Cash flow is NOT king!

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Cash flow is NOT king!

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

“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. 


[email protected]650-575-6114
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
3y

 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.

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  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    3y
    Quote from @Sam Yin:
    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. 

    I think I needed to hear that. I pretty much took the summer off and I’ve taken several trips with my kids so far this summer. As far as investing goes, it takes so much energy and time to get the train moving in the right direction that it’s hard to know when to stop or slow down.  if someone came from a very financially challenged background, it can make it even harder to know when to enjoy some winnings without trying to keep storing away for a rainy day or the future.
    1Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    3y
    Quote from @Austin F.:

    Cash flow lets me take 6 months off every year to travel, ski (100 days last season), mountain bike, whatever. But yeah, I should invest in appreciation and enjoy life when I'm 60 (which is when my loans mature and I can start selling AKA retire).

     Would love to hear more about how you built up such a good cash flow so fast in life. What was your model etc?   You look pretty young in your picture, so are you single living on bare minimum and simply love taking time off?

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y

    I focused on buying fixer uppers from motivated sellers. I paid cash.

    Fast forward a few years and I quit my day job as Electrical Enginneer and my wife quit her job as a manager at the hospital.

    How did I manage this? CASH FLOW

    Many of those inexpensive houses downtown are worth alot of money now. That's nice and all but equity doesn't sustain my lifestyle, Cash Flow does.

    If I sell off my equity to live one that would be like killing the golden goose.

    I have created a cash flow machine and I am reinvesting in the machine to create more cash flow. 

    3Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ 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.

    Many more advantages.  The original buyer is the LLC, so when you sell the LLC, the new buyer of the LLC inherits the original terms, since the buyer never changed.  The profit is made on the sale of the LLC then, not the sale of the property.
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @Joe Villeneuve:
    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.

    Many more advantages.  The original buyer is the LLC, so when you sell the LLC, the new buyer of the LLC inherits the original terms, since the buyer never changed.  The profit is made on the sale of the LLC then, not the sale of the property.

    I have not done the LLC sale before that I can remember anyway.. but you still have basis and you  still have P and L and you still have tax on the delta if there is a P and a write off if there is an L is that not correct ?  I would think the major reason of selling the LLC is to not alienate the title but I suspect that can get busted up . Other wise what are the advantages of selling the LLC instead of just selling the asset in the LLC ?  
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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    3y

    @Jay Hinrichs

    Selling the LLC doesn't "force" a new loan or somesort of wacky loan (e.g. sub2, wrap, etc.), transfer fees, Title insurance, recording, etc. Since Title isn't change there can be a bunch of fees that can be avoided. If in a state like CA, doesn't reset the assessed value (right? CA type assessment systems reset the value with the sale price unlike most East Coast ad valorem systems).

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ 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 ~$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..

    need to stop and smell the roses along the way, not a month goes by that my wife and I have someone we went to high school with or other close friend pass away. In my world my transactional life is my cash flow so cash flow comes in many different flavors rental income just being one of them. But we do live in the Jet age and I see so many on BP that for better or worse like to talk about how frugal they are and thats all great and such but to some your missing out on all sorts of life experiences that become much harder to do when U get older simply because of family obligations ( grand kids) health etc.. So there is no right way or wrong way its all personal choice and what makes you feel good and sleep well is my thought.. I would not know what to do with myself if I was not doing some work every day.. that does not mean I cant have adventures during the year we do that of course but a lot of what we did was done as you mentioned from late 20s to about 50  once you have been all over the world and the US ( if you like Traveling) those type of trips just become a little more challenging as you get older. and for sure wont be happening if your dead before your time all that cash flow and money squirreled away does U no good. But hey if you want to drive around in an old beater with 200k miles on it and own 30 doors thats cool to.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @David M.:

    @Jay Hinrichs

    Selling the LLC doesn't "force" a new loan or somesort of wacky loan (e.g. sub2, wrap, etc.), transfer fees, Title insurance, recording, etc. Since Title isn't change there can be a bunch of fees that can be avoided. If in a state like CA, doesn't reset the assessed value (right? CA type assessment systems reset the value with the sale price unlike most East Coast ad valorem systems).


    David I get the transfer tax and prop tax but .. not sure about the alienation of the title.. but again I dont really have any personal experience with it.
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    0Reply
  • Julien J.
    Investor · CO · Member since 2016 · 757 posts · 1k+ votes
    3y

    well said!

    0Reply
  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    3y
    Quote from @Joe Villeneuve:
    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.

    Many more advantages.  The original buyer is the LLC, so when you sell the LLC, the new buyer of the LLC inherits the original terms, since the buyer never changed.  The profit is made on the sale of the LLC then, not the sale of the property.

     Joe, you give out just enough to be dangerous. I love that strategy.  It's another tool on my belt. But if an new investor is not careful,  they can hurt themselves. 

    Thanks for always be consistent. I hope more members take the time to analyze the education you provide.

    0Reply
  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    3y
    Quote from @Joe S.:
    Quote from @Sam Yin:
    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. 

    I think I needed to hear that. I pretty much took the summer off and I’ve taken several trips with my kids so far this summer. As far as investing goes, it takes so much energy and time to get the train moving in the right direction that it’s hard to know when to stop or slow down.  if someone came from a very financially challenged background, it can make it even harder to know when to enjoy some winnings without trying to keep storing away for a rainy day or the future.

    Any time! I have always preached that. But few ever really understand it. And that's OK too. It keeps the world turning and interesting.  If everyone did the same thing, it would be boring and the jig would be up.

    We all go through similar phases of life. Some skip and hop pass a phase while others get lost in it way too long. 

    When I first landed in America as a kid, my goal was to have a house paid off and $1M in the bank to live off the interest by the time I turn 30. I worked hard towards that goal and bought my 4rd home before 25 years old. I was not an investor of any sort. I was just pursing the goal. But then I got married and that pushed the $1M back. I plucks away at it while working like a machine. 

    One day, my supervisor called me in and said I lost a bunch of vacation time because I had not taken any vacation in several years. The fact is, I did not know what a vacation was nor did I understand the concept. The notion/idea did not exist in my culture. Be booked a week cruise for my wife and I with a 3 day train ride back home in a sleeper car. First vacation we had ever had, and we had been married a few years by then. That very moment, it dawn on me... this is what life should be like. This is what all that work is for. This is what I need to get to do more often. 

    We take road trips and cruises ever since, but limited to mt savings and vacation time. In the last few years, after investing for cash flow, we do extended the summer trips to 5-7 weeks at a time, while kids are off. Adult cruises sprinkled in. Now the wife wants to do one of those round the world cruises with the family.

    That was all made possible by investing for cash flow. Appreciation is a nice bonus, but it doesn't pay the bills. It would not have allowed me to leave the W2 world behind. Like Jay, I do still want to keep busy. But I do it on my terms. I'll go teach motorcycling at the local college here and there, pick up a few bike rebuilds once in while, and teach the kids some Jujitsu in between our travels. In fact,  we just got back from a road trip a few hours ago. I have 1031x in the works, all done via the cellphone that took less than a few hours put of the entire trip.

    If I was single, then may be I would keep working full time and invest for appreciation... may be not...

    @Joe S. It's hard for me to say that Cash Flow is Not King...

    2Reply
  • Arn CenedellaPro Member
    OP
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    3y
    Quote from @David M.:

    @Jay Hinrichs

    Selling the LLC doesn't "force" a new loan or somesort of wacky loan (e.g. sub2, wrap, etc.), transfer fees, Title insurance, recording, etc. Since Title isn't change there can be a bunch of fees that can be avoided. If in a state like CA, doesn't reset the assessed value (right? CA type assessment systems reset the value with the sale price unlike most East Coast ad valorem systems).

    The other question that needs to be address is Buying the LLC.
    if one sells the LLC then someone must also buy the LLC.

    There are risks on the buyer side.
    And these risks must be weighed against the benefits of keeping the existing loan and property tax base.

    Risks involved with buying an existing LLC:

    There is no such thing as title insurance for buying the LLC.
    Does the LLC have outstanding debts or other obligations that are not secured by the property? Does the LLC owe Home Depot $15,000 for carpet? Does the LLC owe some vendor $40,000 for construction work? If the answer is YES, who is responsible for these obligations? The old owner of the LLC or the new buyer?

    Is there a current litigation against the LLC? A public record search can be done but it is difficult to fully investigate and determine what issues exist if any.

    Let’s say a tenant falls down the stairs on May 10 and you buy the LLC May 15. Now the tenants gets an attorney and sues for medical issues on May 20, etc. Who has to deal with the lawsuit? The lawsuit is against the LLC which you now own. You will be involved in a suit for an event that happened before you bought the property. The tenant claim will be against the LLC not the old owner of the LLC.

    So be careful when you think about buying an existing LLC. Understand there are risks that go with the rewards. Consult legal counsel before doing so. The purchase of the LLC can be completed in such a way as to minimize risk. But go into with your eyes open.




    [email protected]650-575-6114
    0Reply
  • Arn CenedellaPro Member
    OP
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    3y
    Quote from @Ethan Gidcumb:

    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.

    Ethan: yes………both and.

    One of my mandatory buy guidelines is: Does the property pay for itself? I take this to mean - does the property generate enough rental and other income to pay operational costs, debt service, a reserve fund and cash reserves (even when a downturn occurs or when an unexpected expense occurs)? If so, I consider the property “self-supporting” - meaning I invested a wad of cash but will never have to put another dollar into the property. That is a win for me. I own a property, it pays for itself, and maybe puts a little cash in my pocket - the amount of which increases over time as rents increase. I own appreciating real estate that doesn’t cost me a penny moving forward.

    Just the way I do it. Others choose a different approach which is dandy fine.
    [email protected]650-575-6114
    2Reply
  • Austin F.
    Investor · MI · Member since 2015 · 227 posts · 478 votes
    3y
    Quote from @Joe S.:
    Would love to hear more about how you built up such a good cash flow so fast in life. What was your model etc?   You look pretty young in your picture, so are you single living on bare minimum and simply love taking time off?
    I buy in tertiary markets, and focus on cash flow (my spreadsheet doesn't even have an appreciation tab). I buy and hold with the expectation of paying off the loan in 30 years, meaning no cash outs, and a slow growth.
    I started in 2014 and jumped in totally over my head (I bought 3 properties at the same time from an investor getting out), learned a lot, made mistakes, but stuck with it and was able to buy a property every year or so skipping a couple years.
    I do all my own rehabs, management, and maintenance, and live fairly frugally, and yes, am single.
    I focus on maintaining a lifestyle I enjoy more than making money, the choices I make in investing always get run though the 'lifestyle' test, and I have built systems to support expansion while still being able to manage remotely.
    I will be 35 next year and have told myself I am switching from a frugal growth mindset to something more sustainable, we'll see how it goes.
    3Reply
  • Ethan Gidcumb
    Lender · San Diego, CA · Member since 2022 · 130 posts · 75 votes
    3y
    Quote from @Arn Cenedella:
    Quote from @Ethan Gidcumb:

    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.

    Ethan: yes………both and.

    One of my mandatory buy guidelines is: Does the property pay for itself? I take this to mean - does the property generate enough rental and other income to pay operational costs, debt service, a reserve fund and cash reserves (even when a downturn occurs or when an unexpected expense occurs)? If so, I consider the property “self-supporting” - meaning I invested a wad of cash but will never have to put another dollar into the property. That is a win for me. I own a property, it pays for itself, and maybe puts a little cash in my pocket - the amount of which increases over time as rents increase. I own appreciating real estate that doesn’t cost me a penny moving forward.

    Just the way I do it. Others choose a different approach which is dandy fine.
    Thanks for your insight Arn, its really helpful. I think I saw a response where you said you have over 1100 units of multifamily. Did I get that right? 

    How did you start in real estate and get to where you are today?
    0Reply
  • Don SpaffordPro Member
    Investor · Idaho Falls, ID · Member since 2016 · 912 posts · 629 votes
    3y
    Quote from @Arn Cenedella:
    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. 😀

    Yes, I know both of them well. The build to rent is MF. But for great cash flows, I actually invest in RV Campground Resorts. I am a general partner with Beyonder Holdings. Current market MF value-add does not provide that level of double digit cash on cash.
    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y
    Quote from @Sam Yin:
    Quote from @Joe Villeneuve:
    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.

    Many more advantages.  The original buyer is the LLC, so when you sell the LLC, the new buyer of the LLC inherits the original terms, since the buyer never changed.  The profit is made on the sale of the LLC then, not the sale of the property.

     Joe, you give out just enough to be dangerous. I love that strategy.  It's another tool on my belt. But if an new investor is not careful,  they can hurt themselves. 

    Thanks for always be consistent. I hope more members take the time to analyze the education you provide.

    I give out a lot more than enough to be dangerous.  I try to avoid that at all costs.  I give out enough so that if someone is interested, they will contact me direct for more details.
    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y
    Quote from @Jay Hinrichs:
    Quote from @Joe Villeneuve:
    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.

    Many more advantages.  The original buyer is the LLC, so when you sell the LLC, the new buyer of the LLC inherits the original terms, since the buyer never changed.  The profit is made on the sale of the LLC then, not the sale of the property.

    I have not done the LLC sale before that I can remember anyway.. but you still have basis and you  still have P and L and you still have tax on the delta if there is a P and a write off if there is an L is that not correct ?  I would think the major reason of selling the LLC is to not alienate the title but I suspect that can get busted up . Other wise what are the advantages of selling the LLC instead of just selling the asset in the LLC ?  
    some of the advantages I listed, and below.  One of the biggest is made by being able to make your profit attached to the sale of the LLC, and it make it a much batter financial scenario for the buy (easier to sell at your profit) since the seller won't need to get financing, pay all the fees associated with mortgages, and title work, and closing, etc..., and the buyer gets the benefit of the exact same cash flow you did since they are inheriting the exact same financial situation the seller had before the sale.
    0Reply
  • Tunui Torres-Borabora
    Investor · Yamhill County, OR · Member since 2018 · 11 posts · 8 votes
    3y

    @Shiloh Lundahl I really like the trade up model. This is the model that I’m personally working on. Can you explain the lease model?

    0Reply
  • Nate R.
    Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes
    3y

    This is correct.

    So many investors chase cash flow to the detriment of long-term returns, whether we're talking about real estate, stocks or other "income" investments. Hence the proliferation of content about dividend stocks, "cash-flow" real estate, etc.

    1Reply
  • Arn CenedellaPro Member
    OP
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    3y
    Quote from @Ethan Gidcumb:
    Quote from @Arn Cenedella:
    Quote from @Ethan Gidcumb:

    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.

    Ethan: yes………both and.

    One of my mandatory buy guidelines is: Does the property pay for itself? I take this to mean - does the property generate enough rental and other income to pay operational costs, debt service, a reserve fund and cash reserves (even when a downturn occurs or when an unexpected expense occurs)? If so, I consider the property “self-supporting” - meaning I invested a wad of cash but will never have to put another dollar into the property. That is a win for me. I own a property, it pays for itself, and maybe puts a little cash in my pocket - the amount of which increases over time as rents increase. I own appreciating real estate that doesn’t cost me a penny moving forward.

    Just the way I do it. Others choose a different approach which is dandy fine.
    Thanks for your insight Arn, its really helpful. I think I saw a response where you said you have over 1100 units of multifamily. Did I get that right? 

    How did you start in real estate and get to where you are today?
    My story is different than many.
    I got out of grad school at the University of Michigan with a Masters Degree in Physical Chemistry of all things and returned to my SF Bay Area roots and went into residential real estate back in 1978. So real estate has been my adult profession and passion.
    So I’ve been doing this a long time and that probably impacts my perspective on REI.

    Yes I am general partner on 1100 apartments so I don’t own them individually but own them with my investors wherein I am the decision maker and in total control of the property and investment. In return, my Spark team and I will receive 20% to 25% of the total profit in the deal as compensation for finding the deal, financing the deal, raising the capital, operating the property and providing our passive investors a nice return with no active involvement. We send out quarterly distributions via ACH. 

    It’s CASH FLOW with no effort.
    [email protected]650-575-6114
    3Reply
  • Ethan Gidcumb
    Lender · San Diego, CA · Member since 2022 · 130 posts · 75 votes
    3y
    Quote from @Arn Cenedella:
    Quote from @Ethan Gidcumb:
    Quote from @Arn Cenedella:
    Quote from @Ethan Gidcumb:

    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.

    Ethan: yes………both and.

    One of my mandatory buy guidelines is: Does the property pay for itself? I take this to mean - does the property generate enough rental and other income to pay operational costs, debt service, a reserve fund and cash reserves (even when a downturn occurs or when an unexpected expense occurs)? If so, I consider the property “self-supporting” - meaning I invested a wad of cash but will never have to put another dollar into the property. That is a win for me. I own a property, it pays for itself, and maybe puts a little cash in my pocket - the amount of which increases over time as rents increase. I own appreciating real estate that doesn’t cost me a penny moving forward.

    Just the way I do it. Others choose a different approach which is dandy fine.
    Thanks for your insight Arn, its really helpful. I think I saw a response where you said you have over 1100 units of multifamily. Did I get that right? 

    How did you start in real estate and get to where you are today?
    My story is different than many.
    I got out of grad school at the University of Michigan with a Masters Degree in Physical Chemistry of all things and returned to my SF Bay Area roots and went into residential real estate back in 1978. So real estate has been my adult profession and passion.
    So I’ve been doing this a long time and that probably impacts my perspective on REI.

    Yes I am general partner on 1100 apartments so I don’t own them individually but own them with my investors wherein I am the decision maker and in total control of the property and investment. In return, my Spark team and I will receive 20% to 25% of the total profit in the deal as compensation for finding the deal, financing the deal, raising the capital, operating the property and providing our passive investors a nice return with no active involvement. We send out quarterly distributions via ACH. 

    It’s CASH FLOW with no effort.
    Wow, that's really impressive and surprising that you got your master's and then went into real estate. 
    0Reply
  • Andrzej Lipski
    Investor · CT · Member since 2022 · 50 posts · 24 votes
    3y
    Quote from @Arn Cenedella:
    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. 

    Well if you wrote a headline to get engagement and then walk it back then mission accomplished. Maybe say Cashflow is King and Equity Growth is Queen. Not as catchy and maybe it will be largely ignored. But thanks for making all my points in your reply.

    0Reply
  • 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:
    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. 

    Well if you wrote a headline to get engagement and then walk it back then mission accomplished.

    @Andrzej Lipski

    What are you talking about?

    Read thru all my comments and I consistently indicate investing for equity growth is primary. Yes cash flow is important. But equity growth is primary.

    Do you comment just to be a troll?

    [email protected]650-575-6114
    0Reply
  • Andrzej Lipski
    Investor · CT · Member since 2022 · 50 posts · 24 votes
    3y
    Quote from @Arn Cenedella:
    Quote from @Andrzej Lipski:
    Quote from @Arn Cenedella:
    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. 

    Well if you wrote a headline to get engagement and then walk it back then mission accomplished.

    @Andrzej Lipski

    What are you talking about?

    Read thru all my comments and I consistently indicate investing for equity growth is primary. Yes cash flow is important. But equity growth is primary.

    Do you comment just to be a troll?

    Ask a lender which is King.  If you are an all cash buyer or buying land then you make your point. Lower your rents on any of your commercial properties and then put it up for sale and tell me how much you are offered on that property. Tell me how much equity growth office properties have right now. Then answer who is king.  If an stable healthy market equity growth is beneficial but it comes from improvements in income which is -- cash flow. 
    1Reply
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