Equity vs. Positive Cash Flow

General Real Estate Investing
19yFollow

Equity vs. Positive Cash Flow

N/A N/A
Member since 2008 · 44 posts · 0 votes

With all of the media on the housing market today, it is tough for real estate investors to know what to do. If you live in one of the markets that is suffering from a sharp price correction, you might think that the entire housing industry is imploding. The reality is that there are many markets across the country that are experiencing double-digit annual appreciation. Reference the OFHEO.gov Housing Price Index report http://www.ofheo.gov/HPI.asp. Wenatchee, WA appreciated 25.6% over the last year. Provo and Salt Lake City appreciated over 19%. Grand Junction, Ogden, Gulfport, Biloxi, Myrtle Beach, and Boise appreciated around 15% or better. So there is plenty of buy-and-hold investing still going on in this country, you just need to know where to look.

One of the trends in real estate investing that has resurfaced in the last year or two is the idea of buying properties that have positive cash flow. This is where the rental income exceeds monthly expenses. While it is certainly beneficial when an investment property provides revenue, it is important to realize why an investment might be doing this.

For example, you can pretty much make any property cash flow positive if you provide a large enough down payment. The problem with large down payments is that you end up diluting your ROI. One of the greatest benefits with real estate is leverage, and utilizing large down payments is counter to that advantage.

Positive cash flow is not a panacea. Blindly looking for positive cash flow without considering all the other angles of an investment opportunity is just as wrong as looking for rapidly appreciating markets without regard to any other element. What you need to do is analyze all of the different aspects of an investment opportunity before moving forward with it.In doing so, it is critical that you determine where you are going to get your return. It might be cash flow, it might be future appreciation, it might be the equity you get when you buy right, or it might be a combination of the three.

Cash flow is basically a return you get every month. It will be considered income that you will need to report on your annual taxes. You and your accountant will need to address the tax issue, either by writing off losses against it (such as depreciation or related expenses), or you

0Reply
54 views

33 Replies

Jump to latestLatest
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    Personally, I would not do business with anyone that couldn't even read the simple forum rules. Posting a blatant advertisement is very poor form and your inability to understand the forum rules doesn't inspire confidence.

    However, your entire premise is bogus. First, it is clear to me that you have no idea how to calculate cash flow. I'd like to see the numbers on a $150,000 property in Raliegh that bought at retail will produce a $150 monthly positive cash flow! I'm afraid I'd have to raise the BS Flag here!!!

    Ridiculous!!! Surely you're not trying to convince anyone that actually making money with rentals is an idea that has only resurfaced in the last year or two. Successful investors have always made money with real cash flow.

    Positive cash flow is the LIFEBLOOD OF EVERY BUSINESS! Without positive cash flow, you are out of business! So, to say that positive cash flow is not a panacea is just ridiculous.

    One of the ways I evaluate an investment is to ask the question "how many of these investments can I afford?" So, with your example, how many of these "investments" can the average person afford if they're losing $200 per month per property? OUCH!

    Looking for "rapidly appreciating markets" is simply speculation. Look at all the people who bought property over the past few years in the rapidly appreciating markets of Las Vegas, Phoenix, or Florida. A huge number of these "investors" are now upside down. They can't sell their properties and they can't rent without being punished with big negative cash flow. They're losing money every month and their houses are being lost to foreclosure by the thousands!

    Instead of buying "investment" properties that have a little equity and NEGATIVE CASH FLOW, why not buy properties that have BOTH SIGNIFICANT EQUITY AND POSITIVE CASH FLOW. With the exception of the balloon areas, this is possible in most of the United States. The last two houses I bought were purchased at 50 cents on the dollar AND had a REAL positive cash flow of $100 per month each. This is real cash flow (including all the real world operating expenses), as opposed to the fantasy cash flow we so often see. So, in my case, I paid $50,000; picked up $50,000 in equity at closing, AND had a $100 per month per property positive cash flow.

    While you seem to equate equity with cash flow, there is one HUGE difference: You can't pay the bills with equity, but you can pay the bills with CASH!

    Good Luck on convincing people that losing money is a good deal!

    Mike

    0Reply
  • Justin Putt
    Huntsville · Member since 2008 · 137 posts · 3 votes
    19y

    I never understand why people buy rentals for equity purposes if there is no cash flow or very limited. I just bought a 4 unit at 53 cents on the dollar with about 40k in equity and will cash flow $400-$500 a month after ALL expenses are taken out, plus this property was just completely renovated with brand new appliances and brand new furnaces in each unit.

    The equity is great, but for me, would mean nothing if it did not have cash flow. If you are looking to make it in this business, taking a monthly loss will kill your business.

    0Reply
  • Joshua D.Pro Member
    BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes
    19y

    I've decided to reopen the thread as I think it is an important subject of debate.

    I hope to hear more views on this topic (barring the blatant solicitation, of course.).

    Podcast Guest on Show #100
    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y

    Thank you. I will edit my original post to remove the mention of the specific product. I don't think the mention of the live teleconference is a solicitation as we will not be selling any product there, we're just inviting people to discuss the issue of Equity vs. Cash Flow. Let me know if that is agreeable.

    Sean

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y
    Originally posted by "MikeOH":
    Personally, I would not do business with anyone that couldn't even read the simple forum rules. Posting a blatant advertisement is very poor form and your inability to understand the forum rules doesn't inspire confidence.

    However, your entire premise is bogus. First, it is clear to me that you have no idea how to calculate cash flow. I'd like to see the numbers on a $150,000 property in Raliegh that bought at retail will produce a $150 monthly positive cash flow! I'm afraid I'd have to raise the BS Flag here!!!

    Ridiculous!!! Surely you're not trying to convince anyone that actually making money with rentals is an idea that has only resurfaced in the last year or two. Successful investors have always made money with real cash flow.

    Positive cash flow is the LIFEBLOOD OF EVERY BUSINESS! Without positive cash flow, you are out of business! So, to say that positive cash flow is not a panacea is just ridiculous.

    One of the ways I evaluate an investment is to ask the question "how many of these investments can I afford?" So, with your example, how many of these "investments" can the average person afford if they're losing $200 per month per property? OUCH!

    Looking for "rapidly appreciating markets" is simply speculation. Look at all the people who bought property over the past few years in the rapidly appreciating markets of Las Vegas, Phoenix, or Florida. A huge number of these "investors" are now upside down. They can't sell their properties and they can't rent without being punished with big negative cash flow. They're losing money every month and their houses are being lost to foreclosure by the thousands!

    Instead of buying "investment" properties that have a little equity and NEGATIVE CASH FLOW, why not buy properties that have BOTH SIGNIFICANT EQUITY AND POSITIVE CASH FLOW. With the exception of the balloon areas, this is possible in most of the United States. The last two houses I bought were purchased at 50 cents on the dollar AND had a REAL positive cash flow of $100 per month each. This is real cash flow (including all the real world operating expenses), as opposed to the fantasy cash flow we so often see. So, in my case, I paid $50,000; picked up $50,000 in equity at closing, AND had a $100 per month per property positive cash flow.

    While you seem to equate equity with cash flow, there is one HUGE difference: You can't pay the bills with equity, but you can pay the bills with CASH!

    Good Luck on convincing people that losing money is a good deal!

    Mike

    Mike,
    Thanks for your reply. Don't think that I didn't know I'd be batting at a hornet's nest here, and people that reply to these posts tend to favor their view very strongly. Clearly, you're someone that focuses on cash flow, and that's an acceptable strategy.

    My post is to raise awareness that it is not the ONLY factor to consider when you are investing. During the 2003-2005 boom, many, if not most real estate investors, especially the new ones, were looking ONLY for rapid appreciation. As prices in those markets rose above a positive cash flow scenario, many of them accepted a negative cash flow in hopes that the monthly increase in their equity would greatly outpace their negative cash flow. So when I said:

    I was citing the fact that a very large segment of the real estate investment industry, and that includes many of the large bulk buying companies and many of the schools, had shifted their entire focus towards rapid appreciation, dropping positive cash flow out of their sights. Only after the current adjusting market have they started to focus back on positive cash flow. The frustrating thing is they need to be considering ALL of the factors when determining the value of an investment.

    I would agree with you when you say:

    That would be a great investment opportunity, and if you can find them, buy them. Most investors aren't coming across these types of investments themselves, and if you have a line on them, I would suggest you go into the business of supplying other investors with them.

    I would like to point something out in your quote above. You say that your last investment was 50 cents on the dollar and you had equity and cash flow, yet you "raise the BS flag" when I say you can make a property cash flow in Raleigh:

    First of all, yes, you CAN ABSOLUTELY DO this, even at the "retail" that you casually threw in, in spite of my not saying that you would be buying at retail. But yes, you can buy retail in Raleigh and still make positive cash flow. I would recommend you Google Jan Wynns, Scott Snyder, or Tiffany Elder and ask them about this.

    Secondly, if you can say that you buy property at 50 cents on the dollar and that you can make a property cash flow and have equity, how is it that my statement of making a property cash flow a measly $150 "raises the BS flag?" I don't mind a valid argument, but please, make it valid.

    You go on to say:

    If a person can afford to provide a $40,000 20% down payment on a $200,000 house, is it not conceivable that they could afford to provide a $10,000 5% down payment and use the remaining $30,000 to cover the $200 a month ($2,400 a year) negative cash flow? That's over 10 years of cash flow that they could cover, and more than likely rents will rise by $200 over the next 10 years. If you're looking for cash flow to "pay the bills" as you say, then doesn't it make sense to keep the $30k in the bank and use that for bills? Doesn't using a lower down payment or buying at "50 cents on the dollar" as you claim you can do make more sense than trying to find a property that brings in a measly $150 per month?

    Look, I'm not saying that it's not nice to have a positive cash flow, and I'm not saying that you should accept any level of negative cash flow just to have a lower down payment. I'm just saying that you need to consider BOTH, and you need to be smart about analyzing it. Just relying on the mantra "I need positive cash flow" is just as irresponsible as relying on the mantra "I need rapid appreciation."

    Any intelligent reader will recognize this as a poor attempt to weaken my argument. I am clearly not trying to convince anyone to "lose money." I am raising their awareness that they need to consider all factors and not fall into the trap of focusing on only one thing like cash flow.

    Again, thanks for providing the yin to my yang, as all good discussions need to be strongly supported by both sides. I look forward to your response as well as anyone else that wants to dive into the debate.

    Cheers,

    Sean

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y
    Originally posted by "**********":
    SEAN......

    WE HAVE TRIED TO ASK YOU TO FOLLOW THE FORUM RULES ON SEVERAL OCCASIONS!
    You run Narrea, and I am sure you have your own protocall. Please follow ours and continue to contribute, not just advertise in the wrong forums!

    Thanks for the catch Mike!

    Here is the entire list of posts that I've made on this forum: http://forums.biggerpockets.com/search.php?search_author=SeanBrown

    Sean

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y
    Originally posted by "japutt":
    I never understand why people buy rentals for equity purposes if there is no cash flow or very limited. I just bought a 4 unit at 53 cents on the dollar with about 40k in equity and will cash flow $400-$500 a month after ALL expenses are taken out, plus this property was just completely renovated with brand new appliances and brand new furnaces in each unit.

    The equity is great, but for me, would mean nothing if it did not have cash flow. If you are looking to make it in this business, taking a monthly loss will kill your business.

    This is the exact reason for this discussion. I agree, if you can find an investment opportunity that will provide you with both positive cash flow and a strong equity position, GO FOR IT. It sounds like you just got an awesome deal, and that's great.

    The point of the discussion is that many people today are looking for houses that are positively cash flowing, but they don't really care if they buy them at retail or if they are appreciating or not. They have been told to GET POSITIVE CASH FLOW, and we're just discussing why it is important to look at all angles.

    If you could step into $40,000 of solid equity and have a positive cash flow of $100, is that good? I would think so. Now let's say you have that same $40,000 equity opportunity and you're negative by $100 a month... is it still a good deal? As it would take you 400 months, or over 33 years to eat into that equity, and if you can assume that rents would go up $100 sometime over the next 33 years (LOL), then yeah, it's probably not a bad deal. So, in the second scenario, would you not do the deal because it wasn't positive cash flow? Some would, some wouldn't, and I'm just trying to make some people aware that it is something to consider.

    Cheers,

    Sean

    0Reply
  • Joshua D.Pro Member
    BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes
    19y

    Sean -
    I think you failed to understand that my decision to allow the conversation to continue did not mean that I was inviting you to re-edit the original post to include multiple solicitations as included in the original post. It was to allow people to continue to discuss the different outlooks on cash-flowing properties vs. appreciation.

    Podcast Guest on Show #100
    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    If you knew anything about rentals, you would know that you CAN NOT pay retail for a property and get positive cash flow. I haven't seen a single property that will cash flow when purchased at retail. You keep saying that but it is JUST NOT TRUE in the vast majority of cases! If you're claiming otherwise, let's see the numbers!

    Yes, many people today are looking for houses that will cash flow, because most of the newbies that bought at retail hoping for appreciation have already been washed out of the market (after losing a bunch of money). Being from Las Vegas, you should know that better than anyone! With fewer newbies, that leaves more experienced investors in the market who know that they need positive cash flow if their businesses are to survive.

    You don't seem to be sure. YES, THAT IS GOOD!

    Now that's some faulty thinking from someone who should know better. That was the big claim in Las Vegas over the past few years. Buy with negative cash flow because things will be better tomorrow. However, that's not the way it worked out. People who bought with a little equity and negative cash flow are now upside down and are losing their property to foreclosure. The market goes down as well as going up, ESPECIALLY IN BUBBLE AREAS and your equity can disappear in a very short period of time. If the rents increased only $100 of the next 33 years, you would have a HUGE NEGATIVE CASH FLOW. Believe it or not, expenses also go up. So, if the rents increase by $100 and expenses increase by $100, you still have a negative cash flow. Inflation eats away at everything.

    Now you've got it. I certainly would NOT buy a property that loses money each and every month!!!

    Keep studying!

    Mike

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y

    Mike, I think we'll just have to disagree on this point, as I see positive cash flow on retail properties with 20% or less down all day long. Any investor that has looked for them has found them and can still find them if they look in the right markets (Biloxi, Baton Rouge, Raleigh, Charlotte, etc.) Those that are reading this thread already know this. I say you can do it, you say you can't, and the readers will just have to decide for themselves.


    Now that's some faulty thinking from someone who should know better. That was the big claim in Las Vegas over the past few years.

    No that is NOT what was going on in Vegas and Phoenix and South Florida. People were NOT buying with equity in the property, they were buying based on past appreciation and hoping that the appreciation would continue. You even say this later in that paragraph.

    Again, please use valid debate processes, not false ones. You only weaken your point by twisting things so obviously. I want a good debate here, not a weak argument. There are good things to debate on the side of cash flow, so use them!

    And this is the exact reason for this thread, to open the minds of investors to understand that which you do not. You need to gain the proper perspective to understand whether you are "losing money" or scoring big to begin with. To obtain that perspective, you need to start from the very beginning of the investment.

    MikeOH buys a $200,000 property for $200,000, provides a $40,000 20% down payment to make $200 a month. SeanBrown buys a $200,000 property for $160,000, only provides $5,000 to get into the deal, and has a negative cash flow of -$200 a month. Assuming a similar appreciation and annual repairs, SeanBrown is coming out of pocket $2,400 a year while MikeOH is making $1,200 a year.

    From the beginning MikeOH is out $40,000 and has to wait 33 years to get that $40k back. MikeOH "lost" or was "in the hole" by $40k from the very beginning, while SeanBrown was "in the hole" by $5k.

    Let's say they both sold their properties in 5 years, and neither of them appreciated and they had the same expenses (just to make the math easier). MikeOH made $1,200x5=$6,000 and got his $40,000 back. SeanBrown lost $2,400x5=$12,000, lost his $5,000 in buying the property, and gained $40,000 in equity when he bought the property, so he made $40,000-$12,000-$5,000=$23,000.

    To summarize:
    MikeOH invested $40,000 for 5 years and made $6,000.
    SeanBrown invested $5,000 for 5 years, invested $200 a month over those five years (for a total of $12,000) and made $23,000.

    Which sounds like the better investment opportunity?

    Obviously, both MikeOH and SeanBrown would not intentionally buy in markets that didn't appreciate over the 5 years, and they would probably expect to have some kind of increase in rent over those years. (And they would also know there are other expenses like occasional repairs, property management, and vacancies.) But to compare the investment to investment opportunity, you need to equal out the variables to see where the return is going to come from.

    Again, I'm not trying to convince any investor to fill their portfolio with properties that are negatively cash flowing. I'm just trying to raise awareness that just because something doesn't cash flow positively doesn't make it a bad investment opportunity. So many people are beating the positive cash flow drum that a lot of readers are forgetting there are other factors in each of the deals. I think it's just as wrong to fill your portfolio with properties that are only positively cash flowing and don't have any equity in them as it it so fill it with only rapdily appreciating properties or with only properties that have some equity in them.

    Sean

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y
    Originally posted by "biggerpo":
    Sean -
    I think you failed to understand that my decision to allow the conversation to continue did not mean that I was inviting you to re-edit the original post to include multiple solicitations as included in the original post. It was to allow people to continue to discuss the different outlooks on cash-flowing properties vs. appreciation.

    Okay. For the readers, I'd like to say that I had originally posted an article that was 10,000 characters long and it is now less than 2,800 characters. It is hard for an article to have any continuity when 75% of it has been edited by someone other than the author, so please forgive me if the edited post is confusing.

    I still think the conversation regarding Equity vs. Cash Flow is valuable.

    Sean

    0Reply
  • Richard Warren
    Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
    19y

    I must say that I am absolutely enjoying this debate. Both sides have validity and make great points. Every investor has his own risk tolerance, investment capital and cash needs. I was a Certified Financial Planner (CFP) for over 15 years. My clients ran the gamut from totally risk averse buy government bonds and CDs only to extreme risk takers who would take a huge gamble in the hope of major rewards. Real estate investors are no different.

    It is all about Risk vs. Reward

    MikeOH takes a fairly low risk approach. Buy at a discount, be sure to have a positive cash flow and don’t worry about appreciation. Make money from rent, mortgage pay down and treat any appreciation as a bonus. You won’t go broke making a profit. It is not totally without risk as a good rental are can dry up leaving you with excessive vacancies but overall the strategy is fairly conservative.

    Sean takes a more aggressive approach. Look for areas with high appreciation potential, buy using maximum leverage to maximize your ROI. It's OK to have a negative cash flow if you plan for it and can handle it. This approach is closer to speculation. There is nothing wrong with that as long as you understand the risk involved and can handle it.

    Every investor, real estate or otherwise, needs to have an approach and strategy that suits them. You can learn from others and adopt the various methods that you are comfortable with and ignore the ones that you aren’t.

    I love MikeOH’s posts on this forum. He is usually dead-on and probably has saved many newbies from making bonehead mistakes.

    On the other hand, I may be the only one on this forum that has actually dealt with Sean Brown and NARREIA. I have benefited from greatly some of NARREIAs recommendations and ignored others as not being for me. I have personally debated the cash flow issue with Sean in the past, and while my own philosophy is a lot closer to MikeOH, his points are valid even if I do not totally agree with them. Sean’s approach is absolutely not for everyone but Sean is a true professional who takes his business seriously.

    I think that most investors will fall in between these two approaches.

    I would love to hear allcash chime in on this one.

    8)

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    Sean,

    You are again ignoring the reality. You made the false claim that you can pay retail and have positive cash flow. Again, I challenge you to post the numbers and I'm not talking about buying cash flow with a big down payment.

    This is all TOTAL NONSENSE! I have made it crystal clear that properties will NOT cash flow when purchased at retail. Furthermore, I do not buy cash flow by putting down big downpayments. As I have posted many times before, I never buy properties unless I can get at least a 30% discount to market and due to the uncertain market, I am currently only buying properties at 50 cents on the dollar or less. In a declining and uncertain market, it is absolutely foolish to pay retail for anything.

    So a more realistic comparison of the two strategies would be that I buy a $200,000 property for $100K and have a $100 per month positive cash flow. I have $100K instant equity and positive cash flow. Am I hoping for appreciation? NO! I got an instant equity of $100K at closing.

    With your strategy, you pickup $40K in equity and lose $2,400 per year. Assuming equal appreciation and repairs, no matter how long you own the property, I will always make more money than you. More importantly, I can buy 100 rentals and have a monthly cash flow of $10,000 per month. With that cash flow, I am out of the 9-5. With your strategy, if you owned 100 rentals, you would need to put $240,000 of your own money in to cover the losses EVERY YEAR! Not much of an "investment" if you ask me!

    Mike

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y

    As I said, we're going to have to agree to disagree on this. Those that have done this in the past will realize the err in your argument. Those that don't have this experience will have to resort to other resources to determine on whether you can do this or not. Oddly enough, there are very many books out there discussing this practice.

    Mike, If you can consistently find these kinds of opportunities, I don't blame you for buying them. I would encourage you to buy them. I would encourage my clients to buy them. However, I don't think it is "realistic" to believe that most investors can find these kinds of deals. If they were that easy to find, we'd all be buying them and no one would be disucssing any other form of real estate investing because it is that good.

    Are you doing these kinds of deals regularly? If so, I would have to assume that you have made yourself a few million and are pretty much set for life. Clearing $100k per deal on a regular basis is phenomenal, nay, fantastic, and if you are able to do this, I would ask that you share this with the rest of the community as we could all use a spare $100k every now and then.

    I would say that if you polled the members of this community and said "If you could find a property that was worth $200,000 and buy it for $100,000, would you buy it?" and most would jump at the chance (you have to factor in the completely random characters that would say no just to say no!) I would do a deal like this, as would all of my clients.

    I would also say that if you also polled them on the question "Do you think you could find a property within 30 days that was truly worth $200,000 and you would only have to pay $100,000 for it?" I think you would find a very low number of people that would say they could. I don't think that I've done a deal like this, and I don't think many, if any of my clients have either. Rich Warren might have had this kind of success in Ely, but on a much smaller scale.

    So then, for those that aren't running into 50% equity positions on a regular basis, it comes back to the original discussion, which is "Would you rather positively cash flow $150 a month or would you rather step into $40,000 equity and negatively cash flow $200 a month?"

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    Sean,

    Well, I think we've finally come to a consensus. You made that claim that you could pay retail for properties in Raliegh that would cash flow, but you can't produce the numbers. We don't need to agree to disagree, your assertion is bogus.

    Yes, Sean, I do buy properties regularly for 50 cents on the dollar, although not usually in the $200K range. A more normal deal for me would be to buy a $60,000 house for $25K -$30K, or an $80K duplex for $40K. I've been doing this almost 4 years and have several dozen rentals. ALL have been bought below 70% of market value. This should come as no surprise to you because in your first post (advertisement) you were pitching properties that people could buy, already rehabbed, with 20% equity. Those properties won't cash flow, hence the discussion we are having, with you trying to convince people that negative cash flow is good. Since I know you are making a profit on these deals, then you certainly bought them at or below 70% of market, unless you're in business as a charity for new investors (I doubt it).

    BTW, I almost never sell properties because I'm in the rental business. That is my living, so selling my properties wouldn't be too intelligent. I'm not interested in making a fast buck that the government will tax. I'm interested in freedom from the 9-5 and only working a few hours per week on my rentals. I don't want to be constantly buying and selling - that sounds like a job to me!

    Good Luck,

    Mike

    0Reply
  • Joshua D.Pro Member
    BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes
    19y
    Originally posted by "SeanBrown":
    Okay. For the readers, I'd like to say that I had originally posted an article that was 10,000 characters long and it is now less than 2,800 characters. It is hard for an article to have any continuity when 75% of it has been edited by someone other than the author, so please forgive me if the edited post is confusing.

    I still think the conversation regarding Equity vs. Cash Flow is valuable.

    Sean

    If the author of the article were able to follow a simple set of rules and guidelines established by this website, that he agreed to follow when signing up for this site, then we wouldn't need to edit it. The original 10,000 character post was simply an advertisement.

    If the edited post is confusing, then the only person at fault here is the author.

    That said, the reason this post has been kept open is that we feel that it is important to hear the debate on Cash-Flow v. Equity investing.

    Podcast Guest on Show #100
    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y

    Here's a property that one of our Raleigh Advisors found last month. It is no longer available, so were' not soliciting anyone to buy this property. I'm just using this as an example to support the fact that you can buy retail and cash flow positively. I just dug into my email folder and found the first one that fit the criteria. This is a duplex, although you can do the same thing with SFRs in Raleigh as well.

    Jay Street, Chapel Hill NC 27516
    Duplex near UNC!!! 3 beds/2.5 baths + den (possible 4th bedroom) on each side.


    Proforma Estimates:
    Purchase Price $349,900.00
    % Down 10.00%
    1st mortgage interest rate 6.75% Interest Only
    Monthly Gross Rental Income $3,190.00
    Monthly Other Income $0.00
    % Property Management 10.00%
    Annual Homeowners Assoc. Dues (HOA) $0.00
    Annual Taxes (previous year actual) $5,272.00
    Annual Insurance Estimate $700.00


    MONTHLY EXPENSES:
    Mortgage Payment $1,771.37
    Tax and Insurance $497.67
    Property Management $319.00
    HOA $0.00

    TOTAL MONTHLY EXPENSES $2,588.04

    ESTIMATED MONTHLY CASHFLOW $601.96
    Year 1 Cash-On-Cash Return 20.64%

    Crystal.

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y

    One of the intriguing elements of forums is the propensity for the vocal members to argue their opinion rather than debate and discuss an issue. Mike, I'm glad you found your niche in buying and holding properties, and I'm glad that you are able to find these properties at such a great discount. As I've said earlier in this thread, if you're able to do so, keep doing it. It's great.

    However, there are many different angles in real estate investing. Some are more aggressive, some require more capital, some require full payment in cash, some require that you are connected, some require making hundreds of phone calls, some can be done by signing a contract sent through the mail... the list is very long. Yet you continue to insisit that your method is the ONLY method and that none of these others have any merit.

    For those reading this thread, understand that there are many ways to successfully invest in real estate, and it is dangerous for you to listen to a single source, especially a single source that preaches a single method of investing. Be sure to make yourself aware of the myriad ways to invest and then find one that fits your risk tolerances, your financial situation, and your personal style. If you can find opportunities that offer you a 50% equity position, consider it! But don't just go writing off an investment opportunity because one ranting guru who charged you $3,000 to learn their system is telling you to do so. Learn that there is more to investing than a single element, and you'll open your eyes to many, many more valid investment opportunities.

    Sean

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    Sean,

    It's just as I thought, you don't own rental properties, do you? Even someone with a basic understanding would know that taxes, insurance, and management are not the only operating expenses.

    You should know that throughout the United States, operating expenses run 45% to 50% of the gross rents. Those numbers well established and I'm surprised that you didn't know that. However, even if you didn't know that, if you are in the rental business, you certainly should know that you've omitted the majority of the operating expenses. Operating expenses don't only include management, taxes, and insurance! Operating expenses also include: advertising, maintenance, vacancy allowance, legal fees, utilties paid by the owner (during vacancies, etc), common area maintenance, lawn care, snow and ice removal, lawsuits, office expenses, capital expenses (although not technically an operating expense), entity maintenance, damage done by tenants (above the deposit), evictions, etc, etc, etc.

    Moreover, you used a gimmick loan (interest only) to try improve this deal.

    Let's look at the real numbers:

    Gross income: $3,190
    Operating Expenses: $1,595
    NOI: $1,595

    Mortgage Payment: $1,968 (using your gimmick loan)
    Monthly Loss: $373

    Mortgage Payment: $2,507 (30 yr, 7.75%, NOO)
    Monthly Loss: $912 OUCH!

    Finally, your insurance number looks bogus. I'm not buying that you can put landlord insurance on a $350K property for $700 per year. That looks like homeowner's insurance to me, which would be void for a NOO property.

    Mike

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y

    Whatever.

    0Reply
  • Ryan Webber
    Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
    19y

    Mike is a pit bull around here, but we really like him. Plus with Mike's approach, you will not go wrong. You WILL make money.

    Now, Sean, in reference to your cash flow numbers on the Chapel Hill deal, I'm going to have to agree with Mike that it doesn't communicate realistic numbers for a rental. You didn't factor in basic maintenance or vacancy, which any investor knows are very real expenses, and $700 annually for $350,000 in insurance? Wow. I don't think that would even cover a home-owner's policy.

    I would guess Mike was right on that you do not personally have rental property. You seem more like a broker than an investor. Broker's like to fluff up a deal as much as possible, and investors like to tear it down to the bones.

    Like Mike, I also find deals at 50% of value, and I keep some for myself but I feed most of them to other investors. I actually make a very good living feeding them to other investors.

    I am an advocate and was one even through the "boom" that cash flowing property is the best way to go when investing. No, it doesn't have the glitz and glamour of those highly appreciating areas that have now popped, but I can sleep a whole lot better knowing that I will be in the black next month and the month after that just like I was last month and the month before. Its the tortoise versus the hare, and we all know who won that one.

    I've had properties that have a lot of equity and little cash flow and I've had cash flow properties that have no equity, and frankly I prefer Mike's strategy of having both. :D

    Now if I had to pick I would take the cash flow. Equity is nice when you sell, but a draining bank account keeps you up at night. You can always build up the cash from cash flow and go buy another one. To tap into your equity you will either have to sell or refinance, and if you have negative cash flow you need to be selling it anyway.

    Equity is not a long term strategy for developing wealth. Equity doesn't generate income. Equity can generate capital but not income. Income, namely passive income, is the name of this game, and equity is not the vehicle for it. Now equity can help you get there, but you will have to convert that equity (potential capital) into real capital and then into passive income.

    On top of all that, I really enjoy sleeping soundly at night, and cash flow provides me with that.

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y

    I buy and sell properties for both myself and clients. The insurance number was provided by the broker in Raleigh, and she's sold many of these properties in Raleigh. But let's say the insurance is higher... how much higher would you say it would be? Factor that into the numbers that she provided. What would you say the vacancy would be? Factor that in. Mike is suggesting that the monthly expenses on a duplex in Raleigh would be almost $1,600. That's ridiculously excessive. I provided numbers so anyone that wants to figure cash flow on a retail deal could crunch them however they want to crunch them. I'm still saying this is/was a cash flow positive opportunity.

    I understand your other points and agree there is merit to many of them. Again, I'm saying that there's more to the picture than just looking for cash flow, and really, I think that is what Mike and you are both saying:

    0Reply
  • N/A N/A
    Member since 2008 · 72 posts · 0 votes
    19y

    I have some quick questions from a newbie.

    When you say you can get a good equity position, do you mean you basically buy it at a discount so there is built in equity?

    And MikeOH, buying rentals on a discount for .50 to the dollar, do you find a lot of these deals in your area or do you think they exist in every state? And do you manage all your rentals because they are all in one area or do you actually invest out of state?

    I'm in chicago and I don't understand how i'm suppose to find these types of discounted deals in the city. I guess if i go farther west there are more suburban areas where homes are under the 100k price range but I don't understand why someone would give up a property for basically 50% of its value. can someone explain that to me? besides foreclosure?

    thanks all.

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 44 posts · 0 votes
    19y
    Originally posted by "splinterlfe":
    When you say you can get a good equity position, do you mean you basically buy it at a discount so there is built in equity?

    Yes. I mean you find places where you can find them at a discount (from wholesalers) or they are financially distressed (pre-foreclosure, REO, divorce, probate). I look for suppliers of these kinds as well as some retail stuff like condotels, pre-construction, and model leasebacks. It sounds like Ryan Webber is a supplier of the types of properties you seek.

    This is basically what I was saying earlier. If you can find properties like this, and there are real instances of being able to do this, you should definitely pounce on the chance. But like you allude to, it's dang hard to be able to find them, especially if you are not doing real estate investing full time or are just starting out.

    The groups that I run into that can buy at any real kind of discount are using bulk buying from bank owned (REO) portfolios. I haven't found a group that is able to consistently acquire any reliable flow of properties at much lower than 60 cents on the dollar, and they mark them up 5-15% when they resell them.

    That said, if you're doing the pre-foreclosure thing, you're dealing with owners, and they are not so savvy and are willing to take a steep discount just to keep from being foreclosed upon.

    I would guess that either Ryan or MikeOH can add to this to let you know how they are doing this.

    Sean

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y
    1st mortgage interest rate 6.75% Interest Only
    Monthly Gross Rental Income $3,190.00
    Monthly Other Income $0.00
    % Property Management 10.00%
    Annual Homeowners Assoc. Dues (HOA) $0.00
    Annual Taxes (previous year actual) $5,272.00
    Annual Insurance Estimate $700.00

    So, let's add it up.

    By your numbers, the taxes are $481 per month
    By your numbers, the management is $319 per month
    The true landlord insurance cost is probably at LEAST $120 per month
    Vacancies 8% would be a normal number $263
    Maintenance is probably about $100 per month
    Capital expenses typically run about 5% $160

    That's $1,443 without even considering all the other expenses that I listed yesterday. Are the total expenses $1,600 - YOU BET THEY ARE!!!

    I don't know why you keep insisting that you are right when you CLEARLY don't know the first thing about rentals. Just last night, you thought the only expenses for rentals were taxes, insurance, and management. That's why I responded to your post in the first place. In a blatant violation of the forum rules, you came on here to advertise your negative cash flow "deals" to the newbies and it was blatantly obvious from you post that you didn't know what you were talking about.

    Splinterlife,

    Deals that are 50 cents on the dollar or even 70 cents on the dollar are HARD to find in every market. They are certainly far less than 1% of the available properties for sale. In my area, I calculate that they are probably less than 1/4 of one percent.

    In my opinion, the key to finding these properties is to meet people (I hate the word networking). Anyway, you've got to meet a lot of people and let them know that you are a serious investor. I have gotten a lot of deals from DESPERATE landlords. The vast majority of landlords don't understand the reality of this business. They pay too much and don't know how to deal properly with tenants. In a very short period of time they are starting to lose a lot of money and then they get a nightmare tenant. These people are often so desperate that they will do ANYTHING (and I mean ANYTHING) to get out of the pain. I've had landlords tell me that it was the worst thing that ever happened to them. I've had landlords tell me that they were physically sick and couldn't sleep at night. Flippers can get into the same state when they underestimate the rehab and holding costs and have a nightmare contractor! Needless to say, I'm happy to put them out of their misery for a BIG discount. The same emotions can happen to people with two homes (mortgages), getting a divorce, estate sales, the breakup of people who are shacking up, etc. In addition, REOs, auctions, foreclosure sales, etc also can be sources of deals.

    I do manage all my own rentals, they are all within 15 minutes driving time of my home.

    Hope that helps.

    Mike

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free