Cash Flow v/s equity

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Cash Flow v/s equity

Raja Polineni
Member since 2022 · 11 posts · 5 votes

Hello Everyone,

Thank you for your time!

My wife and I have decent jobs and are not in need of immediate cash flow from our rental properties. We formulated a strategy to start purchasing rental properties in 2022 with a goal of purchasing enough properties to retire in 10years.

With that strategy, we have purchased three condos in 2022. We have a goal to purchase three more in 2023. From the properties we purchased in 2022, we have a positive cash flow (NOI) of $425. I know it doesn't tick all the traditional calculations for rental properties but our strategy is to scale up our portfolio looking at the equity instead of huge cash flow. All the properties we are purchasing have 15yrs fixed rate loan terms.

My question: Is this a good strategy? I am looking to scale up as fast as we can within our means but not particularly looking for excessive cash flow.

Any thoughts from seasoned investors is much appreciated!

Regards

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Jordan Alexander
Member since 2022 · 106 posts · 39 votes
3y

Equity comes, equity goes, but the cash will always flow. - Pace Morby

Buy for cashflow! It will allow you to succeed in any market cycle.

7Reply
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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    You should buy with cash flow and equity. Equity does not mean anything if you are losing money every month holding your properties, and we enter a recessionary environment.

    4Reply
  • Raja Polineni
    OP
    Member since 2022 · 11 posts · 5 votes
    3y
    Quote from @Eliott Elias:

    You should buy with cash flow and equity. Equity does not mean anything if you are losing money every month holding your properties, and we enter a recessionary environment.

    Thank you for the information.  I agree with your assessment.  We are definitely achieving positive cash flow from the get go from all our investments. Probably around $100 to $150 from each door on average. Since we don't need immediate cash flow, we are ok with this minimal cash flow and focused more on scaling up the portfolio.
     
    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y
    Quote from @Raja Polineni:
    Quote from @Eliott Elias:

    You should buy with cash flow and equity. Equity does not mean anything if you are losing money every month holding your properties, and we enter a recessionary environment.

    Thank you for the information.  I agree with your assessment.  We are definitely achieving positive cash flow from the get go from all our investments. Probably around $100 to $150 from each door on average. Since we don't need immediate cash flow, we are ok with this minimal cash flow and focused more on scaling up the portfolio.
     
    That's not positive CF...that's negative CF waiting to happen.  What you're saying is you have $1200 - $1800/year per door PCF.  If you have just 1 month of vacancy, and/or just one capital expense (or even minor one) for any of these "doors", and they totaled more than $1200 - $1800 in costs, you now have negative CF for that entire YEAR.
    5Reply
  • Jordan Alexander
    Member since 2022 · 106 posts · 39 votes
    3y

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.

    7Reply
  • Raja Polineni
    OP
    Member since 2022 · 11 posts · 5 votes
    3y
    Quote from @Jordan Alexander:

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.

    Well said sir
    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    3y

    If the goal is to scale fast, that will happen more quickly with 30 year rather than 15 year mortgages.

    4Reply
  • Raja Polineni
    OP
    Member since 2022 · 11 posts · 5 votes
    3y
    Quote from @Mike Dymski:

    If the goal is to scale fast, that will happen more quickly with 30 year rather than 15 year mortgages.

    Mike, I'm beginning to understand that now. 30 yr mortgage also provides better cash flow although with 15yr mortgage I'm building equity faster. 
    1Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    3y

    You scale with 30 year loans, and really need to strategize here. Think about this.


    A) Would you rather buy 30 properties in Detroit?
    or
    B) Would you rather buy 12 properties in Dallas?

    12 properties, some would say, is scaling. So it does apply here. But you'll  really want to get off the "number" of properties and focus on the value you're getting from these properties, and the value you're associating with these properties. Most here would take 30 in Detroit with $200 cash flow, and reject 12 in Dallas with ATM or $200 negative CF. They're thinking about today and Day 1, Year 1. They're not thinking ahead. That's why they sit here leveraged to the gills with crap property after crap property.  Bad tenant after bad tenant and lots of maint to cover post tenancy. 

    Scale to get some good properties by exercising 30 year loans in good areas, keep healthy amount of cash to whether capex, long vacancies, job loss. Aim in a few years to sell 1-2 properties, pay off the rest, and get nothing but cash flow. 

    1Reply
  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    3y

    @Raja Polineni

    $150/ door cash flow is really not very good at all... and condos in general present way more challenges than single / multi-family homes. To begin with, they come with HOA / condo association fees. The HOA also will never be your friend as a landlord. Many have restrictions on rentals just to begin with, and condo association board members have little more to do than to run around and find all the things wrong your tenant is doing and let you know about it.

    To me it feels like you are pretty much just in your units for an appreciation play... which is fine... but while you wait for that to happen, you have to deal with the in-between... which are the repairs, the condo assessments for new pavement or roofs, or anything else they can dream up they want to replace... the pool, etc.  My friend had a condo and it was determined that the railings on the balconies needed to be replaced.  It was a $15,000 assessment per unit!  (good grief!... no thanks!). In Florida I have had my property insurance go up by as much as $2,000 in a single year (it's nuts here in that department)... but as a previous poster said, it only takes one issue and you are cash flow negative for at least a year.  Imagine if your AC goes out.  That's a $6,000 repair.  That's 40 months of cash flow gone in a day!  I also second the idea of doing 30 year mortgages... this would likely at least double your cash flow each month.  Remember, it is your tenant that is paying the interest on your loan each month... not you.  

    I wish you all the best... but I'm just not a fan of condos.  You have much more control over a personally owned single / multi family property. 

    All the best!

    Randy

    1Reply
  • Raja Polineni
    OP
    Member since 2022 · 11 posts · 5 votes
    3y
    Quote from @Randall Alan:

    @Raja Polineni

    $150/ door cash flow is really not very good at all... and condos in general present way more challenges than single / multi-family homes. To begin with, they come with HOA / condo association fees. The HOA also will never be your friend as a landlord. Many have restrictions on rentals just to begin with, and condo association board members have little more to do than to run around and find all the things wrong your tenant is doing and let you know about it.

    To me it feels like you are pretty much just in your units for an appreciation play... which is fine... but while you wait for that to happen, you have to deal with the in-between... which are the repairs, the condo assessments for new pavement or roofs, or anything else they can dream up they want to replace... the pool, etc.  My friend had a condo and it was determined that the railings on the balconies needed to be replaced.  It was a $15,000 assessment per unit!  (good grief!... no thanks!). In Florida I have had my property insurance go up by as much as $2,000 in a single year (it's nuts here in that department)... but as a previous poster said, it only takes one issue and you are cash flow negative for at least a year.  Imagine if your AC goes out.  That's a $6,000 repair.  That's 40 months of cash flow gone in a day!  I also second the idea of doing 30 year mortgages... this would likely at least double your cash flow each month.  Remember, it is your tenant that is paying the interest on your loan each month... not you.  

    I wish you all the best... but I'm just not a fan of condos.  You have much more control over a personally owned single / multi family property. 

    All the best!

    Randy

    Randy,

    Thank you for your input. I'm done with condos. This year I'm looking at duplex or a triplex.
    As you rightly pointed out,  I have no control over HOA fees increases and special assessments. 
    Thank you for your guidance on 30yr mortgages.  I was in the mindset of paying off the properties faster and not focusing on cashflow. I can definitely see the need for 30yr mortgage to scale up.

    Thanks for your input friend.  
    0Reply
  • Raja Polineni
    OP
    Member since 2022 · 11 posts · 5 votes
    3y
    Quote from @V.G Jason:

    You scale with 30 year loans, and really need to strategize here. Think about this.


    A) Would you rather buy 30 properties in Detroit?
    or
    B) Would you rather buy 12 properties in Dallas?

    12 properties, some would say, is scaling. So it does apply here. But you'll  really want to get off the "number" of properties and focus on the value you're getting from these properties, and the value you're associating with these properties. Most here would take 30 in Detroit with $200 cash flow, and reject 12 in Dallas with ATM or $200 negative CF. They're thinking about today and Day 1, Year 1. They're not thinking ahead. That's why they sit here leveraged to the gills with crap property after crap property.  Bad tenant after bad tenant and lots of maint to cover post tenancy. 

    Scale to get some good properties by exercising 30 year loans in good areas, keep healthy amount of cash to whether capex, long vacancies, job loss. Aim in a few years to sell 1-2 properties, pay off the rest, and get nothing but cash flow. 


     Jason, 

    thank you my friend for sharing your thoughts and knowledge.  I can see the benefits of 30yr mortgage. 

    "Aim in a few years to sell 1-2 properties, pay off the rest, and get nothing but cash flow" thank you for pointing out this strategy 

    thanks again 

    0Reply
  • Simon Ashbaugh
    Realtor · Columbus Ohio, Cleveland Ohio · Member since 2022 · 849 posts · 830 votes
    3y
    Quote from @Jordan Alexander:

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.


     Pace is a G

    2Reply
  • Jordan Alexander
    Member since 2022 · 106 posts · 39 votes
    3y
    Quote from @Simon Ashbaugh:
    Quote from @Jordan Alexander:

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.


     Pace is a G


    Pace is such an awesome guy! I'm currently listening to the rookie podcast he was on a couple of days ago, and this guy is just a wealth of knowledge!

    1Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    3y
    Quote from @Jordan Alexander:
    Quote from @Simon Ashbaugh:
    Quote from @Jordan Alexander:

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.


     Pace is a G


    Pace is such an awesome guy! I'm currently listening to the rookie podcast he was on a couple of days ago, and this guy is just a wealth of knowledge!


    Nice catch phrase, but an oversimplification at best, if not flat out wrong. Cash flow is never guaranteed: all you have to do is pick the wrong tenant. Or deal with some repairs. 

    In fact in low end properties with very little appreciation capex often exceeds cash flow over time, let that sink in for a moment. A well knows out-of-state-investor trap in Milwaukee.

    I agree with the notion that investing for appreciation tends to be speculation. But you need appreciation to make money long term and pay for a full rehab every 30 or so years. Prices are also what we call downward sticky, especially in the residential space. Owners will just not sell, if they can't get the price they want and wait a year. And in the end inflations sees to it, that values go up every year as the dollar keeps loosing value.

    Last thought: it's very difficult to generate wealth on cash flow. Wealth always comes from equity. So I think you need both and I suggest you find a good balance between cash flow and equity.

    5Reply
  • Raja Polineni
    OP
    Member since 2022 · 11 posts · 5 votes
    3y
    Quote from @Marcus Auerbach:
    Quote from @Jordan Alexander:
    Quote from @Simon Ashbaugh:
    Quote from @Jordan Alexander:

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.


     Pace is a G


    Pace is such an awesome guy! I'm currently listening to the rookie podcast he was on a couple of days ago, and this guy is just a wealth of knowledge!


    Nice catch phrase, but an oversimplification at best, if not flat out wrong. Cash flow is never guaranteed: all you have to do is pick the wrong tenant. Or deal with some repairs. 

    In fact in low end properties with very little appreciation capex often exceeds cash flow over time, let that sink in for a moment. A well knows out-of-state-investor trap in Milwaukee.

    I agree with the notion that investing for appreciation tends to be speculation. But you need appreciation to make money long term and pay for a full rehab every 30 or so years. Prices are also what we call downward sticky, especially in the residential space. Owners will just not sell, if they can't get the price they want and wait a year. And in the end inflations sees to it, that values go up every year as the dollar keeps loosing value.

    Last thought: it's very difficult to generate wealth on cash flow. Wealth always comes from equity. So I think you need both and I suggest you find a good balance between cash flow and equity.

    Thank you for your knowledge.  I have been investing with this exact mindset.  Buying properties in better neighborhoods for long-term equity and I'm ok with minimal cash flow at this point of my life.  I'm in it for the long game. Your insightful advice makes me confident in my investment journey. 

    0Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    Recommend you stop investing for 6 months.

    A. Work on learning.   
    B.  If your objective is to retire on your rentals in 10 years for both of you?  Sit down and do the numbers.  Say your take home for both of you is $80,000.  Divide by 10 months.  10 to cover vacancies, capex, conversion/prep.  Say $8,000 per month.  

    If you retire on Cashflow.  $8,000/$200= 40 doors. But you have to cover income taxes and health insurance paid by your company.  $8,000/.25=. Day $10,000 per month.  Add another $2,000 for insurance.  Then $12,000.  

    $12,000/$200= 60 doors.  

    Let’s say 60 doors at $100,000 per door = $6,000,000 assets.  You need to figure out how to do that. 

    Property management and maintenance.  Unless you plan to do this.  You need to add more doors to cover that.  So instead of 60 you need ?????

    If you take an appreciation approach.  You need to plan to either sale properties and make profits after tax and commissions. Or take loans out and not repay.  

    Let’s use 5% cash equivalents return.   After tax.  Annually.  To get your $80,000 after taxes at 5% after taxes you will need an asset base of $1,600,000.  That means you need to sale and make that profit plus commission and income taxes to get to $1,600,000.

    My point is stop investing. Develop a road map. Decide on an REI asset type to get you there. Go learn. Start building a team around that REI asset approach.

    Otherwise your going to spend years and effort going down the wrong road.        
     
    Start small and Make Your Big Mistakes Early.

    Congratulations.  You have started the journey.  Most people never will.

    1Reply
  • Raja Polineni
    OP
    Member since 2022 · 11 posts · 5 votes
    3y
    Quote from @Henry Clark:

    Recommend you stop investing for 6 months.

    A. Work on learning.   
    B.  If your objective is to retire on your rentals in 10 years for both of you?  Sit down and do the numbers.  Say your take home for both of you is $80,000.  Divide by 10 months.  10 to cover vacancies, capex, conversion/prep.  Say $8,000 per month.  

    If you retire on Cashflow.  $8,000/$200= 40 doors. But you have to cover income taxes and health insurance paid by your company.  $8,000/.25=. Day $10,000 per month.  Add another $2,000 for insurance.  Then $12,000.  

    $12,000/$200= 60 doors.  

    Let’s say 60 doors at $100,000 per door = $6,000,000 assets.  You need to figure out how to do that. 

    Property management and maintenance.  Unless you plan to do this.  You need to add more doors to cover that.  So instead of 60 you need ?????

    If you take an appreciation approach.  You need to plan to either sale properties and make profits after tax and commissions. Or take loans out and not repay.  

    Let’s use 5% cash equivalents return.   After tax.  Annually.  To get your $80,000 after taxes at 5% after taxes you will need an asset base of $1,600,000.  That means you need to sale and make that profit plus commission and income taxes to get to $1,600,000.

    My point is stop investing. Develop a road map. Decide on an REI asset type to get you there. Go learn. Start building a team around that REI asset approach.

    Otherwise your going to spend years and effort going down the wrong road.        
     
    Start small and Make Your Big Mistakes Early.

    Congratulations.  You have started the journey.  Most people never will.

    Mr.Clark- thank you.  I will take your advice and develop a road map. You are correct. Without a set goal or a road map, I wouldn't know what we are trying to achieve here.
    1Reply
  • Jay ThomasPro Member
    Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
    3y

    I would say that your strategy of purchasing rental properties to build equity over time rather than focusing on immediate cash flow can be a viable approach for achieving long-term financial goals. It's important to understand that different investors have different goals and priorities when it comes to real estate investing, and there's no one-size-fits-all strategy.

    However, it's important to note that while equity growth can be a key driver of long-term wealth creation, it's not the only factor to consider. You should also consider the potential for future rental income, property appreciation, and the overall financial performance of your portfolio.

    Additionally, it's important to ensure that you are purchasing properties that are likely to appreciate in value over time and that you have a plan in place for managing and maintaining these properties. It's also important to consider the potential risks and challenges of real estate investing, such as vacancies, unexpected repairs, and changes in the local housing market.

    [email protected]832-889-5607
    1Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    3y

    Something to think about... You can be negative Cashflow and still have a positive P&L depending on the amount of principle you paid down. 

    0Reply
  • John Mathew
    Real Estate Agent · Member since 2019 · 143 posts · 74 votes
    3y

    Congratulations on your decision to start building a rental property portfolio as a long-term investment strategy. Purchasing properties with a goal of accumulating equity over time is a good way to create wealth, especially if you are not in need of immediate cash flow.

    Your strategy of purchasing three properties per year with fixed-rate loans is a good start. By focusing on building equity, you are setting yourself up for a more significant payoff in the long term. However, it's important to remember that it's essential to maintain your properties and ensure that they are producing consistent positive cash flow to keep your investments sustainable.

    When scaling up your portfolio, it's important to keep your financial means in mind. It's essential to have a solid financial plan and understand your risk tolerance when making real estate investments. This includes having a solid understanding of the real estate market and taking calculated risks.

    In terms of advice, I would recommend continuing to monitor the cash flow and ROI of your current properties, ensuring that they are producing consistent returns. It's important to have a solid financial plan in place and a clear understanding of your long-term goals. Also, consider working with a professional real estate advisor who can provide guidance and insight on your investment strategy.

    Overall, your strategy of building a rental property portfolio with a focus on equity is a sound one. With careful planning and management, you can build a portfolio that will generate significant returns over time. Best of luck to you and your wife on your real estate investment journey!

    1Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    3y

    @Raja Polineni people are being laid off left and right and with layoffs come vacancies and your ability to subsidize your properties if you are one of the layoffs. You can always rebuild after losing everything but it is stressful to say the least.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @Marcus Auerbach:
    Quote from @Jordan Alexander:
    Quote from @Simon Ashbaugh:
    Quote from @Jordan Alexander:

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.


     Pace is a G


    Pace is such an awesome guy! I'm currently listening to the rookie podcast he was on a couple of days ago, and this guy is just a wealth of knowledge!


    Nice catch phrase, but an oversimplification at best, if not flat out wrong. Cash flow is never guaranteed: all you have to do is pick the wrong tenant. Or deal with some repairs. 

    In fact in low end properties with very little appreciation capex often exceeds cash flow over time, let that sink in for a moment. A well knows out-of-state-investor trap in Milwaukee.

    I agree with the notion that investing for appreciation tends to be speculation. But you need appreciation to make money long term and pay for a full rehab every 30 or so years. Prices are also what we call downward sticky, especially in the residential space. Owners will just not sell, if they can't get the price they want and wait a year. And in the end inflations sees to it, that values go up every year as the dollar keeps loosing value.

    Last thought: it's very difficult to generate wealth on cash flow. Wealth always comes from equity. So I think you need both and I suggest you find a good balance between cash flow and equity.


    agreed without appreciation there are far better things to invest in than rental houses. Risk is just too great if they are not going to go up in value.. over the years the obsolescence will kill you
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    1Reply
  • Andrew Ricker
    Real Estate Agent · Tampa, FL · Member since 2022 · 12 posts · 6 votes
    3y
    Quote from @Jordan Alexander:

    Equity comes, equity goes, but the cash will always flow. - Pace Morby

    Buy for cashflow! It will allow you to succeed in any market cycle.


     This isn't a foolproof plan. Cash flowing markets are usually the most volatile and suceptable to quick depreciation, which lowers market rents and can eat up or crush your cash flow. I'd focus on steady Markets in cities with GROWTH and bet on the long term appreciation. Cash flow is great and if you are confident in the Markets steady or rapid growth factors, you're safe. Condo's are in trouble in my market so I'd suggest staying away from them if you're in FL. 

    1Reply
  • DJ Rivera
    Rental Property Investor · Nationwide · Member since 2023 · 23 posts · 2 votes
    3y
    Quote from @Raja Polineni:
    Quote from @Mike Dymski:

    If the goal is to scale fast, that will happen more quickly with 30 year rather than 15 year mortgages.

    Mike, I'm beginning to understand that now. 30 yr mortgage also provides better cash flow although with 15yr mortgage I'm building equity faster. 

     you can get a 30 year mortgage and pay it down in 15 years, but you are not forced to if something happens that you weren't expecting.

    0Reply
  • DJ Rivera
    Rental Property Investor · Nationwide · Member since 2023 · 23 posts · 2 votes
    3y

    I'd recommend staying away from condos depending on their HOA fees, but most condos have a higher HOA fee that just seems to go up every year, especially in nicer areas. I get your idea of appreciation, and in the long run buying nicer properties in nicer areas will lead to higher property values in the long run, but if you don't plan on selling the properties or stripping the equity from the properties and just care about living off the rents for retirement, the appreciated value won't be much benefit to you, you want a place that also will provide high rents. And if you turn around and sell, you'll have a huge tax bill. I'd suggest you find something moving forward with low taxes, low to no HOA, and a decent cash flow with a 30 year mortgage in a decent price point.

    1Reply
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