Cash flow is NOT king!

Joe VilleneuvePro Member

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

3y

Quote from @Curtis Cecil:

Quote from @Arn Cenedella:

Quote from @Joe Villeneuve:

Quote from @Brandon Ly:

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.

Agree 100%. Cash flow is nice but it isn't "King". What's the use of cash flowing $1000 per month if if it cost you $100,000 out-of-pocket to secure the property. It'll take you over 8 years to recoup your OOP costs. Value add is the best way to go and using the banks money to finance the projects. If you have an opportunity to add an additional unit or two so the rents cover the financing (like from a HELOC) and then profit from the positive cash flow, that's truly how it should be defined.

Personally, it doesn't truly count as cash flow until you've recouped your initial investment. Additionally, the appreciation in the property you can cash-out refi or take a HELOC against which is not taxed whereas cash flow is taxed.

"What's the use of cash flowing $1000 per month if if it cost you $100,000 out-of-pocket to secure the property."

If it took $100k to buy $1000/month in CF I wouldn't buy it either. That doesn't mean cash flow isn't King. It's just an example of why you wouldn't buy the property.

So $12,000 a year CFI (that’s $1,000 a month) is a 12% annual cash on cash return for $100,000 investment.

I don’t think you mean that do you?

I think even “cash flow is king” investors would be pleased with a 12% annual cash on cash return.

Sorry, long time lurker but trying to get back into RE investing. I was lost on that comment about why someone wouldn't buy a $100k house if it was making $1k a month in rents...? Why not?

I'm about to buy a house from my father who had the house for about 13 years. He bought it for $27k from a sheriff auction and put about $24k in renovation dollars. He's selling it because he doesn't want it anymore and it's out of state for him. I offered to buy it since there were a lot of investors that were jumping on the deal so it must be good. From what I figured out, it's not the best neighborhood but it rents out for $1500/mo. Purchase price is $50k, rehab costs is around $15k.

My goal is replace my W2 income with real estate so why not BRRRR with the first house being this house. I understand interest rates are high but why do people think BRRRR is dead?

It takes too long to recover your cost...which is the cash that comes out of your pocket.
As far as your father's house goes, you stated incomplete sets of numbers. Rent doesn't matter, cash flow does. What you payed for the house doesn't matter. What matters is the property value.

0 Reply

Curtis Cecil

Involved In Real Estate · Chandler, AZ · Member since 2009 · 22 posts · 5 votes

3y

Quote from @Joe Villeneuve:

Quote from @Curtis Cecil:

Quote from @Arn Cenedella:

Quote from @Joe Villeneuve:

Agree 100%. Cash flow is nice but it isn't "King". What's the use of cash flowing $1000 per month if if it cost you $100,000 out-of-pocket to secure the property. It'll take you over 8 years to recoup your OOP costs. Value add is the best way to go and using the banks money to finance the projects. If you have an opportunity to add an additional unit or two so the rents cover the financing (like from a HELOC) and then profit from the positive cash flow, that's truly how it should be defined. "What's the use of cash flowing $1000 per month if if it cost you $100,000 out-of-pocket to secure the property."

If it took $100k to buy $1000/month in CF I wouldn't buy it either. That doesn't mean cash flow isn't King. It's just an example of why you wouldn't buy the property.

So $12,000 a year CFI (that’s $1,000 a month) is a 12% annual cash on cash return for $100,000 investment.

I don’t think you mean that do you?

I think even “cash flow is king” investors would be pleased with a 12% annual cash on cash return.

Sorry, long time lurker but trying to get back into RE investing. I was lost on that comment about why someone wouldn't buy a $100k house if it was making $1k a month in rents...? Why not?

I'm about to buy a house from my father who had the house for about 13 years. He bought it for $27k from a sheriff auction and put about $24k in renovation dollars. He's selling it because he doesn't want it anymore and it's out of state for him. I offered to buy it since there were a lot of investors that were jumping on the deal so it must be good. From what I figured out, it's not the best neighborhood but it rents out for $1500/mo. Purchase price is $50k, rehab costs is around $15k.

My goal is replace my W2 income with real estate so why not BRRRR with the first house being this house. I understand interest rates are high but why do people think BRRRR is dead?

It takes too long to recover your cost...which is the cash that comes out of your pocket.
As far as your father's house goes, you stated incomplete sets of numbers. Rent doesn't matter, cash flow does. What you payed for the house doesn't matter. What matters is the property value.

ARV is approximately around $110k

0 Reply

Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

3y

@Arn Cenedella I agree generally but everyone has different goals.

For you personally how long did you focus on growing your wealth before you pivoted to cashflow?

[email protected]512-888-9122

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1 Reply

Arn CenedellaPro Member

OP

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

3y

Quote from @Jordan Moorhead:

@Arn Cenedella I agree generally but everyone has different goals.

For you personally how long did you focus on growing your wealth before you pivoted to cashflow?

That’s a good question.
As I have noted earlier this is NOT an either or question it’s a both and answer.
Clearly an investor wants both.
So the question becomes more about how much weight does one give to cash flow and how much weight to appreciation.

i am 68 years old been in the game a long time been thru lots of up and down markets…………

I started giving greater weight to cash flow when I was 60 and left the SF Bay Area and my brokerage business to move to Greenville SC.

That is why tipped my scales towards cash flow.

That being said, I figure I have another 30 years on this planet and so it’s too early to play prevent pass defense if you get what I mean.

So while my focus to cash flow has increased I still want to buy appreciating assets.

As we have seen the past couple years with 15% inflation, even with 8% cash flow one is losing ground so I still feel it is important to grow capital.

[email protected]650-575-6114

2 Reply

Andrzej Lipski

Investor · CT · Member since 2022 · 50 posts · 24 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

I respect your opinion and I'm approaching my 50s and I have a growth mindset but I disagree with your statement about cashflow not being king. In residential real estate you are probably right because of the way properties are appraised for value.

But if you are int he commercial space, multifamily 5+ units Cashflow is and will always be king. Without it you can't achieve growth not matter how hot the market is. I'm sure a hot market can drive cap rates down and sitting on a negative cashflow property might appreciate a bit over time but that runs contrary to your goal which is to grow fast. It also take your own decision making out of the equation you are left to the whims of the market.

If I have a $2mil property, 20 units with an NOI of $216k and a cap rate of 10.8% and I replace appliances in all my unit ($2000/unit or $40k of rehab)) and raise rents by $100 dollars I increased the value of the property to $2.1mil. For a $40k investment I made $100k. All by increasing cashflow.

2 Reply

Arn CenedellaPro Member

OP

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

3y

Quote from @Andrzej Lipski:

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

I respect your opinion and I'm approaching my 50s and I have a growth mindset but I disagree with your statement about cashflow not being king. In residential real estate you are probably right because of the way properties are appraised for value.

But if you are int he commercial space, multifamily 5+ units Cashflow is and will always be king. Without it you can't achieve growth not matter how hot the market is. I'm sure a hot market can drive cap rates down and sitting on a negative cashflow property might appreciate a bit over time but that runs contrary to your goal which is to grow fast. It also take your own decision making out of the equation you are left to the whims of the market.

If I have a $2mil property, 20 units with an NOI of $216k and a cap rate of 10.8% and I replace appliances in all my unit ($2000/unit or $40k of rehab)) and raise rents by $100 dollars I increased the value of the property to $2.1mil. For a $40k investment I made $100k. All by increasing cashflow.

I am the owner and operator as General Partner on over 1100 apartment units worth say $150M so I am well aware of the value of commercial real estate and how to increase value.

I didn’t say cash flow is unimportant. I just say I focus more on equity growth. Yes the value of commercial real estate is based on net operating income not cash flow which is dependent on financing.

Your own post actually highlights the growth in equity from value add. You invest $40K to increase value $100K, you just increased your net worth $60K.

So it’s both cash flow and equity growth.

[email protected]650-575-6114

0 Reply

Ethan Gidcumb

Lender · San Diego, CA · Member since 2022 · 130 posts · 75 votes

3y

Hey Arn! I've spoken with investors who try to find a balance between cash flow and appreciation in their investments. In their history, they have scouted properties in places they believe will grow and create more equity in the property; while tying in what you mentioned of making an effort to get the property cash flowing.

2 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Joe Villeneuve:

This is of UBER importance for people to understand, and it seems so simple and elementary, but I notice the avalanche of people oblivious to it.

The price of the real estate DOES NOT MATTER. Rents don't matter, HOA fee's don't matter, PM fee's don't matter, even cap-x and maint etc etc etc, they don't matter, not even interest rate matters. All these things people THINK matters, are just DETAILS.

Details that factor into the 1 and ONLY thing that matters, RATE OF RETURN.

1 Reply

David M.

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

3y

@Account Closed

Again, it goe back to your goals... (shrug)

Not to play the game of "statistics," but realize that its about $100k that is making the $4k.. Sure, that means on a property valued at $1.5m you have ~$1,4mil of appreciation and amortization "stuck" in the property. That's part of real estate investment --- its an illiquid asset.

So, you could sell / 1031, refi, etc.. I think you know that and its well discussed.

I would say that $1.5mil is a pretty high valuation. If you could find a buyer, that would be good and you could 1031 into other, lesser valued properties. Even notionally a trio of $500k single families would be nice. They'd have to be rented at more than $3k so your overall rents increase, you re-leverage, and can at least take advantage of the amortization value build up over time since you say you are 38. In years to come, you will have increased cashflow comign in, and hopefully more wealth with which to fund your retirement.

I'm not a fan of mult-families. I belief is that their value is highly predicated on the rents. Lets face it, anybody buying one of those is automatically an investor unless they have a large family(ies). Also, pretty much all properties are purchased based on the monthly payment... The past ~8 years has seen a dramatic rise in rents. If you want to speculate on rents vs appreciation, that's your call --- yes, I realize that with the logic I presented they are still kinda linked...

Sorry, but not familiar with the "imposter syndrome." Anyway, like I said, i'd be happy to chat. Good luck.

0 Reply

Scott TrenchPro Member

Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

3y

I think that sometimes "investors" on this platform make silly statements that literally talk about preferring a $1M portfolio that produces $200K in cash flow over a $3M equity position that breaks even.

We need to be better as a community than preferring $1M to $3M. Obviously, $3M is preferable.

HOWEVER, I think that a rational 30 something or 40 something can say that they'd rather have a ~$1M portfolio that generates a 10% CoC return, with spendable, taxable, income that they can use to enjoy their 30s and 40s and feel comfortable without a job, or that makes them FEEL able to start that business or travel the world. I think that it is reasonable and rational to feel that a portfolio of this sort optimizes life for them in a way that a the same ~$1M portfolio that is likely to produce a 15% tax advantaged return (but with less liquidity generation and a little higher risk).

This tradeoff happens all the time. I see so many millionaires made on this platform, but many who have real estate portfolios that don't actually generate cash flow, and 401(k) balances that they are unable/unwilling to spend. Why grind for 7-10, (or 15-20, or 25-30) years and have an optimized portfolio for long-term growth, when your kids are little TODAY, and your health is in prime condition TODAY.

By all means - take the OP's approach for the first $1M. But, after that, know when it's time to harvest and use some of that wealth, and know what kind of investor you are and portfolio you need to actually achieve the lifestyle you set out to create in the first place - one likely where working is optional and you feel you have earmarked dollars being generated and usable from your portfolio to spend on your lifestyle..

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7 Reply

Matt Greer

Real Estate Agent · Mesa, AZ · Member since 2017 · 230 posts · 169 votes

3y

Quote from @Arn Cenedella:

Quote from @Matt Greer:

I have to agree. I have worked in two different markets. One had a high cashflow rate with minimal appreciation and the other had minimal cashflow with higher appreciation. A lot of investors have been lured in by the high cashflow but the investors who purchased in the higher appreciating area have had much more of a gain so much so that it's offset the lower cashflow.

Good point.

Let’s assume a 5 year hold.

Investor A

8% average annual cash flow over 5 years

5% appreciation annually over 5 years

Investor B

2% average annual cash flow over 5 years

10% appreciation annually over 5 years.

Which investor has more money at the end of 5 years?

I believe the math will say Investor B. Plus more of the income for B will be taxed as long term capital gain.

And remember the annual cash flow rates are applied to the cash invested whereas the appreciation rates are applied to the total price of the investment. The power of leverage kicks butt. 👍

This is a lesson not all investors take into account and have to learn the hard way. Either way they come out on top, but I'd rather my money grow with Option B.

0 Reply

Sam YinPro Member

Los Angeles, CA · Member since 2021 · 583 posts · 738 votes

3y

Quote from @Scott Trench:

I think that sometimes "investors" on this platform make silly statements that literally talk about preferring a $1M portfolio that produces $200K in cash flow over a $3M equity position that breaks even.

We need to be better as a community than preferring $1M to $3M. Obviously, $3M is preferable.

HOWEVER, I think that a rational 30 something or 40 something can say that they'd rather have a portfolio that generates a 10% CoC return, with spendable, taxable, income that they can use to enjoy their 30s and 40s and feel comfortable without a job, or that makes them FEEL able to start that business or travel the world. I think that it is reasonable and rational to feel that a portfolio of this sort optimizes life for them in a way that a $1M portfolio that is likely to produce a 15% tax advantaged return (but with less liquidity generation and a little higher risk).

This tradeoff happens all the time. I see so many millionaires made on this platform, but many who have real estate portfolios that don't actually generate cash flow, and 401(k) balances that they are unable/unwilling to spend. Why grind for 7-10, (or 15-20, or 25-30) years and have an optimized portfolio for long-term growth, when your kids are little TODAY, and your health is in prime condition TODAY.

By all means - take the OP's approach for the first $1M. But, after that, know when it's time to harvest and use some of that wealth, and know what kind of investor you are and portfolio you need to actually achieve the lifestyle you set out to create in the first place - one likely where working is optional and you feel you have earmarked dollars being generated and usable from your portfolio to spend on your lifestyle..

Well put. I strongly feel that since there are so many variables in family/health dynamics, many posters forget to incorporate that into their wealth-building model. You must keep up your health and enjoy your wealth while it is optimally enjoyable. That way, you can share the experience together with your loved ones while it is most meaningful. The constant chase for more riches often blinds many to the loss of time.

While I was still working, I had a co-worker who put in about 40 years of service to the organization. The last 10 years were really unnecessary. However, there was an incentive program to keep tenured workers for their expertise. The offer amounted to roughly a 500K bonus to work past their normal retirement tenure of 25 to 30 years of service. This co-worker jumped on it. He calls me now and again telling me he is cruising with his family/extended family. Everyone is enjoying the trips. I ask what activities he has been up to and the gives me the same answer all the time... he is lying around on the ship while the kids and grandkids are out and about. His health/fitness is too fragile to do any more than sit around and watch the world go by. Those last 10 years of his version of wealth building are now only for the next generation, not for him. This is one of MANY similar examples I know of firsthand.

Obviously, this is different for everyone, but the one thing that is the same for everyone is that you cannot reverse your age and your health often deteriorates faster as you age. I wonder if a section for married/family investors might benefit the community. The different viewpoint might open a few eyes to those younger and up-and-coming who might need more guidance from those on the family path they might embark on as they invest. This may not resonate with some BP members. Because everyone has a different upbringing and set of life experiences. Not many people have been put in a position to possibly lose everything, or life/death situations, or see the world outside of the US. And that is OK too.

Thank you for bringing clarity to the discussion.

3 Reply

Sherri Plotke

Member since 2023 · 1 post · 0 votes

3y

Quote from @Joe Villeneuve:

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.

...and, add to that using LLC's to buy the property with seller financing,...then sell the LLC. New buyer inherits the original terms and the seller isn't selling RE, so...

I would like to learn more on selling the LLC. Is the benefit to this avoiding capital gains tax, interested on the structure of this for sure.

0 Reply

David M.

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

3y

@Sherri Plotke

I'm sure Joe will chime in... But, by selling the "business" instead of the real property, its not a property transfer. So, any loan/Note/mortgage on the property can stay since the LLC/Business is liable for the Note (assuming somebody didn't "frankenstein" the deal with a personal conforming loan). To me, its really about preserving the loan terms.

Sale of the LLC, i.e. business, however, I THOUGHT was not taxed as capital gains.

0 Reply

Jake AndronicoBusiness Member

Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes

3y

Love this post. Makes a lot of sense :)

Not talked about enough.

415-233-1796

1 Reply

Don SpaffordPro Member

Investor · Idaho Falls, ID · Member since 2016 · 912 posts · 629 votes

3y

As you said, it depends on a person's stage in life and ultimately what their goals are. And I would say what someone considers "cash flow". For me a low 4-6% cash on cash is not cash flow. Your analysis makes a great point. However, for many their goal is to retire early. You need cash flow to make that possible to replace your income. Or if you get sick or injured and can't work, to have that coming in before that happens.
I personally invest in both great cash flowing assets (12-15% average cash on cash) AND build with investing in build to rent projects. Both of these I invest in with syndications as a passive LP investor, but also I am actively involved.

1 Reply

Brian Wilson

Investor · Longmont, CO · Member since 2016 · 185 posts · 156 votes

3y

In my opinion the term "Cash flow is king" is coined for a few reasons.

-Businesses that do not generate sufficient cashflow will fail.
-Cashflow allows someone to quit their job when they reach their FI number.
-It ensures newbies don't focus on speculative market appreciation as their primary strategy for investing.

We all know equity is where wealth is built, and often times those opportunities have limited to no net CF. However, those who are best poised to take advantage of equity plays often have an already high NW or the income to support the downside risk.

1 Reply

Arn CenedellaPro Member

OP

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

3y

Quote from @Don Spafford:

As you said, it depends on a person's stage in life and ultimately what their goals are. And I would say what someone considers "cash flow". For me a low 4-6% cash on cash is not cash flow. Your analysis makes a great point. However, for many their goal is to retire early. You need cash flow to make that possible to replace your income. Or if you get sick or injured and can't work, to have that coming in before that happens.
I personally invest in both great cash flowing assets (12-15% average cash on cash) AND build with investing in build to rent projects. Both of these I invest in with syndications as a passive LP investor, but also I am actively involved.

Are you in the MF space too?
I believe I have seen some of your posts or comments on FB or Linked In.
I’m friends with Tony Torres and Andy McMullen.
Do you know them?

Idaho Falls is a great market! Boise has boomed. Idaho Falls is just getting on the radar.

it’s similar to my market and home town, Greenville SC - 90 miles from Charlotte and 120 miles from Atlanta. Markets that have boomed markets everyone knows about. Greenville is booming but not on everyone’s radar.

I always say: Invest in markets before they become front page news. I’d say Idaho Falls is one of them!

Your approach to combine cash flow investing with new development (which provides NO cash flow for a couple of years but offers high equity returns) is a good one.

There’s a connection between size of capital and cash flow. The more capital you have invested the greater the cash flow. 😀

[email protected]650-575-6114

1 Reply

LaMark Vaughn

Rental Property Investor · Member since 2018 · 2 posts · 2 votes

3y

@Arn Cenedella I agree, but I don't agree, ever had a non paying tenant & a market crash combo? Ive seen a few people lose. I had a tenant that stopped paying as I built equity that I couldn't get to because my DTI wouldn't allow. I heard a popular investor say "You can't eat equity" for me I'd prefer to have a little of each. Of, course it makes sense to purchase with opm and have them pay it down & not cash flow at all, but that's not for a lot of people. just like cash flow doesn't as mean much to a person with 4,000 cash flowing doors, the money's gotta come from some where, dont stop the flow. Lol 🙂🙏🏿

1 Reply

Arn CenedellaPro Member

OP

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

3y

Quote from @Jake Andronico:

Love this post. Makes a lot of sense :)

Not talked about enough.

Thank you. That was my whole point. People talk too much about cash flow and not enough about equity growth.

Cash flow is NOT KING. It’s important and should be considered. But it’s not the only story or the whole story.

[email protected]650-575-6114

1 Reply

Arn CenedellaPro Member

OP

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

3y

Quote from @Brian Wilson:

In my opinion the term "Cash flow is king" is coined for a few reasons.

-Businesses that do not generate sufficient cashflow will fail.
-Cashflow allows someone to quit their job when they reach their FI number.
-It ensures newbies don't focus on speculative market appreciation as their primary strategy for investing.

We all know equity is where wealth is built, and often times those opportunities have limited to no net CF. However, those who are best poised to take advantage of equity plays often have an already high NW or the income to support the downside risk.

True to an extent.

My response would be:

If one buys property with sufficient leverage and ample cash reserves, they will not fail.

Investors who get burnt generally do so because they over leverage and do not have ample cash reserves.

I’d also submit one needs to build up a certain amount of capital to create $120,0000 a year income.

Yea one can start with $100,000 in equity but they won’t be financially free until they create $1M in equity.

Hard to create $120K a year in income on $250,000 in equity. Sorry just doesn’t happen.

[email protected]650-575-6114

1 Reply

Arn CenedellaPro Member

OP

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

3y

Quote from @Sherri Plotke:

Quote from @Joe Villeneuve:

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.

...and, add to that using LLC's to buy the property with seller financing,...then sell the LLC. New buyer inherits the original terms and the seller isn't selling RE, so...

I would like to learn more on selling the LLC. Is the benefit to this avoiding capital gains tax, interested on the structure of this for sure.

Short answer is NO.

[email protected]650-575-6114

0 Reply

Carlos Ptriawan

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

3y

This statement is bit wrong in several ways :
1. There's intricate relationship between appreciation and cash flow. The very reason why house is cash flowing is because the appreciation is slower for that house which means demand is low and rent price is higher than mortgage payment
2. Appreciation is not speculation. It's a mathematical formula as output of supply and demand bid. There's nothing speculative about appreciation. The less the inventory, the higher the appreciation would be and the lesser the cash flow is.

2 Reply

Eric Prescott

Investor · Union County, NJ · Member since 2022 · 92 posts · 51 votes

3y

Starting out as of only last year, I've been happy when I can buy at 50-60 cents on the dollar and rehab properties that cash flow, allow me to cash out more or less what I've put in, and especially when I can do so in areas with above average appreciation. It may not be that 15-20% speculative roller-coaster appreciation, but one reason I diverted funds from equities to RE was to find some boring-but-reliable growth while also throwing off enough cash to--once scaled--replace my wife's income when she is ready to retire and pay for the extra expenses of a special needs child in the meantime (I'm already semi-retired; attached is a picture from my Monday afternoon.)

I'm 52 and feeling the age thing for sure, with 3 levels of cervical fusion less than a month in my future. I'm very much trying to balance enjoying my son's youth while I'm still reasonably able-bodied, with some equity left to show for it when I'm gone. He's only 4, but he's already shown an interest, if only because he enjoys roaming rehabs in their various stages for now.

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Brian Wilson

Investor · Longmont, CO · Member since 2016 · 185 posts · 156 votes

3y

Quote from @Carlos Ptriawan:

This statement is bit wrong in several ways :
1. There's intricate relationship between appreciation and cash flow. The very reason why house is cash flowing is because the appreciation is slower for that house which means demand is low and rent price is higher than mortgage payment
2. Appreciation is not speculation. It's a mathematical formula as output of supply and demand bid. There's nothing speculative about appreciation. The less the inventory, the higher the appreciation would be and the lesser the cash flow is.

Response to 1) I agree. Higher priced properties tend to have better rent growth over time in comparison to stagnant markets with no significant appreciation. Certain acquisition strategies, asset improvements, and management improvements, can yield a more balanced CF and Appreciation return. I haven't thought about the correlation

Response to 2) I agree. Appreciation taken seriously is not a speculation but a calculated assessment. I was referring to those who bought property in a specific area without any research because they "thought it would go up"

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Cash flow is NOT king!

Cash flow is NOT king!

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