Do you require cash flow off the bat for your Properties?

Question

Hello! As we all know, REI is a very powerful tool to building LONG TERM WEALTH. Some people have different goals in mind when going into it. And I am curious to know yours.

If YOU ARE buying an investment property, do YOU need to see cash flow off the bat to make an offer and buy it? Are you okay with breaking even/losing for a few months to a year before seeing cash flow, for the sake of being in a better area where your property will appreciate much faster?

Cincinnati and Northern Ky is a very diverse market, where you can have a 10% ROI off the rip in a not so good area. Or you can break even for a bit in a good area with a bright future. Or you can be in between the 2, and get a 5% ROI in a decent area (Numbers are not exact, just examples)

I hear many people say they are doing it for "long term wealth", but will end up turning down an opportunity that will be much better off in 5 years, opposed to another property that looks great now, but in 5 years will be in the same spot it was before.

I am curious to see what people say about this. (The question I am asking is in the 2nd paragraph by the way, if you missed it)

Randall Alan · Answer

@Sam McCormack

I think a lot of your answers on this will be situational to each investor.  We own 37 rental doors.  My wife and I both quit full time corporate jobs once our portfolio was capable of replacing all of our corporate income.  We gained freedom of time, not having to set an alarm clock for 6am to be at the office by 7:30, and work until 6pm.  Anyone in OUR situation (who is not in the 1% of 1% and has dividend / investment income that would provide a sufficient means of living otherwise) is going to be totally focused on cash-flow.  Cash-flow for us pays all the bills and funds our lifestyle.  Anyone getting cash-flow is almost certainly gaining from appreciation as well.  So it is not like we aren't receiving both.

If you are working a job that sufficiently provides your means of living, it would be easier to make an appreciation play, knowing that each year you pick up 3-5% of value in the property - you don't need the cash-flow necessarily up front.  Appreciation is a long term gain, while cash-flow is the short term gain.

What doesn't work as well is the beginner who buys for appreciation in a high market.  The investor that would be in a bind if a tenant quit paying rent and it took 2 months to complete an eviction where they had to cover an extra mortgage payment on a limited income.

While I will grant you that some areas will appreciate faster than others... the vast majority of our properties are C class blue collar rentals.  We have seen our property values appreciate by 2-3... and sometimes 4 fold since we purchased them between 2018 and 2021.  The point being - outside of being in a really bad part of town, our experience has been that appreciation will come to all who own real estate (in an up market).  Our personal house in a really nice neighborhood has actually appreciated less on a percentage basis than some of our cheaper rental properties in the same amount of time.

The other consideration is the opportunity cost of buying just for appreciation.  Even if you just take the money you would make letting your investment funds sit in a savings account, for instance.

Buying with just appreciation... or even negative cash-flow means every expense a property incurs comes out of your pocket.  Be it a repair, or an eviction, or a Capex expense, etc.  So while you may see 3-5% appreciation a year in value... that is offset by all the expenses you will incur on the property if you aren't cash-flowing.  Point being - if appreciation is close to equal to the interest paid on savings (5% currently) - wouldn't it be much easier to take the 5% from the bank with no headaches associated with owning the property?

If you boil your question down to the basics, it is asking - "Would you be ok with buying a property that only gives you 1/2 of the revenue streams available to an optimal property that both cash-flows and appreciates?"

For us - it just makes sense to have both revenue streams if those properties are available for purchase.

All the best!

Randy

Bjorn Ahlblad · Answer

No, cash flow can be a bonus and a penalty at the same time. If all you want is to calculate cash flow you might be better off investing in an annuity. All the best!

Peter W. · Answer

I am open to break even or negative cash flow. However it’s a strong indication that it isn’t a good deal. You make money via rents and appreciation. Negative cash flow suggests the rent portion isn’t a high enough return. So in order to consider it, I would need reasons to suggest the appreciation portion is going to be much much better than average or you’ll be able to quickly bring the rents up to a positive cash flow situation. I target returns of more than 15% which is unlikely in my market with negative cash flow.

Alan Asriants · Answer

I am always open to breaking, even or losing out on some cash flow if I see upside in the deal. Lots of times people have tenants in the property that are under market rent and the condition is really good. In these cases, I know what the rental values are and I am purchasing the property for its future potential.

I rarely look at a property and analyze if it's a good investment today. If it's a great investment today, that's perfect but often times the opportunity lies on what you could do with the property in the future.

Mateo Oquendo-Chandler · Answer

Hey Sam,

I think we all know that it is different for each individual. If someone is working with a lower balance of funds like I am, than I'm more likely to prefer cashflow so that I can continue to afford the property as well as my life style.

If I had some disposable income that was in excess of what I need to live on, than I'm more inclined to look forward towards appreciation because I would have enough wealth to take the hit now for the bigger payment in the future.

Benjamin Aaker · Answer

I'm big on equity over cash flow. My income is such that I have a significant tax burden when I bring in investment income. I set up my mortgages so that they bring in enough money to be offset by depreciation. This way, I take a loss every year, but build equity. I keep a capital expenditure account for the big issues, but the rest goes into equity. Some years it might be in the red but I have the means to put money in if it does (though not ideal).

Not everybody can do this. Especially those starting out in REI. They should be looking for cash flow deals.

I don't bank on appreciation. I bank on the equity build that I can pull from when I retire from my W2 job.

Sam McCormack · Answer

Love the way you think!

Bob S. · Answer

I will not even look at a property unless I am getting 15- 25% NET per year, based on cash purchase. So yes, it must cash flow immediately

Alecia Loveless · Answer

@Sam McCormack Yes. But there’s other factors at play too.

If a property can’t at least give me positive cash flow from the beginning I don’t not buy it.

Taz Zettergren · Answer

Of course we all want cash flow but if the property is in a very desirable area with a high probability of appreciating quickly over the next decade or so I'm fine breaking even or even paying a little out of pocket every month. In my experience the equity growth is far more beneficial than the little bit of cash flow difference one may see on a monthly return.

Do you require cash flow off the bat for your Properties?

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