Cash Flow v/s equity

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

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.

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James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
3y
Quote from @Jordan Alexander:

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

Well, now we clearly know the focus of who he is looking to make $ off of, and it sure as heck isn't those with a clue.......

Unit is vacant.... "but the cash always flows"

Appliances went out.... "but the cash always flows"

Tenant's lost their jobs.... "but the cash always flows"

Roof worn out.... "but the cash always flows"

MFH in area started dropping rents..... "but the cash always flows"

Look I get it, that's a "cool" saying, it's jazzy, yeah, we can all get RICH, don't need no $, no credit, no anything just pay-up on a program and cha-ching it's "tendies" and "lambos"...... But this little thing called reality comes crashing in.

Cash-flow is the RESULT of things, NOT a thing in and of itself. Cash-flow is the #1 most volatile, CHANGING, and easiest to loose factor there is. FACT. Cash-flow is a statement of an exact moment in time, not permanence.
1 Reply
Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
3y
Quote from @Jay Hinrichs:

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

The way I see it, the big advantage of real estate is being able to use financing to purchase. A while ago you gave an example of a house you bought in CA for $185k and sold 36 years later for $3.5M. That comes out to 8.5% annual appreciation. However, if you purchased that property for $36k down the return would be 13.5% per year. Quite a bit better.
But take a lower appreciation market. Say someone purchased that $185k property with $36k down and over 20 years they paid off the loan and it only appreciated to a value of $370k. That's still a 12.4% annual return. Almost as good as in your CA example. This is why I see the real benefit is leverage.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
3y
Quote from @Raja Polineni:

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

I'm doing something similar. I'm buying land, building apartments, and refinancing to pull my cash back out. I make enough cash flow to be worthwhile, but my real objective is getting these paid off in 20 years. They will be something to pass on to my children.
1 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Marcus Auerbach:

Quote from @Jordan Alexander:

Quote from @Simon Ashbaugh:

Quote from @Jordan Alexander:

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.

Precisely. My method is very easy. TO generate wealth I'm waiting for appreciation from CA properties and Hawaii properties.
Those two appreciation states require mortgages.

Now it's the job of Cash flow properties in AL and Milwaukee, is to pay the mortgage for CA and HI.

I actually don't need the cash-flow, It's the lender that needs the cashflow LOL
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Eric James:

Quote from @Jay Hinrichs:

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

The way I see it, the big advantage of real estate is being able to use financing to purchase. A while ago you gave an example of a house you bought in CA for $185k and sold 36 years later for $3.5M. That comes out to 8.5% annual appreciation. However, if you purchased that property for $36k down the return would be 13.5% per year. Quite a bit better.
But take a lower appreciation market. Say someone purchased that $185k property with $36k down and over 20 years they paid off the loan and it only appreciated to a value of $370k. That's still a 12.4% annual return. Almost as good as in your CA example. This is why I see the real benefit is leverage.

that example was an owner occ not an investment property.. had it been an investment property the rents would have been in the millions on top of the equity. so if its a owner occ situation you also have the tax free 500k gain with the 36k down in both examples the 370k example your gain is only 195 ish. so thats 300k difference in the high apprecaiting market .. ( as long as you stay married that is)
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Jordan Alexander
Member since 2022 · 106 posts · 39 votes
3y
Quote from @James Hamling:

Quote from @Jordan Alexander:

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

Well, now we clearly know the focus of who he is looking to make $ off of, and it sure as heck isn't those with a clue.......

Unit is vacant.... "but the cash always flows"

Appliances went out.... "but the cash always flows"

Tenant's lost their jobs.... "but the cash always flows"

Roof worn out.... "but the cash always flows"

MFH in area started dropping rents..... "but the cash always flows"

Look I get it, that's a "cool" saying, it's jazzy, yeah, we can all get RICH, don't need no $, no credit, no anything just pay-up on a program and cha-ching it's "tendies" and "lambos"...... But this little thing called reality comes crashing in.

Cash-flow is the RESULT of things, NOT a thing in and of itself. Cash-flow is the #1 most volatile, CHANGING, and easiest to loose factor there is. FACT. Cash-flow is a statement of an exact moment in time, not permanence.

I appreciate the insight James. Although I'm not sure what you are trying to accomplish in this post besides being rude. I would imagine a broker who communicates to his clients this way does not get very much business...
Just so you know, Pace Morby does not have a program where he charges people to learn. A lot of his content he posts is accessible from YouTube, Instagram, and FaceBook, so I don't need to pay to hear him say comments like the one stated in the post. He also has appeared on the podcasts a couple of times and just wrote a book with BiggerPockets, so he must be doing something right!
Of course I think you should want to purchase real estate that will appreciate in value over time, but what is the #1 reason most people get into RE? It's cashflow! People are either trying to become financially free, build a good passive income nest egg, etc. Then as times goes on and you become a seasoned investor, I'm sure things like appreciation and the tax benefits tend to be more of a priority. Unless someone has a lot of money and they can weather the storm, I would hope you don't tell your clients to buy for negative cashflow. I would imagine they wouldn't be able to hold it for long...
Have a great day!
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Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
3y
It's very hard to make a million in cash flow alone!
Assume $200 net per door, with one unit that's 5,000 months or 416 years. With 10 doors still 41 years.
With 10 doors, you typically break a million in equity in 7 or 8 years.
1 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Jordan Alexander:

Quote from @James Hamling:

Have a great day!

Hi Jordan, this is midwest way-of-thinking.

I'm from an Asian-world-experience way of thinking and we get used to negative cap rate investment, and seeing the midwest (and even CA) I was like holy cow, buying a house and you can get cash-flow ? that's insane LOL...it's all possible because high cap rate (before) and the availability of 30YFRM product.

But in future we would see even thinner cap rate/cash flow as home price would not go down and wage is just keep increasing.
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Marcus Auerbach:

It's very hard to make a million in cash flow alone!
Assume $200 net per door, with one unit that's 5,000 months or 416 years. With 10 doors still 41 years.
With 10 doors, you typically break a million in equity in 7 or 8 years.

Simple recipe to make million
1. Buy ten 75%ARV a million house each
2. If one is having 3 mil buying power; buy 1 primary and 2 rental, 20%LTV position each with 800k-1 mil price. If inflation is 4% and appreciation rate is 5.5% , one would generate 1 mil. after 8 years of appreciation,etc.

Have been doing that since 1996 in many location. It's just that we need to buy at the right time, at the right location, and buy a good proper asset.
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Marcus Auerbach:

It's very hard to make a million in cash flow alone!
Assume $200 net per door, with one unit that's 5,000 months or 416 years. With 10 doors still 41 years.
With 10 doors, you typically break a million in equity in 7 or 8 years.

I think one of the main things a lot of these folks miss is they think 10k a month of cash flow is going to set them free.. when you age out have kids put them through collage etc etc 10k is just existence living. Now if your single no kids NO debt then you can get by on that.. So a lot of these people dreaming of 10k a month and how many units it takes to get there are living in very low costs areas or as I said have a single persons mind set. Dont get me wrong 10k a month is nice to have but you when you get older and have to pay your own health insurance and many other items its not living the high life thats for sure.
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Brock Mogensen
Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
3y
I generally prefer a longer AM schedule for the higher cashflow. Which would provide you more cashflow to theoretically reinvest into more properties. That being said, I think your strategy works. I would also suggest looking at the 2-4 unit space and not just solely focusing on condos.
2 Reply
Account Closed
Rental Property Investor · St. Louis, MO · Member since 2022 · 125 posts · 124 votes
3y
Quote from @Raja Polineni:

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.

Why not retire sooner than 10 years? Sounds like your goal is to retire once all the properties are paid off and you are receiving large cashflow from each. You can do that a lot cheaper with 30 year fixed mortgages. Your current cashflow will probably double, requiring less properties to reach your income goal, all while someone else is building the equity.

0 Reply
Raja Polineni
OP
Member since 2022 · 11 posts · 5 votes
3y
Quote from @Account Closed:

Quote from @Raja Polineni:

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.

Why not retire sooner than 10 years? Sounds like your goal is to retire once all the properties are paid off and you are receiving large cashflow from each. You can do that a lot cheaper with 30 year fixed mortgages. Your current cashflow will probably double, requiring less properties to reach your income goal, all while someone else is building the equity.

That is tempting...
0 Reply
Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
3y
Quote from @Jay Hinrichs:

Quote from @Marcus Auerbach:

It's very hard to make a million in cash flow alone!

Assume $200 net per door, with one unit that's 5,000 months or 416 years. With 10 doors still 41 years.

With 10 doors, you typically break a million in equity in 7 or 8 years.

I think one of the main things a lot of these folks miss is they think 10k a month of cash flow is going to set them free.. when you age out have kids put them through collage etc etc 10k is just existence living. Now if your single no kids NO debt then you can get by on that.. So a lot of these people dreaming of 10k a month and how many units it takes to get there are living in very low costs areas or as I said have a single persons mind set. Dont get me wrong 10k a month is nice to have but you when you get older and have to pay your own health insurance and many other items its not living the high life thats for sure.

There is that. But also a 10k cash flow comes with a portfolio of properties and the responsibility to keep them going. One unexpected sewer lateral can take out 2 months of income. Which is why most of us ae caught in this perpetual cycle to keep growing and building to protect what we already have.
I think the dream most young investors have is to enjoy the bliss of financial freedom without being burdened by the responsibilities of a W2. And that's an illusion. Your responsibilities just changed.
Same when you climb the corporate career: you think once you become an exec and "are on of them" life is great, until you get there and find out it's really tough. Elon Musk said it well: everyone thinks owning a business is fun (like being Tony Stark style) until you find out the you have to deal with the toughest issues nobody else in the company was able to figure out, now they are your problem robbing your sleep..
3 Reply
Sherief Elbassuoni
Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
3y
I will tweak the strategy to have more balance between equity and cash flow.
Relying on appreciation or equity build only is not a great strategy.
If you have vacancy for 1-2 months, or big capital expense, you will be negative cash flow for the entire year
0 Reply
Bruce Lynn
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
3y
I'm not sure where you are, but normally my suggestion is NOT to buy condos. There are just so many issues that can go wrong. HOA dues normally kill your returns is one.
Some people go into it with the idea that condos will be maintenance free or limited and I can't tell you how far that is to the truth and potentially even detrimental to your investment.
Look at all the issues with FL condos right now. Maintenance has been pushed so far down the road, buildings colapse and others have signinficant strutural issues that will be so expensive to fix, people probably can never exit them and will hate the rest of their life. Saw a place in Dallas recently that more or less has $250,000 condos, but there is outstanding $25,000 special assessment which the board says may or may not be the end of the issue. I've seen others with super old roofs. Almost every condo in Dallas that I see has deferred maintenance that will be expensive to fix. Then to top it off with a bunch of amateurs trying to solve the problem often does not set you up for success.
So many bad things can happen in condos that you just have no control over and can be detrimental to your investment.
You may live or have bought in a place that is different than this, but that is what I see way too often. I like the idea of condos in many ways, but I think it is better for owner occupants vs investors, so be careful out there. Even if you are buying super cheap condos.
Buy single family or duplexes as you get started, then at some point roll up to multifamily.
0 Reply
Raja Polineni
OP
Member since 2022 · 11 posts · 5 votes
3y
Quote from @Bruce Lynn:

I'm not sure where you are, but normally my suggestion is NOT to buy condos. There are just so many issues that can go wrong. HOA dues normally kill your returns is one.
Some people go into it with the idea that condos will be maintenance free or limited and I can't tell you how far that is to the truth and potentially even detrimental to your investment.
Look at all the issues with FL condos right now. Maintenance has been pushed so far down the road, buildings colapse and others have signinficant strutural issues that will be so expensive to fix, people probably can never exit them and will hate the rest of their life. Saw a place in Dallas recently that more or less has $250,000 condos, but there is outstanding $25,000 special assessment which the board says may or may not be the end of the issue. I've seen others with super old roofs. Almost every condo in Dallas that I see has deferred maintenance that will be expensive to fix. Then to top it off with a bunch of amateurs trying to solve the problem often does not set you up for success.
So many bad things can happen in condos that you just have no control over and can be detrimental to your investment.
You may live or have bought in a place that is different than this, but that is what I see way too often. I like the idea of condos in many ways, but I think it is better for owner occupants vs investors, so be careful out there. Even if you are buying super cheap condos.
Buy single family or duplexes as you get started, then at some point roll up to multifamily.
Hi Bruce,
I'm located in the northeast and I'm glad I asked this question and hear from people like you who walk the talk.
This year, I'm only looking at multifamily properties and I can see the benefits with it compared to condos. My thoughts during earlier stages of my investment strategy were just like you said. Condos are maintenance free. Since I purchased three condos last year, two of them have had HOA dues increased which put a dent on the cash flow.
Thank you for your advice and time my friend.
1 Reply
Bruce Lynn
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
3y
Quote from @Raja Polineni:

Quote from @Bruce Lynn:

I'm not sure where you are, but normally my suggestion is NOT to buy condos. There are just so many issues that can go wrong. HOA dues normally kill your returns is one.

Some people go into it with the idea that condos will be maintenance free or limited and I can't tell you how far that is to the truth and potentially even detrimental to your investment.

Look at all the issues with FL condos right now. Maintenance has been pushed so far down the road, buildings colapse and others have signinficant strutural issues that will be so expensive to fix, people probably can never exit them and will hate the rest of their life. Saw a place in Dallas recently that more or less has $250,000 condos, but there is outstanding $25,000 special assessment which the board says may or may not be the end of the issue. I've seen others with super old roofs. Almost every condo in Dallas that I see has deferred maintenance that will be expensive to fix. Then to top it off with a bunch of amateurs trying to solve the problem often does not set you up for success.

So many bad things can happen in condos that you just have no control over and can be detrimental to your investment.

You may live or have bought in a place that is different than this, but that is what I see way too often. I like the idea of condos in many ways, but I think it is better for owner occupants vs investors, so be careful out there. Even if you are buying super cheap condos.

Buy single family or duplexes as you get started, then at some point roll up to multifamily.

Hi Bruce,
I'm located in the northeast and I'm glad I asked this question and hear from people like you who walk the talk.
This year, I'm only looking at multifamily properties and I can see the benefits with it compared to condos. My thoughts during earlier stages of my investment strategy were just like you said. Condos are maintenance free. Since I purchased three condos last year, two of them have had HOA dues increased which put a dent on the cash flow.
Thank you for your advice and time my friend.
My first investment was a condo, so I've been there. There are some areas where either prices or just what is available are condos, so you don't always have a choice. I'm guessing NE is different than Texas where I live as far as what is available to purchase.
0 Reply
Raja Polineni
OP
Member since 2022 · 11 posts · 5 votes
3y
Quote from @Bruce Lynn:

Quote from @Raja Polineni:

Quote from @Bruce Lynn:

I'm not sure where you are, but normally my suggestion is NOT to buy condos. There are just so many issues that can go wrong. HOA dues normally kill your returns is one.

Some people go into it with the idea that condos will be maintenance free or limited and I can't tell you how far that is to the truth and potentially even detrimental to your investment.

Look at all the issues with FL condos right now. Maintenance has been pushed so far down the road, buildings colapse and others have signinficant strutural issues that will be so expensive to fix, people probably can never exit them and will hate the rest of their life. Saw a place in Dallas recently that more or less has $250,000 condos, but there is outstanding $25,000 special assessment which the board says may or may not be the end of the issue. I've seen others with super old roofs. Almost every condo in Dallas that I see has deferred maintenance that will be expensive to fix. Then to top it off with a bunch of amateurs trying to solve the problem often does not set you up for success.

So many bad things can happen in condos that you just have no control over and can be detrimental to your investment.

You may live or have bought in a place that is different than this, but that is what I see way too often. I like the idea of condos in many ways, but I think it is better for owner occupants vs investors, so be careful out there. Even if you are buying super cheap condos.

Buy single family or duplexes as you get started, then at some point roll up to multifamily.

Hi Bruce,
I'm located in the northeast and I'm glad I asked this question and hear from people like you who walk the talk.
This year, I'm only looking at multifamily properties and I can see the benefits with it compared to condos. My thoughts during earlier stages of my investment strategy were just like you said. Condos are maintenance free. Since I purchased three condos last year, two of them have had HOA dues increased which put a dent on the cash flow.
Thank you for your advice and time my friend.
My first investment was a condo, so I've been there. There are some areas where either prices or just what is available are condos, so you don't always have a choice. I'm guessing NE is different than Texas where I live as far as what is available to purchase.
Actually, Condos here are quite expensive compared to multifamily if you compare per unit and square footage depending on where you are.
Between HOA fees and high property taxes, condos seems less appealing for investment.
We do have good mix of single family, multifamily and condos available.
1 Reply
Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
3y
Great one @Bruce Lynn Keep up the great work.
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Shannel Tuitele
Investor · Salt Lake City · Member since 2022 · 15 posts · 7 votes
3y
Now that's a response! Thanks I'm going to develop a roadmap too :)

@Henry Clark
0 Reply
Adam BartomeoBusiness Member
Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
3y
I would advise avoiding condos and HOA's. Your $425/month can be erased with just one association raising fees, not to mention several raising fees. Also, appreciation is normally not as good with a condo vs SFH. Normal trends typically show that condos are the first to get hit with price depreciation and are the last to see price appreciation.
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