Loan Pay down and breaking even on cash flow

Member since 2023 · 21 posts · 22 votes

I feel like I’ve been posting a lot lately!

Something I've been thinking about is the benefits of loan pay down. So I've been listening to bigger pockets a lot, and am learning that a BRRRR method is a good method for making money. But let's say you buy a property for fair value, and it just barely cash flows or you just break even. On this forum and podcast, most people make it sound like that is completely unacceptable and you should get rid of the property.

Hypothetically, let’s say you have a property that barely cash flows and isn’t appreciating much in the long term. The property isn’t really making you passive income, but it’s also not costing you anything to own. If you have a long term 10 plus year outlook, wouldn’t loan paydown still be a positive for keeping the rental? I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home. In my mind this is the worst case scenario.

So where I’m getting at is, if your goal to replace your W2 with passive rental income isn’t working out, at the end of the day you’d still have passive equity being built that you could withdraw some day. Isn’t this a win? Thoughts?

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

Quote from @Carlos Lopes:

I feel like I’ve been posting a lot lately!

You'll get crucified by the folks that say make your tenant pay it for you. Truth is if you're really seeking financial freedom, then no debt is the route. It's all about goals. You'll see people tell you if you have $500k to invest, rather than buy 1 property go buy 5 properties with $100k down. Or if you have limited means, go put down 3.5%-5% and house hack and then do it again next year. Or if it doesn't cash flow Day 1, don't buy it. These three myths are exactly why people get burned.

I shouldn't have to explain why but I will. 5 houses with $100k down won't be $500k, once you factor closing costs & reserves. Try 3 houses, 4 if you want to stretch yourself. Scaling is appropriate if you know how to measure your risk. Risk isn't like a stock, you're not looking at beta you're looking at quality of neighborhood you're purchasing, interest rate, rental liquidity, etc.

House hack at 3.5%-5%. Go do that, see where the math leads. You'll never get out from underneath with rates at 7%. Try 15-20% down + every 3-7 years.

Another loud and proud statement here is cash flow negative is a big no. Paying cash down is a disservice to leveraging debt. Technically, math wise they're absolutely correct. You're truly better leveraging $300k at 7% and keeping your $300k invested elsewhere aside. Cannot argue with the math. You're better off on paper today buying a house that gives you you're $200 in cash flow versus one that gives you -$100. That's correct match wise. But this isn't it just outright math, this is to a degree speculation risk tolerance, and behavior. Cash flow negative or ATM is absolutely okay if you're buying a good area. And I think you should ONLY buy in a good area for a variety of reasons, but the main reasons will be the real way you evaluate risk in real estate transactions.

Behaviorally, and depending on your goals, it's absolutely asinine to leverage through the gills. If you lose your job, if your significant other does, or if you both? Child gets sick or parents get sick and you have a large bill? True financial freedom is no debt.

The concept here is to buy a **** house that makes you $200/mo, cross your fingers it appreciates in 3-5 years, cash out refi and buy another house with it. The real concept should be buy a good house in a good area, pay it down to where it's a low monthly payment in a 3-7 year time frame through recasting + pre paying mortgage. Take that increase in DTI and use it to invest elsewhere. I'd take 1-2 really good houses over 4-6 **** houses. If you're able to scale and take that mechanism to buy 3-5 quality houses, you may be able to sell 1 to pay off the others and just make nothing but cash(outside of taxes, insurance, property management).

Look at what you're doing as a portfolio, and how it's all going to work.

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
3y
Loan paydown, if you're the one doing it out of your pocket, just means you are buying your property, and paying full price. Loan paydown is only good when it comes from the tenant's rent...not your pocket. Let the tenant buy the property for you. When you buy your own equity you aren't gaining anything. All you are doing is transferring your cash from your bank to the property. No gain. You're not eliminating interest since you're not paying it...the tenant is, or at least they are supposed to be through positive CF.
Any and all money that comes out of your pocket is a cost to you. Restrict that "cost" to the DP. This is why negative CF and low cash flow(negative CF waiting to happen) is bad. It means you are paying more for the property than you should be.
Equity bought by you isn't again. Equity gained from appreciation is.
Bottom line is this. There should never be a choice between a property that cash flows and one that builds up equity from appreciation. If the property doesn't have both,...DON'T BUY IT!!!
9 Reply
Ryan B.
Illinois and Nevada · Member since 2018 · 12 posts · 7 votes
3y
@Carlos Lopes I don't think it's completely unacceptable, but it's less than ideal.
Yes you're getting the loan paid down by the tenants and hopefully the property appreciates in that time. You're also getting tax benefits from the property. Cashflow on top of that would be ideal, but I guess technically not required.
Also, over time as rents increase, the property should start to cashflow.
I think it's just not ideal because it's a matter of opportunity cost. Yes you're getting all of those benefits, but you may be getting those benefits plus strong cashflow with a different property.
If you're barely cashflowing then any repairs or vacancy would put you into the negative easily.
1 Reply
Carlos Lopes
OP
Member since 2023 · 21 posts · 22 votes
3y
Quote from @Ryan B.:

@Carlos Lopes I don't think it's completely unacceptable, but it's less than ideal.
Yes you're getting the loan paid down by the tenants and hopefully the property appreciates in that time. You're also getting tax benefits from the property. Cashflow on top of that would be ideal, but I guess technically not required.
Also, over time as rents increase, the property should start to cashflow.
I think it's just not ideal because it's a matter of opportunity cost. Yes you're getting all of those benefits, but you may be getting those benefits plus strong cashflow with a different property.
If you're barely cashflowing then any repairs or vacancy would put you into the negative easily.
Gotcha makes sense. Yea cash flow is obviously the most desirable outcome, but I just felt like the loan pay down aspect of it seems to always be dismissed as if it doesn’t exist. So really it’s still a benefit, just not ideal because you could be making cash flow elsewhere with the equity of your property, assuming you have any. In that case would you sell or cash out refi to use that equity elsewhere? I guess depending on future rates, cash out refi could potentially make a break even property finally cash flow all while taking out cash to buy another?

1 Reply
Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
3y
You also want to make sure the cash flow is real and not just a calculation on paper. A number of cheap homes in less desirable areas will look great on paper, but in reality they are not. A balance between cash flow and appreciation is good, though you can't bank on the latter. How much are rents going up in your area (over the long term, not the last year or two as covid created anomalies). What are the vacancy rates in your area?
Selling and buying another property may work, but the cost of doing that may or may not put you further ahead. Run your numbers and check.
3 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
3y
Quote from @Carlos Lopes:

Quote from @Ryan B.:

@Carlos Lopes I don't think it's completely unacceptable, but it's less than ideal.
Yes you're getting the loan paid down by the tenants and hopefully the property appreciates in that time. You're also getting tax benefits from the property. Cashflow on top of that would be ideal, but I guess technically not required.
Also, over time as rents increase, the property should start to cashflow.
I think it's just not ideal because it's a matter of opportunity cost. Yes you're getting all of those benefits, but you may be getting those benefits plus strong cashflow with a different property.
If you're barely cashflowing then any repairs or vacancy would put you into the negative easily.
Gotcha makes sense. Yea cash flow is obviously the most desirable outcome, but I just felt like the loan pay down aspect of it seems to always be dismissed as if it doesn’t exist. So really it’s still a benefit, just not ideal because you could be making cash flow elsewhere with the equity of your property, assuming you have any. In that case would you sell or cash out refi to use that equity elsewhere? I guess depending on future rates, cash out refi could potentially make a break even property finally cash flow all while taking out cash to buy another?

It's not a benefit if you are the one making the payments to pay it down. Besides, if you look closely at an amortization schedule, you'll see there is very little paydown, and mostly interest, that makes up about the first 70% of the payments. Debt paydown is a very minor benefit since the real paydown doesn't happen until very late in the mortgage term.
0 Reply
Account Closed
Member since 2021 · 240 posts · 300 votes
3y

@Carlos Lopes here's my real world example. I've been renting out my previous primary for 5 years. I had refinanced at 3% for 15 years prior to moving out. House was valued at approx. 125k when I moved out. Rent was 1200 and PITI was about 900 originally. It was basically breaking even cash flow wise. Luckily home values have gone up, the sale value now is about $210-220k . Tenants were paying $500 a month on the mortgage, only about $140 or so was interest. Tenants paid mortgage down from $98k to $68k now. I'm prepping it to sell, and house needs major repairs now (30k). So I'm paying that out of pocket to be reimbursed by the sale price later this year. Had I not been selling, this would all be out of pocket expense due to no saved up cash flow.
Rent value now is about $1500-1600. If I change my mind and keep it, I can now use a property manager to handle it, which stops any headaches but goes back to little to no cash flow. If I continued to self manage, it would be cash flowing.
2 Reply
Jon KellyPro Member
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
3y
@Carlos Lopes mortgage paydown and tax savings are usually mentioned as benefits but rarely factored in the equation for three reasons:
1. they're variable from investor to investor. mortgages are always different (5-30yr terms, different interest rates, fixed/variable rate, interest only / fully amortizing, etc.) and everyone's tax situation is different
2. they're hard to calculate because they're "paper" gains. Mortgage paydown is great but you can't access the equity unless you sell or refinance. What if the country goes into a recession and your property loses 20% of it's value? Then, what happens to your mortgage paydown? Any equity "gained" is wiped away.
3. Cash-on-cash return is a simplified calculation and translates across most properties and investors
I always keep track or mortgage paydown and annual tax savings separately from my cash-on-cash calculation. I don't do anything with these numbers when I'm analyzing new deals, but it's good to know how much equity is built up or how much I'm saving on taxes.
0 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
3y
@Carlos Lopes don’t buy it.
1 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Carlos Lopes:

I feel like I’ve been posting a lot lately!
Something I've been thinking about is the benefits of loan pay down. So I've been listening to bigger pockets a lot, and am learning that a BRRRR method is a good method for making money. But let's say you buy a property for fair value, and it just barely cash flows or you just break even. On this forum and podcast, most people make it sound like that is completely unacceptable and you should get rid of the property.
Hypothetically, let’s say you have a property that barely cash flows and isn’t appreciating much in the long term. The property isn’t really making you passive income, but it’s also not costing you anything to own. If you have a long term 10 plus year outlook, wouldn’t loan paydown still be a positive for keeping the rental? I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home. In my mind this is the worst case scenario.
So where I’m getting at is, if your goal to replace your W2 with passive rental income isn’t working out, at the end of the day you’d still have passive equity being built that you could withdraw some day. Isn’t this a win? Thoughts?

You'll get crucified by the folks that say make your tenant pay it for you. Truth is if you're really seeking financial freedom, then no debt is the route. It's all about goals. You'll see people tell you if you have $500k to invest, rather than buy 1 property go buy 5 properties with $100k down. Or if you have limited means, go put down 3.5%-5% and house hack and then do it again next year. Or if it doesn't cash flow Day 1, don't buy it. These three myths are exactly why people get burned.

I shouldn't have to explain why but I will. 5 houses with $100k down won't be $500k, once you factor closing costs & reserves. Try 3 houses, 4 if you want to stretch yourself. Scaling is appropriate if you know how to measure your risk. Risk isn't like a stock, you're not looking at beta you're looking at quality of neighborhood you're purchasing, interest rate, rental liquidity, etc.

House hack at 3.5%-5%. Go do that, see where the math leads. You'll never get out from underneath with rates at 7%. Try 15-20% down + every 3-7 years.

Another loud and proud statement here is cash flow negative is a big no. Paying cash down is a disservice to leveraging debt. Technically, math wise they're absolutely correct. You're truly better leveraging $300k at 7% and keeping your $300k invested elsewhere aside. Cannot argue with the math. You're better off on paper today buying a house that gives you you're $200 in cash flow versus one that gives you -$100. That's correct match wise. But this isn't it just outright math, this is to a degree speculation risk tolerance, and behavior. Cash flow negative or ATM is absolutely okay if you're buying a good area. And I think you should ONLY buy in a good area for a variety of reasons, but the main reasons will be the real way you evaluate risk in real estate transactions.

Behaviorally, and depending on your goals, it's absolutely asinine to leverage through the gills. If you lose your job, if your significant other does, or if you both? Child gets sick or parents get sick and you have a large bill? True financial freedom is no debt.

The concept here is to buy a **** house that makes you $200/mo, cross your fingers it appreciates in 3-5 years, cash out refi and buy another house with it. The real concept should be buy a good house in a good area, pay it down to where it's a low monthly payment in a 3-7 year time frame through recasting + pre paying mortgage. Take that increase in DTI and use it to invest elsewhere. I'd take 1-2 really good houses over 4-6 **** houses. If you're able to scale and take that mechanism to buy 3-5 quality houses, you may be able to sell 1 to pay off the others and just make nothing but cash(outside of taxes, insurance, property management).

Look at what you're doing as a portfolio, and how it's all going to work.
11 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Carlos Lopes:

I feel like I’ve been posting a lot lately!
Something I've been thinking about is the benefits of loan pay down. So I've been listening to bigger pockets a lot, and am learning that a BRRRR method is a good method for making money. But let's say you buy a property for fair value, and it just barely cash flows or you just break even. On this forum and podcast, most people make it sound like that is completely unacceptable and you should get rid of the property.
Hypothetically, let’s say you have a property that barely cash flows and isn’t appreciating much in the long term. The property isn’t really making you passive income, but it’s also not costing you anything to own. If you have a long term 10 plus year outlook, wouldn’t loan paydown still be a positive for keeping the rental? I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home. In my mind this is the worst case scenario.
So where I’m getting at is, if your goal to replace your W2 with passive rental income isn’t working out, at the end of the day you’d still have passive equity being built that you could withdraw some day. Isn’t this a win? Thoughts?

You should not think about it but you should calculate it.

this is how you make money in residential:

( cash flow + appreciation + equity building ) - (mortgage+PITI)
if you do not cash flow is ok as long as appreciation rate is high.

For example, CA property typically cash flow min $200/mo or barely breakeven after paying PITI, but appreciation is like $4K-$6K per month For typical 600k house, appreciation rate is 5.8% per annual.

Equity building, however, depending on interest rate, doesn't mean much on the first 2-4 years, equity building only useful if you purchase with 10YFRM where interest to principal ratio is 1:2. This only happened in 10YFRM with sub 3% rate.
Now, if you do not cash flow, do not appreciate, and use 40YFRM I/O then you have asset with negative yield. In that regard you better put money into CD. LOL

I have my own Excel sheet calculating all of these, because none of these are not unpredictable. In Real estate, it's 90 percent predictable.

In appreciation city:
So you need to buy place where it appreciates a lot , DSCR > 1.0 + use 15YFRM is recommended or 30YFRM
In cash flow city
You could buy anything with higher cash flow and use 30/40YFRM (don't use 15YFRM here)

This is my own calculation how much I make from 500k house in CA compare to $100k cashflow MF in Wisconsin:

net cash flow + appreciation for CA: ($200*12)+($5000*12)= $62,000
net cash flow + appreciation for WI: ($700*12)+($1666*12)= $28,400

This is indirectly how the cap rate works, I don't count the equity building like you said because the LTV is predictable and would be the same regardless the location of property.

This is why also when you have two set of very different problem, you arrive with two set of different solution.

Do not use Cash flow strategy IN appreciation city.
Do not use Apreciation strategy in Cash flow city.
4 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Jon Kelly:

@Carlos Lopes mortgage paydown and tax savings are usually mentioned as benefits but rarely factored in the equation for three reasons:
1. they're variable from investor to investor. mortgages are always different (5-30yr terms, different interest rates, fixed/variable rate, interest only / fully amortizing, etc.) and everyone's tax situation is different
2. they're hard to calculate because they're "paper" gains. Mortgage paydown is great but you can't access the equity unless you sell or refinance. What if the country goes into a recession and your property loses 20% of it's value? Then, what happens to your mortgage paydown? Any equity "gained" is wiped away.
3. Cash-on-cash return is a simplified calculation and translates across most properties and investors
I always keep track or mortgage paydown and annual tax savings separately from my cash-on-cash calculation. I don't do anything with these numbers when I'm analyzing new deals, but it's good to know how much equity is built up or how much I'm saving on taxes.

1. Agreed

2. Okay and what happens if we go into that same recession, and your tenant can't make rent? And to get a new tenant you've got to drop rent? You're little itty bitty cash flow all wiped away. They're not hard to calculate cause they're paper gains. Wipe away debt, you know your fixed payment monthly and it's alot more attractive against any downturn. Paying off debt is the best hedge you can make, especially high interest debt.

3. You don't walk around with a CoC return on your shirt, or tattood on your forehead or even in your bank account. Yes, not even in your bank account. It doesn't tell you hey great job you made 14% CoC. Your bank account will tell you got X amounted in fixed payments, eliminate debt and you'll return a lot more. And be able to invest a lot further.

2 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @V.G Jason:

Quote from @Carlos Lopes:

I feel like I’ve been posting a lot lately!
Something I've been thinking about is the benefits of loan pay down. So I've been listening to bigger pockets a lot, and am learning that a BRRRR method is a good method for making money. But let's say you buy a property for fair value, and it just barely cash flows or you just break even. On this forum and podcast, most people make it sound like that is completely unacceptable and you should get rid of the property.
Hypothetically, let’s say you have a property that barely cash flows and isn’t appreciating much in the long term. The property isn’t really making you passive income, but it’s also not costing you anything to own. If you have a long term 10 plus year outlook, wouldn’t loan paydown still be a positive for keeping the rental? I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home. In my mind this is the worst case scenario.
So where I’m getting at is, if your goal to replace your W2 with passive rental income isn’t working out, at the end of the day you’d still have passive equity being built that you could withdraw some day. Isn’t this a win? Thoughts?

You'll get crucified by the folks that say make your tenant pay it for you. Truth is if you're really seeking financial freedom, then no debt is the route. It's all about goals. You'll see people tell you if you have $500k to invest, rather than buy 1 property go buy 5 properties with $100k down. Or if you have limited means, go put down 3.5%-5% and house hack and then do it again next year. Or if it doesn't cash flow Day 1, don't buy it. These three myths are exactly why people get burned.

I shouldn't have to explain why but I will. 5 houses with $100k down won't be $500k, once you factor closing costs & reserves. Try 3 houses, 4 if you want to stretch yourself. Scaling is appropriate if you know how to measure your risk. Risk isn't like a stock, you're not looking at beta you're looking at quality of neighborhood you're purchasing, interest rate, rental liquidity, etc.

House hack at 3.5%-5%. Go do that, see where the math leads. You'll never get out from underneath with rates at 7%. Try 15-20% down + every 3-7 years.

Another loud and proud statement here is cash flow negative is a big no. Paying cash down is a disservice to leveraging debt. Technically, math wise they're absolutely correct. You're truly better leveraging $300k at 7% and keeping your $300k invested elsewhere aside. Cannot argue with the math. You're better off on paper today buying a house that gives you you're $200 in cash flow versus one that gives you -$100. That's correct match wise. But this isn't it just outright math, this is to a degree speculation risk tolerance, and behavior. Cash flow negative or ATM is absolutely okay if you're buying a good area. And I think you should ONLY buy in a good area for a variety of reasons, but the main reasons will be the real way you evaluate risk in real estate transactions.

Behaviorally, and depending on your goals, it's absolutely asinine to leverage through the gills. If you lose your job, if your significant other does, or if you both? Child gets sick or parents get sick and you have a large bill? True financial freedom is no debt.

The concept here is to buy a **** house that makes you $200/mo, cross your fingers it appreciates in 3-5 years, cash out refi and buy another house with it. The real concept should be buy a good house in a good area, pay it down to where it's a low monthly payment in a 3-7 year time frame through recasting + pre paying mortgage. Take that increase in DTI and use it to invest elsewhere. I'd take 1-2 really good houses over 4-6 **** houses. If you're able to scale and take that mechanism to buy 3-5 quality houses, you may be able to sell 1 to pay off the others and just make nothing but cash(outside of taxes, insurance, property management).

Look at what you're doing as a portfolio, and how it's all going to work.

Totally, at the end of the day, practically, if you have $1 mil buying power, it is wiser to buy in two Class A $500k house than buy ten $100k duplex somewhere in Ohioville :)
You would know it from real live actual execution , HVAC price is the same between 100k houses and 500k houses.
6 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Carlos Ptriawan:

Quote from @Carlos Lopes:

I feel like I’ve been posting a lot lately!
Something I've been thinking about is the benefits of loan pay down. So I've been listening to bigger pockets a lot, and am learning that a BRRRR method is a good method for making money. But let's say you buy a property for fair value, and it just barely cash flows or you just break even. On this forum and podcast, most people make it sound like that is completely unacceptable and you should get rid of the property.
Hypothetically, let’s say you have a property that barely cash flows and isn’t appreciating much in the long term. The property isn’t really making you passive income, but it’s also not costing you anything to own. If you have a long term 10 plus year outlook, wouldn’t loan paydown still be a positive for keeping the rental? I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home. In my mind this is the worst case scenario.
So where I’m getting at is, if your goal to replace your W2 with passive rental income isn’t working out, at the end of the day you’d still have passive equity being built that you could withdraw some day. Isn’t this a win? Thoughts?

You should not think about it but you should calculate it.

this is how you make money in residential:

( cash flow + appreciation + equity building ) - (mortgage+PITI)
if you do not cash flow is ok as long as appreciation rate is high.

For example, CA property typically cash flow min $200/mo or barely breakeven after paying PITI, but appreciation is like $4K-$6K per month For typical 600k house, appreciation rate is 5.8% per annual.

Equity building, however, depending on interest rate, doesn't mean much on the first 2-4 years, equity building only useful if you purchase with 10YFRM where interest to principal ratio is 1:2. This only happened in 10YFRM with sub 3% rate.
Now, if you do not cash flow, do not appreciate, and use 40YFRM I/O then you have asset with negative yield. In that regard you better put money into CD. LOL

I have my own Excel sheet calculating all of these, because none of these are not unpredictable. In Real estate, it's 90 percent predictable.

In appreciation city:
So you need to buy place where it appreciates a lot , DSCR > 1.0 + use 15YFRM is recommended or 30YFRM
In cash flow city
You could buy anything with higher cash flow and use 30/40YFRM (don't use 15YFRM here)

This is my own calculation how much I make from 500k house in CA compare to $100k cashflow MF in Wisconsin:

net cash flow + appreciation for CA: ($200*12)+($5000*12)= $62,000
net cash flow + appreciation for WI: ($700*12)+($1666*12)= $28,400

This is indirectly how the cap rate works, I don't count the equity building like you said because the LTV is predictable and would be the same regardless the location of property.

This is why also when you have two set of very different problem, you arrive with two set of different solution.

Do not use Cash flow strategy IN appreciation city.
Do not use Apreciation strategy in Cash flow city.

If you're in an appreciation strategy area, and the numbers do not work today, they're likely going to tighten real quick. Buy a good house in a good neighborhood in a growing city, you may be out of the money today by $100/mo but you'll be ITM within 2 years if not higher with a primo property. If you paid down by recasting, your DSCR/DTI on it will be beautiful. Don't run away from really good properties in good areas cause you'll lose $150.

I bought a 3br, 3ba condo here in Miami for $690k more than 3 years ago, all cash. I needed my parents nearby for my growing family so I bought a 2br, 2ba right under neath it for $365k fully leveraged(20% down). I was going to rent it out for the first 6 months as my parents needed time to move. I was losing $600k/mo on it. Didn't give a ****, cause it wasn't an investment but a necessity for my growing family. If I rented it 18 months later, and my parents did not come down my rent would've been $1k/mo ITM as rent rates exploded. If I was on here, I would've been crucified. Less than 3 years later, I sold it for $710k. My 3br, 3ba I'm selling for right over $2M. Had I leveraged it, and if I rented it at the time I bought it in 2020 I would have lost probably $1k/mo on it, today if I rented it for 1 year I would make over $1k/mo on it.

I bought a quadplex in DFW for $555k and have put in about $68K worth of work. All cash, just 4 months ago. I was told I was beyond dumb for it. I just got it appraised for right over $800k.

The hockey player fella is right. I skate to where the puck is going to be, not where it has been. If you buy in areas you can comfortably afford that is growing, favorable laws( I know Carlos P is going to disagree with me here due to Cali), and ideally under the median price you'll make out like a bandit. There's several cities not discussed on here that I am investing in and I see other large individuals invest in that do not fit the cash flow $500/mo in the philosophy, but I'd take over almost any area that's producing legit cash flow. It'll lose today, maybe in 2024. But I am willing to bet in the 3 year, probably 5 year and definitely 7 year + frame that these investments will rock any of those one's winning today.
3 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @V.G Jason:

Quote from @Carlos Ptriawan:

The hockey player fella is right. I skate to where the puck is going to be, not where it has been. If you buy in areas you can comfortably afford that is growing, favorable laws( I know Carlos P is going to disagree with me here due to Cali), and ideally under the median price you'll make out like a bandit. There's several cities not discussed on here that I am investing in and I see other large individuals invest in that do not fit the cash flow $500/mo in the philosophy, but I'd take over almost any area that's producing legit cash flow. It'll lose today, maybe in 2024. But I am willing to bet in the 3 year, probably 5 year and definitely 7 year + frame that these investments will rock any of those one's winning today.

Actually I really agree with this (the problem with CA law is very easy to overcome), there're just two dogma in BP that the cash-flow should be the main key but for appreciation-focus like us, we are not scared with the cash-flow. Even to the point I'm very comfortable locking the door for 5 years because I know in year 5 I would make such and such LOL.

The problem with BP answer is folks here answering multi-dimensional problem with single set of answer. For example, in Miami,FL you don't use cashflow projection but use appreciation forecasting. I know Miami,FL is actually more appreciatiable than many west coast cities.

It's just you need to place "the right way of thinking" in the right place and time, we have 4 set of problems:
1. appreciation focus, low interest rate
2. appreciation focus, high interest rate
3. cash-flow focus, low interest rate
4. cash-flow focus, high interest rate
So in 2018 we focus on #1 and #3, but in 2023 we are fousing on #2 and #4, it all required different way of thinking.
1 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
You're not considering the opportunity cost of your money. Having your money in a property that barely cash flows and barely appreciates is the last thing you should do.
2 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Eliott Elias:

You're not considering the opportunity cost of your money. Having your money in a property that barely cash flows and barely appreciates is the last thing you should do.

lol, buy leasehold condo property and rent it cheaply, it's guaranteed one would lose money every year.
0 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

I will make thing easy for you.
This is my actual real live assumption.

Prop Price=$560k , interest rate=3.3%, capital gain tax for invstment=33%, appreciation=5.75% , slightly positive cash flow (DSCR 1.05).
Result after 10 years:

Return after 10 years		total_net_PITI	net		Return Factor
capital gain if OO	$577,851	-$385,000	$192,000	(live for free)	1.6
capital gain if rental,positive CF	$381,000	$26,000	$407,000	(still the biggest buck)	3.391666667
caiptain gain if rental , negative CF	$381,000	-$24,000	$357,000	( not that bad really)	2.975

so rental property with highest appreciation and bit cash flow at the end of 10 year is still performed better, even negative CF is not that bad, the return from original investment after 10 years is still almost 3x. Even owner occupant after 10 years is actually living for free and make almost twice than the original investment.

This is why I recommend focus on appreciation. I do have sample of two cities, Indiana city with zero appreciation and meet 3x rules and/or Wisconsin property that has CF as well as appreciation.

0 Reply

Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
3y
@Carlos Lopes
to simplify
say you buy a turn key property for 200K
that will set you back 50K plus closing costs
you're saying no cash flow but mortgage paydown
but you have 55K stuck in it
0 Reply
Kyle Butler
Property Manager · Indianapolis · Member since 2022 · 21 posts · 8 votes
3y
Hi Carlos,
Have you considered converting your unit into a STR and MTR? This would help with your cash flow.

0 Reply
Mark Cruse
Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
3y
This just depends on you personally. You are asking a basic question; is it a good idea to take a slump deal or a better one. If you were going to acquire a Popeye's franchise would you take one that earns profit or the one where you are working for free ten years to start getting profit? You would be better off dumping 200k in a high yield fund or something that tracks the S & P. I'd like to know the world where it costs nothing to own. Maintenance, tenant turnover and repairs costs. Your vacancy rate over years can cost tens of thousands of dollars. Lets say you are waiting to get that cash flow flip in 5 years; a new roof, HVAC, routine upgrades and the other stuff I mentioned can leave you in the whole another 5 years once it collectively adds up. The only way I would ever consider anything like that it would have to be a perfect storm. Maybe a super hot unit on South Beach or something in DC i'm emphatically confident will turn substantial appreciation in the very near further. Other stuff would have to line up as well but I doubt it will ever be something I consider.
0 Reply
Callaway Pate
Real Estate Agent · Washington, D.C. · Member since 2022 · 37 posts · 15 votes
3y
Hey @Carlos Lopes, I see what you're saying. Buying a property and the rent makes the exact amount to pay the mortgage and other costs at first doesn't cost you anything. But you don't have any hedge against changing market conditions. What if in 5 years there is a downturn and rental rates decrease? You're losing money. This can also work in reverse but with other properties out there that can cashflow there's no reason to tie up money and effort in a property like the one you described. To continue growing it'd probably be best to move on from that sort of deal.
Best of luck!
1 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y
Quote from @Carlos Lopes:

you buy a property for fair value, and it just barely cash flows or you just break even.
Hypothetically,  let’s say you have a property that barely cash flows and isn’t appreciating much
I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home.

OK. The problem is you're combining a valid investing metric (loan pay down) with a bad investment (paying market value, limited appreciation prospects) and a cash-flow need (quitting the w-2).
First, we never pay retail. We are investors that solve seller problems and are compensated for that with equity capture.
2nd, we buy in areas we expect to appreciate or to cash-flow well.
The 'cash-flow' requirement can be missing when you're in the capital preservation phase, but you still need to buy below market value and reasonably expect good appreciation.
I have a few of these and am ok with it because of the large principal paydown every month (5×+ of $200/mo cf) and I'm not trying to quit my w2. Valid approach, different scenarios. Start with a good equity capture deal in a growing area.
2 Reply
Jay ThomasPro Member
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
3y
Loan paydown in real estate can be a tricky game. Although it may seem like an easy way to increase equity, it's important to remember that if you are drawing from your own pocket, you will not be gaining anything. Instead of using your own cash reserves to buy equity, it's better to allow the tenant's rent payments to do the job for you. This way, you'll have more money in the bank and won't be paying any interest on the loan itself since the tenant is responsible for keeping up with their payments. Put simply, don't use your own money when buying into real estate investments - let your tenants do most of the work for you! They’re already paying for a piece of your property anyway, so why not make sure it's going towards something beneficial? Loan paydown is only good when it comes from the tenant’s rent. Otherwise, you're just transferring your money from one place to another with no benefit in return. Bottom line - use tenant payments for loan paydown and keep more of your own cash in the bank!
[email protected]832-889-5607
1 Reply
Jay ThomasPro Member
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
3y
It's always a good idea to speak with a financial advisor or real estate professional to get a better understanding of your options
[email protected]832-889-5607
0 Reply
Dave Skow
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
3y
@Carlos Lopes- thanks - your points about accelarting the loan payoff are accurate ....the main downside to this is that whatever funds you are using towards the extra paydown - wont be able to work for you in some other way .... if the property is treading water with the min payment being made - let it ride and the loan will pay down on its own ....and then use your extra funds for other purposes
0 Reply

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