the last few years. Why? Because I had the expectation (by your definition speculation) of appreciation and rent growth. These properties have appreciated by 14% and 17% annually and have had comparable rent growth. Now they are both cash cows and I have a deep pool of quality and high-income renters to choose from.
One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much.
I am not writing off your investment style as there is obviously merit to buying a property that cash flows from the get-go, but I would ask that you both consider the merit of strategies that might not match yours.
Also, my strategy isn't to accumulate SFH doors as I'm pretty sure you think it is. The system involves a specific step by step plan that may (I use the term "may" here) include SFH.
"One property appreciated 100k in just a year. I imagine a single door of yours would take two decades to cash flow that much".
Isn't a valid comparison, and you know it. If I bought a $100k property, I would pay no more than $20k for it. Are you paying that little for the property you have that appreciated $100k in a year? IT isn't the number of properties that you should be comparing. You should be comparing what $20k does for me, and you in a year...or, whatever you paid for your property and let me use that same amount, and compare those results.I am not pretending to know your strategy. I simply categorized you as a CF investor because it seems to be a major criterion for you.
I'm a little skeptical you are getting an 80% discount on your acquisitions in this market. If you mean you are only putting 20% down that is another story. I put negative money down on my last property (0% down and I took a commission) so the cash on cash metric is useless.
Some people on here aren't in REI full-time. If I were to spend all my time trying to find heavily discounted properties I would be forgoing significant income to do so and in the time it took me to source that property I would have probably missed out on significant appreciation. Same thing goes for finding cash flow.
All I'm saying is your criteria aren't necessarily the only criteria that work. I didn't buy with cash flow going in or much equity. But it would have been nearly impossible to do so in the area I bought in. Today it is a cash cow with huge amounts of equityIn this market, the biggest mistake I see investors make is trying to find a property that meets unrealistic criteria suggested by participants in this forum that have no idea what is going on in another market. Meanwhile they miss out on appreciation, face rising interest rates, and higher purchase prices.
As far as being locked into CF, and categorizing me as a CF investor is only part true. I've never said equity was a bad thing, or not something to strive for in a deal. The facts are this, no discussion about REI should ever be a choice between one of the other. It that is your choice, in the market you are investing in, you need to find a different market. A good deal must have both. I can understand you thinking I'm focused on CF since most of my comments are on posts that start are based on NCF being somehow OK...and it isn't. So is equity and appreciation on top of that equity. The differences between the two are:
1 - CF is real, equity is virtual
2 - CF is cash that is usable now; equity must be converted to be of any use
3 - CF is the way the REI recovers their cost, since the only cost to the REI is what cash comes out of their pocket,...as in the DP; equity is the future return (hopeful) that as time passes is less and less predictable, and more and more speculative.
4 - CF can be reinvested within 5 minutes of getting it; equity takes a lot longer to get in the first place.
5 - Since CF can be reinvested instantly, and CF is acquired instantly, it has a greater return due the speed it can be rolled over, and over, and...the gains are exponential; Equity loses that value as time passes...exponentially.
6 - Both are critical to the success of the deal
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
2 - Equity growth from appreciation (free) equal to the equity bought at purchase (DP).
3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Equity is real. You can use it as collateral, you can exchange it, you can refinance, and you can sell. Sure it is less liquid but it is certainly real.I also would much prefer equity growth as it is often tax-advantaged compared to cash flow.
Some questions regarding your strategy:
My strategy (as of now):
1 - Recover my cost (DP) ASAP (3 to 5 years)
This is likely easiest with low downpayment options which often negatively impact cash flow. How do you reconcile/ think about this?3 - When both are achieved, sell...because at that point my equity is losing value, and my CF potential is being lost,...both of these loses are exponential.
Would you still sell if you have an extremely low interest rate locked in?
Equity
First, equity isn't real until you do one of the things you mentioned which makes it real. Until then it's virtual. Also, except for selling the property, all the other "real" things you mentioned costs you money...and in the end isn't your money you end up with. If it was your's, you wouldn't have to pay for it.
Your Questions:
Question 1: The lower DP is always best since your cost is only the cash that comes out of your pocket...which should be nothing more than the DP. The lower the cost, the lower the DP. This is important because you don't make a profit until you recover your cost. The lower the cost, the faster the road to profit.Yes, this does lower your CF. The net result is still faster to profit.
Example: $100k property. 2 choices, 1 - 100% cash, 2 - 20% DP
Option 1: 100% cash
a - Cost = $100k
b - CF = $10k/year
c - years to recovery = 10
d - profit 1st 10 years = 0 = none
Option 2: 20% DP
a - Cost = $20k
b - CF = $5k/year
c - years to recovery = 4
d - profit 1st 10 years = $30k
Question 2: Yes
The increased CF on the current property due to the lower interest rate is minimal. Also, when you sell, you should be able to increase your CF with 2 properties instead of 1...and based on the criteria for selling, you should be able to buy 2 properties like the first, which means your CF should come close to doubling.The equity doesn't change...it's just split.
The equity is now buying total PV at 5 times the face value of the equity. Not selling, although the equity increases, the value of what that equity is buying, is reduced from the 5 to 1 it started with. You equity grows on a 1 to 1 increase as the PV increases. A $100k property with $20k equity where the PV increases to $120, is losing money because the equity (now $40k) is now only worth (buying) a $120k property...that's a 3 to 1 value. When sold, it goes back to a 20% DP which now buys a total PV of $200k.
The exponential loss exists when this isn't executed because these steps would be repeated when the selling criteria is achieved.
Equity is real. It shows on a balance sheet, can be used as collateral, can be used for credit enhancement, and can be realized pretty easily. The transaction cost of selling a property and purchasing another is also MUCH higher than any of the strategies I mentioned for realizing equity, as well as likely incurs a capital gain.
These considerations modeled out over a 20-30 year portfolio would likely be a dramatic difference.I also think the scenario you laid out with option 1 and 2 is unrealistic for 98% of investors. A 10% yield is unrealistic and heavily downplays the impact of interest rates. In most markets, the difference between a 2.9% mortgage and a mortgage at 4.5% is the difference between cash flow and negative cash flow.
Also, I'm not down playing "...the impact of interest rates". What I speak is based on a mathematical formula where the variable for interest, when the numbers compared are both as low as you mentioned, have less impact on the cash results when compared to the doubling effect on CF that a sale of the property has.
You mentioned costs associated with sales, which is valid. I have taken that into account. The doubling of the equity, as I mentioned, comes exclusively from the property appreciation. The equity that is added from the mortgage paydown (thank you tenant) is not included in that doubling and is what is used for those costs.
If that is the case your example changes. Instead of having 10k cash flow you would have 5k cash flow, and in option 2 you would have very little cash flow:
Option 1 (100% down):
Cost- 100k
Cash Flow before debt service: 5k
Years to recovery: 20
Option 2: (20%) Down
Cost: 100k
Cash Flow before debt service: 5k
Debt Service (4.5% interest rate): 4.9k
Net Cash Flow: $100Years to recovery: 200
My point is that this model falls apart if the numbers are in line with an A or B market. Cash flow becomes more scarce and much more nuance is required in modeling. Interest rate sensitivity skyrockets and DTI must be much more carefully managed.
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes4y
@Jason Nguyen I'm renting my property monthly on websites like Airbnb and VRBO. I'm doubling the revenue with a lot less headache than a STR.
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes4y
real estate: 10 year cycles and five year memories. We were dancing in the streets at 6% interest rates. It can be done.
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