Cash flow is NOT king!

Helena, MT · Member since 2015 · 12 posts · 11 votes

What happens when you have about 1.1m in equity in a property and only a cash flow of 1,700/mo. What's the right answer?

1 Reply

Arn CenedellaPro Member

OP

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Account Closed:

What happens when you have about 1.1m in equity in a property and only a cash flow of 1,700/mo. What's the right answer?

That’s a good question.
Your cash on cash return is only about 2%.

The right answer of course is “depends”.

What kind of property is it? SFR, small multi, large multi?

You have a lot of “idle” equity that could be put to better use.

If you like the property and believe in its future potential, then I would consider a potential refinance to pull cash out so you can buy another investment. Based on the numbers you could pull out maybe $150,000 to $200,000 and still have a positive cash flow. Of course a lot of this depends on what your current loan rate is. If it is 3% it would be hard to refinance at 6%.

Depending on your goals, it might make sense to access this equity and do a 1031 exchange into a larger more leveraged property that should produce more cash flow for you.

Without knowing the specifics - ie your basis in the property etc etc, hard to provide specific advice.

But refi and buy with cash obtained in refi or 1031 into bigger property are probably two good places to start.

Happy to chat further.

Thank you,
Arn

[email protected]650-575-6114

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Arn CenedellaPro Member

OP

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Joe Villeneuve:

Quote from @Arn Cenedella:

Quote from @Joe Villeneuve:

The problem with you conclusion is you are assuming the person buying CF properties is buying properties that won't appreciate. One without the other is a fools game. You have to have both, or don't buy.

Yes of course you want both - cash flow and appreciation.

Then the question is: How does each investor weigh cash flow against appreciation?

in my 45 years of investing experience, I have noticed that more dramatic growth areas those that offer higher probabilities of significant appreciation comes at a cost in terms of reduced cash flow. Conversely I have found that areas that offer more predictable stable cash flow generally offer low appreciation.

Most knowledgeable investors understand investing in Boise or Austin or Phoenix or Nashville or Charlotte may provide less cash flow than investing in more stable markets like Tulsa or Indianapolis or Kansas City for example.

So for me I will choose investments that offer lower cash flow in exchange for higher rates of appreciation.

So I choose appreciation over cash flow but I still get both.

Other investors can choose how they want to invest. Hope there is no problem with that. 😀

All that means is the areas you've investigated, don't work for both. What about the areas you haven't investigated?

True I’ve invested all over the country and typically have gone for strong growth markets - Austin TX and the Carolinas where I now live. I invested in the SF Bay Area starting in 1980 and did very well and trust me the SF Bay Area isn’t a cash flow market. Anyone on this thread would have loved to invest in the SF Bay Area in the 1980s and 1990s. When you get 15% to 20% a year appreciation or more and with the use of leverage which creates 50% to 100% annual returns on equity, 8% annual cash flow is pennys on the dollar - loose change. So yes my investing experience is based on where I’ve lived and where I’ve invested.

All this being said, real estate is local and the key for any investor is to know their market and then determine which strategies work best. Buying in the SF Bay Area and in Austin TX was not about cash flow. It was about equity growth. I’m happy with the choices I made and have continued to make.

[email protected]650-575-6114

2 Reply

Christopher Mooney

Member since 2019 · 47 posts · 47 votes

3y

Quote from @Shiloh Lundahl:

Better than a cash flow model, and better than an appreciation model, the trade up model is hands-down, the better model. The trade up model is basically buying properties under market value that have a value add component. Then after you have adeed the value, keeping the asset for 3 to 7 years in order to get tax benefits and experience appreciation, depreciation, and debt pay down. Then using the 1031 exchange to take all of the gain from the asset and rolling it into another property and then doing the cash out refinance, which then allows you to take out a chunk of cash without incurring a taxable event. And if you really want to accelerate the process, use the lease option strategy rather than just the regular rental strategy. This is how I went from 330k to 5 million in 6 years.

Is holding 3-7 years the sweet spot for tax benefits?

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Arn CenedellaPro Member

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Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Account Closed:

Quote from @Arn Cenedella:

“Cash flow is king” is a mantra to many.

It’s repeated over and over in forums and conferences.

I am not a “cash flow is king” investor

Pending one’s stage in life and career, I submit growing equity and increasing net worth should be the goal of most investors in their 30s and 40s and perhaps even in their 50s - as they enter and are in their prime income years. Presumably someone who has cash to buy investment real estate has a W2 income sufficient to cover their total monthly cost of living - their “job” pays for their lifestyle. So they don’t need cash flow to live off of. From folks in that position, I submit it’s better to invest for capital growth. Properties should pay for themselves with some cash flow left over to cover unexpected expenses. But the focus in my should opinion should be on long term capital growth.

Question: Who will be able to generate more cash flow when they want and need it?

Investor A with $1M of investible assets

Or

Investor B with $3M if investible assets

The answer is obvious, it’s investor B.

I see countless investors talking about buying a cash flow property.

I see countless brokers and owners trying to sell property by indicating “it’s a cash flow property”.

If I may offer my perspective on:

Does the property cash flow?

It’s an incomplete question with no answer.
I believe an additional layer of detail and sophistication is required.

I submit:

Every property will cash flow if you buy with all cash. Right?

So the better question the more informative question is:

What size cash down payment do I need to make so that the property cash flows?

Does an investor need to put 20% down or 30% or 50% down to cash flow?

That’s the better question.

Any question or statement about cash flow only has meaning when connected to the amount of cash required to buy it.

And yes in todays market with todays debt costs, I suspect most SFRs will require 30% to 40% down to cash flow. In my opinion you won’t find cash flow with 20% down unless the property and location are horrible. Even MF assets require 30% to 35% down to provide some cash flow.

The “popular” opinion isn’t always the best opinion.

One should tailor their investment approach to their assets - education income capital knowledge experience etc etc - and their goals.

I’d submit investing for capital growth is by far the better option for many.

Aim to hit line drive base hits not grand slams.

You would think this would be taught in school but it is not. I taught my boys about money and they are working very hard to accomplish their short and long term goals. My oldest works two jobs and invested in the ESPP at his job. He invested every penny allowed into the program and invested the rest in $SPY while living off his second income and driving a used Honda Civic. It has been 5 years and he just crossed $550,000 in cash (that is he continually reinvest in $SPY (plus the dividends). He will be a millionaire by 25 and never went to college. He plans to go to college once he hits the $1M and will drop one job while earning his degree in what ever he has decided to do for his career at that point. More than likely he will be an Architect. I am very proud that he listened to me about money and did the work early on. My younger son is well on his way as well to his first $100k at just 16! He runs an online store. Solid boys for sure. Building up capital is the key.

When me and the wife hit $10M a few years back we celebrated by purchasing a 2 year old Honda Passport with 25,000 miles. That is us splurging. We still rent as we have to be flexible to move where real estate is most lucrative, at least in the areas I am an expert in. I can do it all day, I have never lost money on a trade or real estate. I did break even a few times though. I have a system that is really good and only requires one person to operate. My plan is to create this system into program in the next 5 years to help others learn how to take cheap land and turn it into 300% profits in less than 12 months. The entry is affordable by almost anyone but it is not for everyone. Neither of my boys are interested in real estate investing and both have found other ways to build wealth. Real Estate is one way but you need to love doing it.

When we hit $20M (Estimated May 2025) we will slow down and buy a middle class home. I plan to splurge on a used Ferrari 458 and she plans to get a baby grand piano, those are things we have always wanted that are kind of dumb but whatever. After that we will travel and continue to refine my real estate system to perfection! In retirement I want to help others build wealth. I love how money works and I love helping others. If I can help anyone on here please feel free to message me.

Great example. Congrats!

You bring up a great point:

The key the first step is to live frugally- live below your means - and then the income you don’t spend can be invested. If one spends every dollar they make on lifestyle there is no cash left over to invest.

So the key is live off 80% or 90% of your income And invest the rest. And truth be told living below one’s means to generate investible cash is way more important that what you ultimately invest in. It’s the NOT spending that money and instead investing it that wins the day.

Great approach.

PS My car is a 2013 Acura with 120,000 miles on it. It runs great and I plan to have it another 10 years. I could buy a new car every two years if I wanted but that would be dumb. Rather keep my cash invested in RE.

[email protected]650-575-6114

2 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

3y

I use IRR, where every cash inflow and outflow matter (down payments, monthly rent, monthly expenses, mortgage payments, refinances, sales, etc...all the various "cash flows" matter).

2 Reply

Arn CenedellaPro Member

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Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @John Kunick:

@Arn Cenedella, while the title of this thread is provocative, I honestly think it's misleading. Perhaps Cash Flow is King IF the goal of the investor is to build cash flow to replace W2 for whatever reason. In my case, Cash Flow was my #1 objective as I wanted to build up enough cash flow so I would have the choice to leave (or not) my W2 corporate gig.. Fortunately, after several years of buying cash flowing properties, I did get to point I could make that choice. I still kept working for a couple more years, but ultimately did retire and now spend my time managing my various real estate holdings.

I've had the honor of mentoring several others, several that I've met on BP, as they were getting started in their REI journey. I always tell them the #1 thing they need to define is "what are your goals".. Depending on your goals, your strategy will be different. To your point, those in their earlier years may decide capital appreciation is king. But, it all depends.

very true each investor is unique.

cash flow v appreciation is a BOTH AND not an EITHER OR question.

if I may ask a question, how much equity do you have in the properties that produce the cash flow that replaced your W2 income?

[email protected]650-575-6114

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Arn CenedellaPro Member

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Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Nicholas L.:

@Arn Cenedella

good post and good discussion to have. David Greene has been pivoting to this message over the last few months, a little bit late in my opinion.

and it's going to be tougher or impossible for new investors that need cash flow to invest for capital growth.

Thank you.
My main point was to bring up the equity growth side of the equation when so much of the conversation is simply about cash flow. The focus on cash flow can lead to some missed opportunities.

Agreed on diversification. I’ve been in RE 45 years. I’d say 60% of my net worth is in RE 40% in stocks and mutual funds. I agree there is a place for lots of different investments.

PS I’m not doing crypto because I don’t understand it. I’ll stick with what I know. 😀

[email protected]650-575-6114

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Arn CenedellaPro Member

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Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Sam Yin:

@Arn Cenedella

I'm going to have to disagree with your math a bit. Based on you assessment, you are assuming no movement/exchanges in the initial capital used. Whereas in reality, the strategy should be to continue to work thay capital to get to your FI number.

In your example, it would seem impossible to generate 120K of income without $1M+ in capital.

If you take a step back and consider all the facets of REI, and employ sweat equity, value add, 1031x, I will argue that you can easily cashflow $120K with a lot less money, AND leave a large portfolio for generational wealth in short order.

I have done this recently, with a start up capital of about $130k, initially spread between 3 SFRs. Using what I described above, it has grown close to 100 rental units, well beyond 120K of cash flow, over $10M in assets, and still growing. Children college is set, if they want to go, but I hope they do mot waste their time with the college scam. As the portfolio grows, I grow the reserves to at least 5% to 10% of the valuation... but I get caught up and reinvest when opportunities pop up and start the cycle over.

This is a great thread with good education. Like many on here, I am still new at this and learning all the time. But I wanted to present a different perspective so that cash flow is in the forefront. Remember, cash flow keeps you in business, not equity. If you have 10M in equity across a large portfolio, but the cash flow is minimal or none, a small emergency can wipe out your business. The unforeseen environmental costs can snowball and wipe out your assets.

If the model is to invest long term with partnerships or syndication or REITs, then that's a different story.

In the end, it does really depend on the goal of the individual.

In a way, we agree.
Your $10M in assets assuming 60% leverage is $4M.
One could say the $4M in equity is creating the cash flow.

As you noted, you started with little capital and thru investing multiplied that capital.

So you stated with $130,000 in capital and grew it to $4M let’s say.

That capital growth was actually the key to FI. If you only owned $2M assets I don’t think they would produce the income you now enjoy from $10M in assets.

My post was focus on capital growth and the cash flow will come. I believe that’s exactly what you have accomplished. Congrats!

Just another way to look at it.

[email protected]650-575-6114

1 Reply

Arn CenedellaPro Member

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Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Alecia Loveless:

@Arn Cenedella I buy for both CF and appreciation. My market provides both. Even before the pandemic there has been a steady appreciation of 7-10% per year here and while it was much higher during the pandemic it still remains strong.

Unfortunately there’s been lots of greedy sellers just throwing up astronomically high prices for rental properties that just don’t work for true investors. All of a sudden many out of the area people have come into our market as cash buyers thinking that these prices are 1/3 or less of their big city prices and have been buying these expensive properties anyway.

You can still find good deals, it’s just been harder as it has been everywhere. But there’s still good deals with both CF and appreciation. I’ve landed two inside of four months.

Yea of course it’s both. I didn’t say ignore cash flow. I just said got me cash flow isn’t the be all end all.

And when you come to think about it value and cash flow are connected.

Cash flow comes from rents - when home prices go up in an area - rents surely will too. If an area where the cost of housing is increasing - whether to Buy or to Rent - one increases cash flow and increases value.

When one buys a property with fixed rate debt in a good market, one can count on increasing cash flow over time and also increasing values. The two go hand in hand. They are not independent.

I’ve bought plenty of properties where cash flow was minimal year one or two but now in year five or 10 the cash flow is strong.

[email protected]650-575-6114

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

3y

Quote from @Arn Cenedella:

Quote from @Joe Villeneuve:

Quote from @Arn Cenedella:

Quote from @Joe Villeneuve:

The problem with you conclusion is you are assuming the person buying CF properties is buying properties that won't appreciate. One without the other is a fools game. You have to have both, or don't buy.

Yes of course you want both - cash flow and appreciation.

Then the question is: How does each investor weigh cash flow against appreciation?

in my 45 years of investing experience, I have noticed that more dramatic growth areas those that offer higher probabilities of significant appreciation comes at a cost in terms of reduced cash flow. Conversely I have found that areas that offer more predictable stable cash flow generally offer low appreciation.

Most knowledgeable investors understand investing in Boise or Austin or Phoenix or Nashville or Charlotte may provide less cash flow than investing in more stable markets like Tulsa or Indianapolis or Kansas City for example.

So for me I will choose investments that offer lower cash flow in exchange for higher rates of appreciation.

So I choose appreciation over cash flow but I still get both.

Other investors can choose how they want to invest. Hope there is no problem with that. 😀

All that means is the areas you've investigated, don't work for both. What about the areas you haven't investigated?

True I’ve invested all over the country and typically have gone for strong growth markets - Austin TX and the Carolinas where I now live. I invested in the SF Bay Area starting in 1980 and did very well and trust me the SF Bay Area isn’t a cash flow market. Anyone on this thread would have loved to invest in the SF Bay Area in the 1980s and 1990s. When you get 15% to 20% a year appreciation or more and with the use of leverage which creates 50% to 100% annual returns on equity, 8% annual cash flow is pennys on the dollar - loose change. So yes my investing experience is based on where I’ve lived and where I’ve invested.

All this being said, real estate is local and the key for any investor is to know their market and then determine which strategies work best. Buying in the SF Bay Area and in Austin TX was not about cash flow. It was about equity growth. I’m happy with the choices I made and have continued to make.

this is an important distinction.. I too started in the SF Bay Area.. bought my first home in Milpitas ( new shappel construction for 80k in 79. And have rode the West coast appreciation
game ever since. Sold that home bought in Palo Alto for 180k in 84 then went to Napa valley and then finally Portland metro so just on personal resi's and being able to do the 2 and 5 we have amassed some pretty nice gains. One simply could not do that in the quote un quote cash flow no appreciation markets. Many of the cash flow markets values peaked and went down in the same time frame and the ONLY reason to buy was for cash flow and there by pigeon holing the values at what a local would pay for a given cash flow..

Then about 2000 the West coast buyers were getting priced out and went in search of cheaper investment properties same with upper east coast buyers. and now you have all these investors investing all over the county.. You know the Pearl Live were you want but invest where it makes sense. So to me and we see this with this thread it really depends on what part of the country you live and invest no right or wrong just the cards your dealt..

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4 Reply

Scott JohnsonBusiness Member

Specialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes

3y

Quote from @Arn Cenedella:

“Cash flow is king” is a mantra to many.

It’s repeated over and over in forums and conferences.

I am not a “cash flow is king” investor

Pending one’s stage in life and career, I submit growing equity and increasing net worth should be the goal of most investors in their 30s and 40s and perhaps even in their 50s - as they enter and are in their prime income years. Presumably someone who has cash to buy investment real estate has a W2 income sufficient to cover their total monthly cost of living - their “job” pays for their lifestyle. So they don’t need cash flow to live off of. From folks in that position, I submit it’s better to invest for capital growth. Properties should pay for themselves with some cash flow left over to cover unexpected expenses. But the focus in my should opinion should be on long term capital growth.

Question: Who will be able to generate more cash flow when they want and need it?

Investor A with $1M of investible assets

Or

Investor B with $3M if investible assets

The answer is obvious, it’s investor B.

I see countless investors talking about buying a cash flow property.

I see countless brokers and owners trying to sell property by indicating “it’s a cash flow property”.

If I may offer my perspective on:

Does the property cash flow?

It’s an incomplete question with no answer.
I believe an additional layer of detail and sophistication is required.

I submit:

Every property will cash flow if you buy with all cash. Right?

So the better question the more informative question is:

What size cash down payment do I need to make so that the property cash flows?

Does an investor need to put 20% down or 30% or 50% down to cash flow?

That’s the better question.

Any question or statement about cash flow only has meaning when connected to the amount of cash required to buy it.

And yes in todays market with todays debt costs, I suspect most SFRs will require 30% to 40% down to cash flow. In my opinion you won’t find cash flow with 20% down unless the property and location are horrible. Even MF assets require 30% to 35% down to provide some cash flow.

The “popular” opinion isn’t always the best opinion.

One should tailor their investment approach to their assets - education income capital knowledge experience etc etc - and their goals.

I’d submit investing for capital growth is by far the better option for many.

Aim to hit line drive base hits not grand slams.

Boom! Nailed it on the head.

Minimize cash flow and maximize on loan paydown/tax incentives. Builds wealth, not taxable income. Being a full-time real estate professional adds icing to the cake.

[email protected]

2 Reply

Arn CenedellaPro Member

OP

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Scott Johnson:

Quote from @Arn Cenedella:

“Cash flow is king” is a mantra to many.

It’s repeated over and over in forums and conferences.

I am not a “cash flow is king” investor

Pending one’s stage in life and career, I submit growing equity and increasing net worth should be the goal of most investors in their 30s and 40s and perhaps even in their 50s - as they enter and are in their prime income years. Presumably someone who has cash to buy investment real estate has a W2 income sufficient to cover their total monthly cost of living - their “job” pays for their lifestyle. So they don’t need cash flow to live off of. From folks in that position, I submit it’s better to invest for capital growth. Properties should pay for themselves with some cash flow left over to cover unexpected expenses. But the focus in my should opinion should be on long term capital growth.

Question: Who will be able to generate more cash flow when they want and need it?

Investor A with $1M of investible assets

Or

Investor B with $3M if investible assets

The answer is obvious, it’s investor B.

I see countless investors talking about buying a cash flow property.

I see countless brokers and owners trying to sell property by indicating “it’s a cash flow property”.

If I may offer my perspective on:

Does the property cash flow?

It’s an incomplete question with no answer.
I believe an additional layer of detail and sophistication is required.

I submit:

Every property will cash flow if you buy with all cash. Right?

So the better question the more informative question is:

What size cash down payment do I need to make so that the property cash flows?

Does an investor need to put 20% down or 30% or 50% down to cash flow?

That’s the better question.

Any question or statement about cash flow only has meaning when connected to the amount of cash required to buy it.

And yes in todays market with todays debt costs, I suspect most SFRs will require 30% to 40% down to cash flow. In my opinion you won’t find cash flow with 20% down unless the property and location are horrible. Even MF assets require 30% to 35% down to provide some cash flow.

The “popular” opinion isn’t always the best opinion.

One should tailor their investment approach to their assets - education income capital knowledge experience etc etc - and their goals.

I’d submit investing for capital growth is by far the better option for many.

Aim to hit line drive base hits not grand slams.

Boom! Nailed it on the head.

Minimize cash flow and maximize on loan paydown/tax incentives. Builds wealth, not taxable income. Being a full-time real estate professional adds icing to the cake.

Scott,
I’m in Greenville SC but the Greenville NC is if interest. Let’s connect.
Thanks
Arn

[email protected]650-575-6114

1 Reply

Shiloh LundahlPro Member

Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

3y

@Christopher Mooney holding for more than a year gives you tax benefits and sets you up nicely for a 1031 exchange. The other reasons to hold for 3-7 years is because:

1. If I have rehabbed the property then the styles don’t change drastically within 3-7 years and I usually don’t need to do another round of updating before I sell.

2. Usually the property is still in pretty good condition and doesn’t need a lot of repairs if I have had good tenants and I rehabbed the property after I initially purchased it.

3. Three years is a good amount of time for a tenant buyer to get their finances and credit in order to exercise a lease option saving me around 6-7% in closing costs.

4. The longer you keep an asset, the lower your return on equity gets. So I like to trade up my properties into value add assets where I can immediately create more value and equity which in turns multiplies my capital.

5. A 3-7 year hold is a relatively short time where I may not experience capital expenditure I has needing to replace a roof or AC unit.

6. Also, 3-7 years gives me some time to experience some good appreciation before selling.

Those are some of the reasons I like to do a 3-7 year hold on a property.

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6 Reply

Corby GoadeBusiness Member

Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes

3y

Quote from @Arn Cenedella:

“Cash flow is king” is a mantra to many.

It’s repeated over and over in forums and conferences.

I am not a “cash flow is king” investor

Pending one’s stage in life and career, I submit growing equity and increasing net worth should be the goal of most investors in their 30s and 40s and perhaps even in their 50s - as they enter and are in their prime income years. Presumably someone who has cash to buy investment real estate has a W2 income sufficient to cover their total monthly cost of living - their “job” pays for their lifestyle. So they don’t need cash flow to live off of. From folks in that position, I submit it’s better to invest for capital growth. Properties should pay for themselves with some cash flow left over to cover unexpected expenses. But the focus in my should opinion should be on long term capital growth.

Question: Who will be able to generate more cash flow when they want and need it?

Investor A with $1M of investible assets

Or

Investor B with $3M if investible assets

The answer is obvious, it’s investor B.

I see countless investors talking about buying a cash flow property.

I see countless brokers and owners trying to sell property by indicating “it’s a cash flow property”.

If I may offer my perspective on:

Does the property cash flow?

It’s an incomplete question with no answer.
I believe an additional layer of detail and sophistication is required.

I submit:

Every property will cash flow if you buy with all cash. Right?

So the better question the more informative question is:

What size cash down payment do I need to make so that the property cash flows?

Does an investor need to put 20% down or 30% or 50% down to cash flow?

That’s the better question.

Any question or statement about cash flow only has meaning when connected to the amount of cash required to buy it.

And yes in todays market with todays debt costs, I suspect most SFRs will require 30% to 40% down to cash flow. In my opinion you won’t find cash flow with 20% down unless the property and location are horrible. Even MF assets require 30% to 35% down to provide some cash flow.

The “popular” opinion isn’t always the best opinion.

One should tailor their investment approach to their assets - education income capital knowledge experience etc etc - and their goals.

I’d submit investing for capital growth is by far the better option for many.

Aim to hit line drive base hits not grand slams.

Couldn't agree more- in many cases, I find the people who only talk about cash flow are those who have not yet experienced the true value of leverage.

I always like to say that cash flow pays for my kids' lunch. Equity pays for their college. Apples to oranges.

4 Reply

Arn CenedellaPro Member

OP

Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes

3y

Quote from @Corby Goade:

Quote from @Arn Cenedella:

“Cash flow is king” is a mantra to many.

It’s repeated over and over in forums and conferences.

I am not a “cash flow is king” investor

Pending one’s stage in life and career, I submit growing equity and increasing net worth should be the goal of most investors in their 30s and 40s and perhaps even in their 50s - as they enter and are in their prime income years. Presumably someone who has cash to buy investment real estate has a W2 income sufficient to cover their total monthly cost of living - their “job” pays for their lifestyle. So they don’t need cash flow to live off of. From folks in that position, I submit it’s better to invest for capital growth. Properties should pay for themselves with some cash flow left over to cover unexpected expenses. But the focus in my should opinion should be on long term capital growth.

Question: Who will be able to generate more cash flow when they want and need it?

Investor A with $1M of investible assets

Or

Investor B with $3M if investible assets

The answer is obvious, it’s investor B.

I see countless investors talking about buying a cash flow property.

I see countless brokers and owners trying to sell property by indicating “it’s a cash flow property”.

If I may offer my perspective on:

Does the property cash flow?

It’s an incomplete question with no answer.
I believe an additional layer of detail and sophistication is required.

I submit:

Every property will cash flow if you buy with all cash. Right?

So the better question the more informative question is:

What size cash down payment do I need to make so that the property cash flows?

Does an investor need to put 20% down or 30% or 50% down to cash flow?

That’s the better question.

Any question or statement about cash flow only has meaning when connected to the amount of cash required to buy it.

And yes in todays market with todays debt costs, I suspect most SFRs will require 30% to 40% down to cash flow. In my opinion you won’t find cash flow with 20% down unless the property and location are horrible. Even MF assets require 30% to 35% down to provide some cash flow.

The “popular” opinion isn’t always the best opinion.

One should tailor their investment approach to their assets - education income capital knowledge experience etc etc - and their goals.

I’d submit investing for capital growth is by far the better option for many.

Aim to hit line drive base hits not grand slams.

Couldn't agree more- in many cases, I find the people who only talk about cash flow are those who have not yet experienced the true value of leverage.

I always like to say that cash flow pays for my kids' lunch. Equity pays for their college. Apples to oranges.

Love cash flow pays for lunch. Equity pays for college. And of course Boise is a growth market. I am a piece of a 200 unit property out in Nampa. Great market!

[email protected]650-575-6114

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Account Closed

Helena, MT · Member since 2015 · 12 posts · 11 votes

3y

Arn,

Thanks for the response. To answer some questions..

It is a SFR in Park City, UT. My basis is around 12k "I used a VA loan". Value is around 1.5, the loan balance is 409k, my interest rate is 3%, and the purchase price was 525k in 2013.

I agree about the idle capital. The property has obviously exploded in value. The market will continue to gain value but there is a sealing " to a degree" on the rent. I just don't know if I should continue to ride the equity train or find a higher cash-flow property. Wether it be a few rentals paid outright, or a fourplex or something.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Quote from @Arn Cenedella:

Quote from @Joe Villeneuve:

Quote from @Arn Cenedella:

Quote from @Joe Villeneuve:

The problem with you conclusion is you are assuming the person buying CF properties is buying properties that won't appreciate. One without the other is a fools game. You have to have both, or don't buy.

Yes of course you want both - cash flow and appreciation.

Then the question is: How does each investor weigh cash flow against appreciation?

in my 45 years of investing experience, I have noticed that more dramatic growth areas those that offer higher probabilities of significant appreciation comes at a cost in terms of reduced cash flow. Conversely I have found that areas that offer more predictable stable cash flow generally offer low appreciation.

Most knowledgeable investors understand investing in Boise or Austin or Phoenix or Nashville or Charlotte may provide less cash flow than investing in more stable markets like Tulsa or Indianapolis or Kansas City for example.

So for me I will choose investments that offer lower cash flow in exchange for higher rates of appreciation.

So I choose appreciation over cash flow but I still get both.

Other investors can choose how they want to invest. Hope there is no problem with that. 😀

All that means is the areas you've investigated, don't work for both. What about the areas you haven't investigated?

True I’ve invested all over the country and typically have gone for strong growth markets - Austin TX and the Carolinas where I now live. I invested in the SF Bay Area starting in 1980 and did very well and trust me the SF Bay Area isn’t a cash flow market. Anyone on this thread would have loved to invest in the SF Bay Area in the 1980s and 1990s. When you get 15% to 20% a year appreciation or more and with the use of leverage which creates 50% to 100% annual returns on equity, 8% annual cash flow is pennys on the dollar - loose change. So yes my investing experience is based on where I’ve lived and where I’ve invested.

All this being said, real estate is local and the key for any investor is to know their market and then determine which strategies work best. Buying in the SF Bay Area and in Austin TX was not about cash flow. It was about equity growth. I’m happy with the choices I made and have continued to make.

Knowing the market you invest in is critical. That doesn't mean you have to, or even should, invest locally. If the local market tells you don't invest here because there's no cash flow or appreciation, then don't invest there just because it's local.
Find a market that tells you that you should invest there, and learn that market better than the one's local to you.

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Shiloh LundahlPro Member

Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

3y

@Account Closed the simple answer is it depend on what your goals are. If it is to maximize your returns that your money can make then you need to find out what is the return on your equity minus sales costs. Then your next question would be, if you were to sell it, where would you put it to have it perform better? Without knowing the answer to these questions, the answer you will get from others will be uneducated, biased opinions.

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Konstantin GinzburgPro Member

Member since 2021 · 376 posts · 242 votes

3y

@Arn Cenedella

I think you do bring up some good points; however I believe this view is a bit overly simplified. I personally view any investment as a combination of opportunity cost and most efficient use of available capital. There are trade offs with any investment. Some markets offer higher appreciation over time but at the cost of minimal or no initial cash flow while other markets offer lower long term appreciation but higher cash flow. It is important to remember that in the latter market; the property appreciation is not 0; those properties will still offer long term appreciation returns simply at a slower rate than other markets. In my opinion, the trade off to foregoing cash flow though is that it limits your options and creates more risk exposure. If your cash flow is minimal initially; you may have enough built up reserves for smaller repairs such as a broken window but larger repairs such as roof repairs or HVAC might wind up coming out of pocket if there has not been enough cash accrued to pay for this cost.

Minimal cash flow also prevents other opportunities such as using this revenue source to fund additional real estate purchases which would allow you to scale your portfolio or put into other assets instead. From a non-financial standpoint; many people's ideal goal with real estate is to create a revenue source that would either supplement their lifestyle or provide the freedom to leave their W-2 jobs. This requires a focus on cash flow so that a revenue stream can be created that replaces their salary. While long-term wealth is a great goal; wealth for the sake of wealth that is locked up in properties does not hold the same appeal as a source of revenue that allows one to enjoy life in whatever means they want to; whether it be travel or more time with family.

I see nothing wrong with your mindset but I believe it comes down to what a person's goals actually are. A financial strategy can not be a "one size fits all" that is suited for everyone but instead different financial strategies should be employed by different people to fit what their actual goals are.

While it may be harder now to find cash flowing properties, it can certainly be accomplished; granted not in every market. This is another trade off example. Finding deals that are able to cash flow with a 20% deposit is still possible to do but will require far more time and effort sifting through many deals. I have personally been able to find such deals but doing so required sorting through dozens, if not 100s of deals to find those that met my criteria.

3 Reply

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

3y

Quote from @Account Closed:

Arn,

Thanks for the response. To answer some questions..

It is a SFR in Park City, UT. My basis is around 12k "I used a VA loan". Value is around 1.5, the loan balance is 409k, my interest rate is 3%, and the purchase price was 525k in 2013.

I agree about the idle capital. The property has obviously exploded in value. The market will continue to gain value but there is a sealing " to a degree" on the rent. I just don't know if I should continue to ride the equity train or find a higher cash-flow property. Wether it be a few rentals paid outright, or a fourplex or something.

@Account Closed

So, what are your goals?

Its easy to use metrics/statistics to say "anything..."

Looks like you have ~1mil in equity that sounds like you say not doing anything for you... Its really just untapped appreciation. Your $12k "got you" $1mil !!! Holy. break out the crystal ball --- do you keep riding the appreciation? do you think the appreciation is done and "cash-in" and get more properties?

What if you just keep patient? Use the power of leverage to pay off the loan? If it doesn't appreciate you will have $1.5mil free and clear, and then look at your cash flow. What is that, 20 years (didn't pull out a table) and you'll have some cash flow to live off assumed closer to retirement. Or, take the $1.5mil and invest / live off it. by then it might be $3mil....

So, it goes back to your goal/strategy. No... saying that you just want checks in the mail or be rich isn't an answer. Is $1.5mil enough for you? Is $1mil enough for you? could you retire now? What about retire "later?" If one property won't get you enough, then you should probable scale and leverage some more to meet your goal.

In my opinion, the "good" investors / wealthy persons are not "one trick" wonders. They invest where the opportunities are and invest in a manner that meets their goals (for themselves and for their whole family). This includes different types of real estate investments and non-real estate investments. A rental isn't the end all.

Hope that helps. Good luck.

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Alan AsriantsBusiness Member

Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes

3y

I get a lot of people who want "cash flowing" properties in my area.

What I try to explain to them is that a "cash flowing" property that makes $1000/ after expenses but is only worth 180k is not the same thing as a property making $300/m but is worth 400k.

Sure numbers wise that first deal is killer and blows the other one out of the park.

But if you were to put 20% down on both properties, your 20% will take you a lot further on the 400k deal over time.

The 400k property will appreciate faster and better since the location is more desirable.

The 180k property can give you headaches every day. The way people treat properties makes it a lot more of a responsibility. You will find yourself doing more repairs, dealing with more tenant issues, chasing down rent.

And what you will quickly realize is that all that work effort, time and money, is not worth that cash flow.

Sure you can hire a management company, but trust me, there's only so much they can do to, you will be involved.

7% rates, all time high prices are crushing the BRRRR investor, and any investor.

If you're buying RE today, buy for the next 10 years. Ask yourself - is this area strong? Will I see more increase in value here or somewhere else?

Location, location, location

I 100% agree with you, don't buy into this cash flow is king nonsense. This is my market, but other markets can be different!

[email protected]267-767-0111

Alan Asriants - New Century Real Estate 591 Reviews

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Marcus R.

Real Estate Agent · Denver CO · Member since 2019 · 210 posts · 333 votes

3y

@Arn Cenedella - You're gonna get people riled up with this one but it's a fun discussion topic! Well done!

It all depends on circumstances but I'm in a similiar position as yourself where I invest for equity on the long term since my W2 job handles my living expenses. All things being equal you can always trade equity for cash flow in the future...Ex: In the future extract $1M of equity and buy all cash in a cash flow market.

No wrong answer either way and the goal is to find a way to do both.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Quote from @Alan Asriants: