Is investing based on appreciation a recipe for disaster?
Rental Property Investor · Cleveland, OH · Member since 2018 · 100 posts · 61 votes
Is investing based on appreciation a recipe for disaster?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
2yAny property in the major coastal cities leveraged at 75% ltv would be cash flow negative. Yet those are the cities that are going to make you rich, and pretty quickly.
Remember the higher the cap rate, the higher the cash flow, means the higher the risk. This is a fundamental rule to finance. The low risk markets, with low cap rates are that way because they are high demand and appreciate quickly.
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Quote from @Grant Tyler Short:
Buying negative cash flow properties dependent on a W2 income is playing russian roulette with a large magazine. The magazine size in this analogy depends on 1) the stability of your W2 income industry/company and 2) the number of properties one owns that they have to fund from that W2 into perpetuity. The more properties, exponentially more risk for disaster.Quote from @Dan H.:
Been doing this 3 decades. Apparently I been on BP nearly 9 years. On the cash flow vs appreciation my stance never changed. Even before my first purchase that had negative cash flow I indicated I would have zero issue purchasing a negative cash flow property.Quote from @Grant Tyler Short:
Reading about actual humans in this thread, accepting and justifying negative cash flow as a mechanism to invest in real estate, tells me everything I need to know about the current state of the rental real estate market.
It's almost as if every single podcast full of veteran investors for decades, all of those golden rules of thumb/pearls of wisdom/rules to mitigate risk, are tossed out the window all for the sake of chasing a yield.
I feel like I need to take a shower after reading this nonsense. So many of you are going to get wacked as inventory keeps growing MoM / YoY while the fed keeps their rates higher for longer. God speed.
2.5 years ago I did exactly that (purchased a property that my underwriting showed to have significant negative cash flow) and it is my highest monthly return at far over $10k a month over my hold period so far. There is a decent chance by a year from now the property will be worth $1m more than I paid for it.
I suspect you and I are at different points in our RE investment journey. There is nothing wrong with that.
however to be closed to appreciation being a viable option to such an extreme that you refer to it as “nonsense” demonstrates a closed minded approach.
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.
best wishes in your journey.
I suspect that you likely have not been in a position of losing your W2 income while attempting to support a mortgage. I have. It was stressful, and it was only one property. I can't imagine the stress/anxiety of positioning myself in such a way where I am reliant on a W2 income to buoy n > 1 properties, keeping them afloat month after month despite receiving a W2 income, hoping and praying life circumstances don't force a liquidation, especially in a rapidly changing market where appreciation is not a guarantee as supply continues to pile up and major metro STR markets continue to find equilibrium.I do not have or need a w2 job. We are definitely at different points in our RE path.
you act as cash flow is guaranteed but it is not. There were many markets that had reduced cash flow (either due to increased vacancy and/or decreased rent) at the Great Recession. The average cash flow achieved per unit is a pittance in comparison to what can be achieved via appreciation, value adds, smart tax strategies, etc.Overall return defines the success of an RE purchase, but if you require the cash flow to sustain the purchase then cash flow is important to you. It does not imply that the property that is returning 5 digits per month is not a good RE investment just because it does not cash flow.
It appears you are not open to a different perspective (not even to ponder it). That is fine.
good luck- Investor · Miami · Member since 2020 · 70 posts · 34 votes2yI suspect you would be mistaken !! My partners and lenders would laugh me out of the room if I told them the property doesnt cash flow and just look at appreciation ... we only look for cash flowing assets and "hope" they appreciate along the way. I am primarily a commercial RE investor but also had a 50+ unit SFR portfolio..
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll. - 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
just a reminder that @Dan H. is just telling you what he does and what he is successful at - he's not dictating anything to anyone. and so you're not really arguing. if you read his original post... he says (italics mine):
"I recommend everyone start in their local market whether that is a cash flow market or appreciation market. You can succeed in both markets if you make smart decisions and perform the work necessary."
and with that said, there are lots of new investors who come on BP, buy something in a C- class neighborhood for 'cash flow,' and immediately get absolutely crushed by capex. and then they have nothing - no cash flow, no appreciation, nothing.
so FWIW i think this has been a good and thoughtful thread.
- Investor · Miami · Member since 2020 · 70 posts · 34 votes2yThat holds true with any deal - all I am saying is cash flow is a bit more predictable than appreciation assumptions ... We could easily be in a long period of stagnant appreciation.. wouldn't be the first time..
I would not look at the previous 15 years and think the market will continue with double digit appreciation or you may be setting yourself up for a big disappointment.
and agree, good thread... Investing for appreciation is what you're supposed to do. What you're not supposed to do is be in a deep cash flow negative position; so for that you use less leverage, negotiate a better price, or find a way to optimize revenue better if not three.
Cash flow strictly and only investment is just missing the forest for the trees and one of the worst things you can do. The premise of this boards popularity came after the deepest real estate crash coupled with the lowest rates in any historical era, and was conveyed through someone like a rookie that runs crashing and failing syndication. Don't confuse that success with material.
How you want to invest, depending on age/family/risk tolerance;
90% hard assets, 10% soft to 60% hard,40% soft. Own the underlying asset and worry about cash flow nonsense through other mechanisms. The best investments are low cap rate assets with a distressed seller at the helm.
- If people start losing their W2s at scale, so will your tenants likely. So cash flow is never guaranteed.
Quote from @Grant Tyler Short:
Buying negative cash flow properties dependent on a W2 income is playing russian roulette with a large magazine. The magazine size in this analogy depends on 1) the stability of your W2 income industry/company and 2) the number of properties one owns that they have to fund from that W2 into perpetuity. The more properties, exponentially more risk for disaster.Quote from @Dan H.:
Been doing this 3 decades. Apparently I been on BP nearly 9 years. On the cash flow vs appreciation my stance never changed. Even before my first purchase that had negative cash flow I indicated I would have zero issue purchasing a negative cash flow property.Quote from @Grant Tyler Short:
Reading about actual humans in this thread, accepting and justifying negative cash flow as a mechanism to invest in real estate, tells me everything I need to know about the current state of the rental real estate market.
It's almost as if every single podcast full of veteran investors for decades, all of those golden rules of thumb/pearls of wisdom/rules to mitigate risk, are tossed out the window all for the sake of chasing a yield.
I feel like I need to take a shower after reading this nonsense. So many of you are going to get wacked as inventory keeps growing MoM / YoY while the fed keeps their rates higher for longer. God speed.
2.5 years ago I did exactly that (purchased a property that my underwriting showed to have significant negative cash flow) and it is my highest monthly return at far over $10k a month over my hold period so far. There is a decent chance by a year from now the property will be worth $1m more than I paid for it.
I suspect you and I are at different points in our RE investment journey. There is nothing wrong with that.
however to be closed to appreciation being a viable option to such an extreme that you refer to it as “nonsense” demonstrates a closed minded approach.
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.
best wishes in your journey.
I suspect that you likely have not been in a position of losing your W2 income while attempting to support a mortgage. I have. It was stressful, and it was only one property. I can't imagine the stress/anxiety of positioning myself in such a way where I am reliant on a W2 income to buoy n > 1 properties, keeping them afloat month after month despite receiving a W2 income, hoping and praying life circumstances don't force a liquidation, especially in a rapidly changing market where appreciation is not a guarantee as supply continues to pile up and major metro STR markets continue to find equilibrium.
Primo location is always. Quit being blinded by meager cash flow. Underwrite very conservatively, buy 1-1.2 dscr by using less leverage and/or increase revenue of property, keep cash. 99% of these folks stating cash flow> everything else aren't even calculating cash flow right.
Real cash flow for your property is likely 50% of net revenue, the other needs to go to reserves of the property. Go underwrite with that and tell me how in the black you are. You want assets that at worst case are moving up around inflationary values, the primo locations will always be better. Buy less, but buy better most folks here and in the world cannot tolerate the risk of scale for 10-15 properties. Stick to getting up to 6-8 and de risking to 4-6. Live nicely. Quote from @Andrew Lax:
I suspect you would be mistaken !! My partners and lenders would laugh me out of the room if I told them the property doesnt cash flow and just look at appreciation ... we only look for cash flowing assets and "hope" they appreciate along the way. I am primarily a commercial RE investor but also had a 50+ unit SFR portfolio..
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.I have participated in my fair share of residential syndications. Virtually all pitch a means of forced appreciation. I cannot remember a single one that obtained funding without a forced appreciation opportunity.
The 2nd to last syndication I joined was purchased with initial negative cash flow and achieved the capital raise exceptionally quick. They had successfully implemented the same sophisticated value add around a dozen times, each time achieving returns that resulted in maximum GP profit share.
Are you indicating you had a syndication that you sponsored that successfully found LPs to invest in that was based on cash flow without an appreciation play (without a Value add)? Can you provide me your investor presentation? Even if it was not cash flow negative, I suspect the investors came in for the value add (for the appreciation play). As indicated I have not seen a successful fund raise without an appreciation play. I know I would not choose to participate in a syndication if there was such a syndication without an appreciation play (which I have never seen) because the return would not meet my buy criteria. Purchasing with negative cash flow can result in increased value add potential.
I hold by my statement, if we only pulled those with 8 digit plus net worth (or successful syndication sponsors), buying for appreciation would whoop the buy for cash flow. I know my vote. I also know my worst appreciation play out of all my purchases would whoop any primary cash flow play.
Why does (virtually?) every residential syndication have an appreciation play? It is because the appreciation provides the high return. Do the sponsors not know what they are doing?
Something to ponder.
Note I am not saying you cannot do well investing for cash flow. I recommend you start in a market you have intimate knowledge regardless if it is high cash flow/low appreciation or vice versa. Note beginners are not syndication sponsors. After you have some experience, you will be better prepared to branch to other RE markets.
good luck- Investor · Miami · Member since 2020 · 70 posts · 34 votes2y
Quote from @Dan H.:
Quote from @Andrew Lax:
I suspect you would be mistaken !! My partners and lenders would laugh me out of the room if I told them the property doesnt cash flow and just look at appreciation ... we only look for cash flowing assets and "hope" they appreciate along the way. I am primarily a commercial RE investor but also had a 50+ unit SFR portfolio..
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.I have participated in my fair share of residential syndications. Virtually all pitch a means of forced appreciation. I cannot remember a single one that obtained funding without a forced appreciation opportunity.
The 2nd to last syndication I joined was purchased with initial negative cash flow and achieved the capital raise exceptionally quick. They had successfully implemented the same sophisticated value add around a dozen times, each time achieving returns that resulted in maximum GP profit share.
Are you indicating you had a syndication that you sponsored that successfully found LPs to invest in that was based on cash flow without an appreciation play (without a Value add)? Can you provide me your investor presentation? Even if it was not cash flow negative, I suspect the investors came in for the value add (for the appreciation play). As indicated I have not seen a successful fund raise without an appreciation play. I know I would not choose to participate in a syndication if there was such a syndication without an appreciation play (which I have never seen) because the return would not meet my buy criteria. Purchasing with negative cash flow can result in increased value add potential.
I hold by my statement, if we only pulled those with 8 digit plus net worth (or successful syndication sponsors), buying for appreciation would whoop the buy for cash flow. I know my vote. I also know my worst appreciation play out of all my purchases would whoop any primary cash flow play.
Why does (virtually?) every residential syndication have an appreciation play? It is because the appreciation provides the high return. Do the sponsors not know what they are doing?
Something to ponder.
Note I am not saying you cannot do well investing for cash flow. I recommend you start in a market you have intimate knowledge regardless if it is high cash flow/low appreciation or vice versa. Note beginners are not syndication sponsors. After you have some experience, you will be better prepared to branch to other RE markets.
good luckI dont syndicate ... I have a small group of well healed partners that invest in real estate ...
Maybe I wasn't clear and I apologize, yes appreciation is always important and agree thats where we make the lions share of profits ... but my crystal ball cant see around the corner let alone 5 or 10 years years out... So all those IRR plays are purely speculative... it just looks good on paper.... difficult to raise money if you dont show a nice return.
The last 15 years everyone has been a brilliant RE investor... Lets see what higher interest rates, lower rents, and higher cap rates do to all that brilliance..
Lots of debt rolling in the next few years ... Just keep an eye on that ...
Quote from @Andrew Lax:
Quote from @Dan H.:
Quote from @Andrew Lax:
I suspect you would be mistaken !! My partners and lenders would laugh me out of the room if I told them the property doesnt cash flow and just look at appreciation ... we only look for cash flowing assets and "hope" they appreciate along the way. I am primarily a commercial RE investor but also had a 50+ unit SFR portfolio..
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.I have participated in my fair share of residential syndications. Virtually all pitch a means of forced appreciation. I cannot remember a single one that obtained funding without a forced appreciation opportunity.
The 2nd to last syndication I joined was purchased with initial negative cash flow and achieved the capital raise exceptionally quick. They had successfully implemented the same sophisticated value add around a dozen times, each time achieving returns that resulted in maximum GP profit share.
Are you indicating you had a syndication that you sponsored that successfully found LPs to invest in that was based on cash flow without an appreciation play (without a Value add)? Can you provide me your investor presentation? Even if it was not cash flow negative, I suspect the investors came in for the value add (for the appreciation play). As indicated I have not seen a successful fund raise without an appreciation play. I know I would not choose to participate in a syndication if there was such a syndication without an appreciation play (which I have never seen) because the return would not meet my buy criteria. Purchasing with negative cash flow can result in increased value add potential.
I hold by my statement, if we only pulled those with 8 digit plus net worth (or successful syndication sponsors), buying for appreciation would whoop the buy for cash flow. I know my vote. I also know my worst appreciation play out of all my purchases would whoop any primary cash flow play.
Why does (virtually?) every residential syndication have an appreciation play? It is because the appreciation provides the high return. Do the sponsors not know what they are doing?
Something to ponder.
Note I am not saying you cannot do well investing for cash flow. I recommend you start in a market you have intimate knowledge regardless if it is high cash flow/low appreciation or vice versa. Note beginners are not syndication sponsors. After you have some experience, you will be better prepared to branch to other RE markets.
good luckI dont syndicate ... I have a small group of well healed partners that invest in real estate ...
Maybe I wasn't clear and I apologize, yes appreciation is always important and agree thats where we make the lions share of profits ... but my crystal ball cant see around the corner let alone 5 or 10 years years out... So all those IRR plays are purely speculative... it just looks good on paper.... difficult to raise money if you dont show a nice return.
The last 15 years everyone has been a brilliant RE investor... Lets see what higher interest rates, lower rents, and higher cap rates do to all that brilliance..
Lots of debt rolling in the next few years ... Just keep an eye on that ...
Any form of investment is speculative. The fact people think $100/mo ITM for rent is less speculative than -$200/mo OTM in rent is just a farce. It's totally obstructive and missing the crux of why you invest. I am not sure who you're investor pool is but anyone worth a dime here or off the boards I know value real estate primarily off appreciation qualities and mitigate cash flow through different mechanisms. Talking 30-100 SFR property range pool with that being a portion of their investment portfolio(so not including ag, oil, timber investments, etc.).
The yester 15 years you were told to buy a house for it's cash flow properties, but in reality they capitalized on the appreciation in H2 2020-H1 2022. Funny how that works. They thought they made money on the $2400/annually gross before taxes & capex & vacancy etc., they actually made the money on a refi giving them $100k up front tax free or tax deferred. Or selling a house 2-3x in value and going and recycling the capital.The last 15 years everyone has been brilliant, it's because it's been conveyed by popular folks on this exact board that you just a house that's intrinsic and it's easy. That same logic has that guy behind the 8 ball on all his post 2020 syndications. That's why prioritizing those same characteristics in investing will leave you in the dust.
You're buying a house in the next 15 years for it's inflation agility properties. The govt debt isn't a tangible concern, despite what others state it's future inflation adjusted and scarcity plays that'll make the wealth gap wider and the ability to withstand day to day living as is with strong headwinds. You'll see families consolidate, less transactional movement, and more risk averse speculation than folks in 2010-2022 or before.
- >appreciation is always important and agree thats where we make the lions share of profits
Quote from @Andrew Lax:
Quote from @Dan H.:
Quote from @Andrew Lax:
I suspect you would be mistaken !! My partners and lenders would laugh me out of the room if I told them the property doesnt cash flow and just look at appreciation ... we only look for cash flowing assets and "hope" they appreciate along the way. I am primarily a commercial RE investor but also had a 50+ unit SFR portfolio..
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.I have participated in my fair share of residential syndications. Virtually all pitch a means of forced appreciation. I cannot remember a single one that obtained funding without a forced appreciation opportunity.
The 2nd to last syndication I joined was purchased with initial negative cash flow and achieved the capital raise exceptionally quick. They had successfully implemented the same sophisticated value add around a dozen times, each time achieving returns that resulted in maximum GP profit share.
Are you indicating you had a syndication that you sponsored that successfully found LPs to invest in that was based on cash flow without an appreciation play (without a Value add)? Can you provide me your investor presentation? Even if it was not cash flow negative, I suspect the investors came in for the value add (for the appreciation play). As indicated I have not seen a successful fund raise without an appreciation play. I know I would not choose to participate in a syndication if there was such a syndication without an appreciation play (which I have never seen) because the return would not meet my buy criteria. Purchasing with negative cash flow can result in increased value add potential.
I hold by my statement, if we only pulled those with 8 digit plus net worth (or successful syndication sponsors), buying for appreciation would whoop the buy for cash flow. I know my vote. I also know my worst appreciation play out of all my purchases would whoop any primary cash flow play.
Why does (virtually?) every residential syndication have an appreciation play? It is because the appreciation provides the high return. Do the sponsors not know what they are doing?
Something to ponder.
Note I am not saying you cannot do well investing for cash flow. I recommend you start in a market you have intimate knowledge regardless if it is high cash flow/low appreciation or vice versa. Note beginners are not syndication sponsors. After you have some experience, you will be better prepared to branch to other RE markets.
good luckI dont syndicate ... I have a small group of well healed partners that invest in real estate ...
Maybe I wasn't clear and I apologize, yes appreciation is always important and agree thats where we make the lions share of profits ... but my crystal ball cant see around the corner let alone 5 or 10 years years out... So all those IRR plays are purely speculative... it just looks good on paper.... difficult to raise money if you dont show a nice return.
The last 15 years everyone has been a brilliant RE investor... Lets see what higher interest rates, lower rents, and higher cap rates do to all that brilliance..
Lots of debt rolling in the next few years ... Just keep an eye on that ...
note this has been my point the whole thread.
>difficult to raise money if you dont show a nice return.
the nice return is via an appreciation play. As I indicated I never remember a sponsor getting funding without an appreciation play. I have seen a pitch deck once without it. A new sponsor who was depicting good cash flow. He was unable to secure the investors.
>Lets see what higher interest rates, lower rents, and higher cap rates do to all that brilliance..
We are already seeing that in the commercial MF (maybe not the lower rents as rents in most markets seem to be holding), but the issue seems to be more a result of declining cash flow. Sure values have plummeted in some markets but the underlying cause of that is the shorter term financing associated with commercial. The rates more than double resulting in near doubling of P&i, the cash flow (after allocating for all expenses including P&I) falls to poor or negative with no value add to save them.
I suspect in any given year ~1/7 of commercial loans hit end of term or at least end of fixed term. The rates have been higher just over 2 years. So ~2/7 of financed commercial RE have lost their very low rates. Most of these suffered huge hits to their cash flow which results in their desire to exit even at higher cap rates. There is no vacuum here, the 2 (appreciation and cash flow) are related in this commercial MF decline.
But my belief is 1) there would be much less decline without the cash flow impact 2) there would be much less need to sell without the cash flow decline. Most owners would hold the property content with their cash flow until the market recovered. Because of their huge P&I increase, this is not possible or desirable for some owners.
cash flow is far from guaranteed. I recognize most users of BP are not commercial REinvestors, but here is a current example of declining cash flow. I suspect few commercial RE investors underwrote interest rates doubling in such a short period of time. Those that may have thought something close to this, exited (@brian Burke).
best wishes - Scottsdale, AZ · Member since 2017 · 21 posts · 18 votes2y
I think folks who disagree with me are missing my point.
Nobody is arguing a +$2400/yr margin from a +$200/month cash flowing property is a mechanism to "get rich." They (me) are arguing that that +$200 per month is what keeps the musical chairs game going and ensures you have a seat when the music stops. If suddenly, you lose your job, rents decline in your area due to X/Y/Z (I know many in AZ whose STRs have plummeted, so if you underwrote your purchases on razor thin margins in the past 4 year bubble..."oops"), unemployment increases, you get a crap diagnosis, if life "happens" to you, and all of the sudden you are unable to keep afloat all of your negative cash flowing properties, do you really want to be in a forced liquidation position in perhaps what could be a buyers market in the future? Ideally you want to liquidate when you think it's best to liquidate on your own terms, not when you are unable to service your mortgage payments. That's the entire point of this conversation, risk mitigation, not wealth generation. The fact that people are willing to walk the edge of the cliff in 2024 tells me all I need to know about how this community has morphed over the past 7 years since I began listening. It seems as though many have a risk tolerance far higher than I, and that's A-okay.
Quote from @Grant Tyler Short:
I think folks who disagree with me are missing my point.
Nobody is arguing a +$2400/yr margin from a +$200/month cash flowing property is a mechanism to "get rich." They (me) are arguing that that +$200 per month is what keeps the musical chairs game going and ensures you have a seat when the music stops. If suddenly, you lose your job, rents decline in your area due to X/Y/Z (I know many in AZ whose STRs have plummeted, so if you underwrote your purchases on razor thin margins in the past 4 year bubble..."oops"), unemployment increases, you get a crap diagnosis, if life "happens" to you, and all of the sudden you are unable to keep afloat all of your negative cash flowing properties, do you really want to be in a forced liquidation position in perhaps what could be a buyers market in the future? Ideally you want to liquidate when you think it's best to liquidate on your own terms, not when you are unable to service your mortgage payments. That's the entire point of this conversation, risk mitigation, not wealth generation. The fact that people are willing to walk the edge of the cliff in 2024 tells me all I need to know about how this community has morphed over the past 7 years since I began listening. It seems as though many have a risk tolerance far higher than I, and that's A-okay.
+200/mo versus -$100/mo isn't stopping the train from veering off it's tracks when **** gets south. So I'm not saying it's "get rich", I'm saying it's equally bad and naive from a "risk mitigation". This all goes together, the music stops all at once. So the underwriting needs to not be cash flow "positive", that's a metric based off two things-- your debt servicing and your revenue. There's ways to tinker both independently. If you want risk mitigation, have less total debt and higher quality properties(less capex, higher quality tenants). Those two rarely go together.
Secondly, my point on $200/mo versus -$100/mo if you look at it from a risk on perspective the real money was actually made in appreciation. So all those folks who bought in 2011-2014 killing it with their $2400 annually, really made money by refi/selling in 2020-2022. They didn't make money on their monthly cash flow if we were to audit it-- they made it on the realized value in that 20-22 time frame.
What really is the value is the actual land itself-- so that needs be the directional pursuit for an investment thesis.
- Member since 2024 · 16 posts · 4 votes2y
100% a mistake, although some houses can be ugly, it sometimes doesn't cost as much as investors think to make a place look pretty. Keep in mind, sometimes the cheapest makeup can make the ugliest girls look pretty
- Real Estate Investor · Milwaukee, WI · Member since 2017 · 25 posts · 9 votes2y
Cash flow is king in business!
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes2y
Quote from @Grant Tyler Short:
I think folks who disagree with me are missing my point.
Nobody is arguing a +$2400/yr margin from a +$200/month cash flowing property is a mechanism to "get rich." They (me) are arguing that that +$200 per month is what keeps the musical chairs game going and ensures you have a seat when the music stops. If suddenly, you lose your job, rents decline in your area due to X/Y/Z (I know many in AZ whose STRs have plummeted, so if you underwrote your purchases on razor thin margins in the past 4 year bubble..."oops"), unemployment increases, you get a crap diagnosis, if life "happens" to you, and all of the sudden you are unable to keep afloat all of your negative cash flowing properties, do you really want to be in a forced liquidation position in perhaps what could be a buyers market in the future? Ideally you want to liquidate when you think it's best to liquidate on your own terms, not when you are unable to service your mortgage payments. That's the entire point of this conversation, risk mitigation, not wealth generation. The fact that people are willing to walk the edge of the cliff in 2024 tells me all I need to know about how this community has morphed over the past 7 years since I began listening. It seems as though many have a risk tolerance far higher than I, and that's A-okay.
Having sufficient reserves is a given. So is investing in areas where there is little risk of extended periods of vacancy or declines in rent. Those are all basic criteria for many of us...table stakes. We are very risk adverse, hence this criteria. Many of us have been investing for decades, always carried reserves, never had more than 1-2 months of vacancy, and never had rents decline (all intentional and controllable based on what and where we buy). Incidentally, I have never purchased a negative cash flowing property...and I force appreciation (to significantly mitigate risk).
Quote from @Grant Tyler Short:
I think folks who disagree with me are missing my point.
Nobody is arguing a +$2400/yr margin from a +$200/month cash flowing property is a mechanism to "get rich." They (me) are arguing that that +$200 per month is what keeps the musical chairs game going and ensures you have a seat when the music stops. If suddenly, you lose your job, rents decline in your area due to X/Y/Z (I know many in AZ whose STRs have plummeted, so if you underwrote your purchases on razor thin margins in the past 4 year bubble..."oops"), unemployment increases, you get a crap diagnosis, if life "happens" to you, and all of the sudden you are unable to keep afloat all of your negative cash flowing properties, do you really want to be in a forced liquidation position in perhaps what could be a buyers market in the future? Ideally you want to liquidate when you think it's best to liquidate on your own terms, not when you are unable to service your mortgage payments. That's the entire point of this conversation, risk mitigation, not wealth generation. The fact that people are willing to walk the edge of the cliff in 2024 tells me all I need to know about how this community has morphed over the past 7 years since I began listening. It seems as though many have a risk tolerance far higher than I, and that's A-okay.
No one is stating being over leveraged is not risky. But purchasing for appreciation in no way implies being over leveraged.
I have stated many times that the only people to lose money in my market were those forced to sell at an inopportune time. I suspect the number one reason people have to sell at an inopportune time is being over leveraged (divorce and death are 2 other reasons one may need to sell at an inopportune time). Do not over leverage yourself as you do not want to be forced to sell at an inopportune time.
I invest for total return and have no issue purchasing negative cash flow (and proved it 2.5 years ago). I am in no way over leveraged. I suspect I could withstand a rent fall better than 99% of BP Users. This is because I do not require the cash flow to live or make my payments. If my rental income fell 50% (which has not happened nationally since at least the Great Depression), I could still make payments indefinitely but because the loans are non-recourse it may not be smart to do so (depending on what has occurred with property value).
I suspect that negative cash flow does not imply over leveraged is the point that many of the cash flow over appreciation are missing.
The reality is virtually every residential syndication’s slide deck is emphasizing the appreciation. Cash flow virtually never can produce the desired return to obtain LPs. This tells you what the accredited investors concentrate on (total return which is virtually always an appreciation play). I recognize the bar is set pretty low to qualify for accredited investor but it shows what those investors value.
Ponder why.
note this does not imply that I believe the new investor should seek out the highest appreciation market except if they are intimate with that market. They should start in a market they know well and have contacts (their home market or the market where their parents live, etc).Good luck
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
The question of CF vs Appreciation has been floating around since the beginning of time. My take on is is this. This debate is like arguing if it's better to buy a car with an engine, or tires. As far as I'm concerned, the answer is always "C",...BOTH.
They both have their very important roles in the deal:
1 - The cash flow's responsibility is to recover the REI cost, that is recover the cash they put into the deal. This means, a deal with negative CF will NEVER recover it's cost. Equity doesn't count here since it is virtual. It does count in #2.
2 - Appreciation builds equity on a 1 to 1 basis, meaning every dollar of appreciation is that same dollar increase in equity. This is where you make your profits. This is also where you lose money when you let the equity grow in the same property. Built up equity is the potential cash you use to buy more properties. It's your bank.
Quote from @Brandon C.:
Cash flow is king in business!
King if your goal is only to pay the bills.
I question whether there is any RE investors who have made at least $1m in RE that did not make the majority via appreciation. I double question if there is any RE investor that has made $10m in RE that has not made the majority via appreciation.
I do not know what king means to RE but Appreciation is where the real wealth is created. For proof, try to find a residential syndication that does not have an appreciation play. If you find one (which I doubt), see how long it takes to obtain their LP funding goal. Cash flow without appreciation cannot meet the LP profit expectations. This is because appreciation is the process source.
My lowest appreciating property has appreciated $2700/month over its hold. My lowest appreciating unit has appreciated over $1400/month over its hold. I have 3 properties that have appreciated over $10k/month over the hold and one of those is over $20k/month ($5k unit per month). No way to obtain these returns this via cash flow alone.
Best wishes
Quote from @Dan H.:
Quote from @Brandon C.:
Cash flow is king in business!
King if your goal is only to pay the bills.
I question whether there is any RE investors who have made at least $1m in RE that did not make the majority via appreciation. I double question if there is any RE investor that has made $10m in RE that has not made the majority via appreciation.
I do not know what king means to RE but Appreciation is where the real wealth is created. For proof, try to find a residential syndication that does not have an appreciation play. If you find one (which I doubt), see how long it takes to obtain their LP funding goal. Cash flow without appreciation cannot meet the LP profit expectations. This is because appreciation is the process source.
My lowest appreciating property has appreciated $2700/month over its hold. My lowest appreciating unit has appreciated over $1400/month over its hold. I have 3 properties that have appreciated over $10k/month over the hold and one of those is over $20k/month ($5k unit per month). No way to obtain these returns this via cash flow alone.
Best wishes
It's all appreciation-- forced or via patience. I rehabbed about 2/3 of my properties I bought in 2023( that's about 29 properties). I was in the money on every single one by a (large) margin in arguably the worst market to be doing this in. It's because the value add in great areas is higher than a 1:1 ratio. Go put lipstick on a pig in the hood, versus higher quality makeup on a model the model will have no cap on value. The pig will catch a sucker, the model will catch a healthy bid. Of the 29 properties, all but 2 for the re-fi level came in higher than I expected. The other 2 were just 1% higher, when I mean higher I mean more than 3%(used 90% of CPI as my metric)
The STRs I buy I use low leverage. Cash flow is a mechanism of debt service rate & revenue; for STRs I use little to no leverage, for LTRs I own at a 1-1.2 DSCR.
So the question is, is cash flow negative vs more equity? Not appreciation. Appreciation is a different ball game that's more marked to demand/scarcity of land. I understand the math of less equity in the deal, but it goes against my risk tolerance so each to their own on these.
Anyone thinking they'll get rich on cash flow in REI is fooling themselves. Anyone thinking something less than 50% will save them a seat when the music stop is delusional. You need to underwrite with 50% of gross rents as your actual takeway, go do the math and see if you're truly in the black. You're not-- you need to underwrite with significantly larger reserves to in a higher rate era too. Guarantee you're not there. Any tax or insurance re-allocation, let a capex or vacancy expense and you'll tap out. You need 75-100% of capex set aside, 15-24 months of vacancy set aside. Those two plus 50% of gross rents=cash flow, other 50% goes to house reserves. Go re-do all your math, see if you're cash flowing now.
Quote from @V.G Jason:
Quote from @Dan H.:
Quote from @Brandon C.:
Cash flow is king in business!
King if your goal is only to pay the bills.
I question whether there is any RE investors who have made at least $1m in RE that did not make the majority via appreciation. I double question if there is any RE investor that has made $10m in RE that has not made the majority via appreciation.
I do not know what king means to RE but Appreciation is where the real wealth is created. For proof, try to find a residential syndication that does not have an appreciation play. If you find one (which I doubt), see how long it takes to obtain their LP funding goal. Cash flow without appreciation cannot meet the LP profit expectations. This is because appreciation is the process source.
My lowest appreciating property has appreciated $2700/month over its hold. My lowest appreciating unit has appreciated over $1400/month over its hold. I have 3 properties that have appreciated over $10k/month over the hold and one of those is over $20k/month ($5k unit per month). No way to obtain these returns this via cash flow alone.
Best wishes
It's all appreciation-- forced or via patience. I rehabbed about 2/3 of my properties I bought in 2023( that's about 29 properties). I was in the money on every single one by a (large) margin in arguably the worst market to be doing this in. It's because the value add in great areas is higher than a 1:1 ratio. Go put lipstick on a pig in the hood, versus higher quality makeup on a model the model will have no cap on value. The pig will catch a sucker, the model will catch a healthy bid. Of the 29 properties, all but 2 for the re-fi level came in higher than I expected. The other 2 were just 1% higher, when I mean higher I mean more than 3%(used 90% of CPI as my metric)
The STRs I buy I use low leverage. Cash flow is a mechanism of debt service rate & revenue; for STRs I use little to no leverage, for LTRs I own at a 1-1.2 DSCR.
So the question is, is cash flow negative vs more equity? Not appreciation. Appreciation is a different ball game that's more marked to demand/scarcity of land. I understand the math of less equity in the deal, but it goes against my risk tolerance so each to their own on these.
Anyone thinking they'll get rich on cash flow in REI is fooling themselves. Anyone thinking something less than 50% will save them a seat when the music stop is delusional. You need to underwrite with 50% of gross rents as your actual takeway, go do the math and see if you're truly in the black. You're not-- you need to underwrite with significantly larger reserves to in a higher rate era too. Guarantee you're not there. Any tax or insurance re-allocation, let a capex or vacancy expense and you'll tap out. You need 75-100% of capex set aside, 15-24 months of vacancy set aside. Those two plus 50% of gross rents=cash flow, other 50% goes to house reserves. Go re-do all your math, see if you're cash flowing now.
I can tell you are experienced by your underwriting on expenses alone. The inexperienced have maintenance/cap ex for low unit count properties at unsustainable numbers.
I am unsure you saw my post where I detailed one of my more recent value adds. I indicated the cash flow was calculated using 50% rule then subtract P&I. I indicated that rule was close to a match to my detailed underwriting on the property. note my property at purchase was performing a little worse than 50% rule because my expenses without PM were near 50% of stabilized rent (you do not want to know the expense ratio compared to rents at purchase but by far the worst of any of my purchases).
As for your comment on value adds on high value properties, in May I completed my most over budget rehab. I admit I was getting cocky and starting to think I would never significantly bust a rehab budget. Well I did. However, I was saved from a loss because the property has value far over $1k/ft. I added a half bathroom. The data shows half bathroom in that market is worth ~$50k. Adding a half bathroom is not much more costly in that market then adding one in a cheap market where half bathroom may not even add $10k. even though my rehab busted budget badly, I added enough value to were it was not something I would want to repeat but I did not lose money.
Best wishes
- Real Estate Investor · Milwaukee, WI · Member since 2017 · 25 posts · 9 votes2y
Quote from @Dan H.:
Quote from @Brandon C.:
Cash flow is king in business!
King if your goal is only to pay the bills.
I question whether there is any RE investors who have made at least $1m in RE that did not make the majority via appreciation. I double question if there is any RE investor that has made $10m in RE that has not made the majority via appreciation.
I do not know what king means to RE but Appreciation is where the real wealth is created. For proof, try to find a residential syndication that does not have an appreciation play. If you find one (which I doubt), see how long it takes to obtain their LP funding goal. Cash flow without appreciation cannot meet the LP profit expectations. This is because appreciation is the process source.
My lowest appreciating property has appreciated $2700/month over its hold. My lowest appreciating unit has appreciated over $1400/month over its hold. I have 3 properties that have appreciated over $10k/month over the hold and one of those is over $20k/month ($5k unit per month). No way to obtain these returns this via cash flow alone.
Best wishes
I guess we will have to wait out the recession/depression setting in to see who is right. Lol.
Quote from @Brandon C.:
Quote from @Dan H.:
Quote from @Brandon C.:
Cash flow is king in business!
King if your goal is only to pay the bills.
I question whether there is any RE investors who have made at least $1m in RE that did not make the majority via appreciation. I double question if there is any RE investor that has made $10m in RE that has not made the majority via appreciation.
I do not know what king means to RE but Appreciation is where the real wealth is created. For proof, try to find a residential syndication that does not have an appreciation play. If you find one (which I doubt), see how long it takes to obtain their LP funding goal. Cash flow without appreciation cannot meet the LP profit expectations. This is because appreciation is the process source.
My lowest appreciating property has appreciated $2700/month over its hold. My lowest appreciating unit has appreciated over $1400/month over its hold. I have 3 properties that have appreciated over $10k/month over the hold and one of those is over $20k/month ($5k unit per month). No way to obtain these returns this via cash flow alone.
Best wishes
I guess we will have to wait out the recession/depression setting in to see who is right. Lol.
I am not sure what you think that will dictate. A recession will impact those without reserves and has virtually nothing to do with the investing philosophy. I suspect those that invested for appreciation are likely to have bigger reserves What sort of reserves can you obtain at a few hundred per door a month? I have units that have returned $5k/month via appreciation That can create real reserves I am not stating everyone that purchases for cash flow has poor reserves, but I am stating it is hard to create significant reserves with only cash flow. It would require a lot of units.
In addition appreciation includes forced appreciation. You can potentially do this in any market including a recession.
I do not wish a recession due to impact it will have on many but I am well capitalized to make a fortune if there was a significant recession.
Best wishes.
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNo you don't. All you have to do is look back at history.
Quote from @Brandon C.:
Quote from @Dan H.:
Quote from @Brandon C.:
Cash flow is king in business!
King if your goal is only to pay the bills.
I question whether there is any RE investors who have made at least $1m in RE that did not make the majority via appreciation. I double question if there is any RE investor that has made $10m in RE that has not made the majority via appreciation.
I do not know what king means to RE but Appreciation is where the real wealth is created. For proof, try to find a residential syndication that does not have an appreciation play. If you find one (which I doubt), see how long it takes to obtain their LP funding goal. Cash flow without appreciation cannot meet the LP profit expectations. This is because appreciation is the process source.
My lowest appreciating property has appreciated $2700/month over its hold. My lowest appreciating unit has appreciated over $1400/month over its hold. I have 3 properties that have appreciated over $10k/month over the hold and one of those is over $20k/month ($5k unit per month). No way to obtain these returns this via cash flow alone.
Best wishes
I guess we will have to wait out the recession/depression setting in to see who is right. Lol.
Quote from @Dan H.:
Quote from @V.G Jason:
Quote from @Dan H.:
Quote from @Brandon C.:
Cash flow is king in business!
King if your goal is only to pay the bills.
I question whether there is any RE investors who have made at least $1m in RE that did not make the majority via appreciation. I double question if there is any RE investor that has made $10m in RE that has not made the majority via appreciation.
I do not know what king means to RE but Appreciation is where the real wealth is created. For proof, try to find a residential syndication that does not have an appreciation play. If you find one (which I doubt), see how long it takes to obtain their LP funding goal. Cash flow without appreciation cannot meet the LP profit expectations. This is because appreciation is the process source.
My lowest appreciating property has appreciated $2700/month over its hold. My lowest appreciating unit has appreciated over $1400/month over its hold. I have 3 properties that have appreciated over $10k/month over the hold and one of those is over $20k/month ($5k unit per month). No way to obtain these returns this via cash flow alone.
Best wishes
It's all appreciation-- forced or via patience. I rehabbed about 2/3 of my properties I bought in 2023( that's about 29 properties). I was in the money on every single one by a (large) margin in arguably the worst market to be doing this in. It's because the value add in great areas is higher than a 1:1 ratio. Go put lipstick on a pig in the hood, versus higher quality makeup on a model the model will have no cap on value. The pig will catch a sucker, the model will catch a healthy bid. Of the 29 properties, all but 2 for the re-fi level came in higher than I expected. The other 2 were just 1% higher, when I mean higher I mean more than 3%(used 90% of CPI as my metric)
The STRs I buy I use low leverage. Cash flow is a mechanism of debt service rate & revenue; for STRs I use little to no leverage, for LTRs I own at a 1-1.2 DSCR.
So the question is, is cash flow negative vs more equity? Not appreciation. Appreciation is a different ball game that's more marked to demand/scarcity of land. I understand the math of less equity in the deal, but it goes against my risk tolerance so each to their own on these.
Anyone thinking they'll get rich on cash flow in REI is fooling themselves. Anyone thinking something less than 50% will save them a seat when the music stop is delusional. You need to underwrite with 50% of gross rents as your actual takeway, go do the math and see if you're truly in the black. You're not-- you need to underwrite with significantly larger reserves to in a higher rate era too. Guarantee you're not there. Any tax or insurance re-allocation, let a capex or vacancy expense and you'll tap out. You need 75-100% of capex set aside, 15-24 months of vacancy set aside. Those two plus 50% of gross rents=cash flow, other 50% goes to house reserves. Go re-do all your math, see if you're cash flowing now.
I can tell you are experienced by your underwriting on expenses alone. The inexperienced have maintenance/cap ex for low unit count properties at unsustainable numbers.
I am unsure you saw my post where I detailed one of my more recent value adds. I indicated the cash flow was calculated using 50% rule then subtract P&I. I indicated that rule was close to a match to my detailed underwriting on the property. note my property at purchase was performing a little worse than 50% rule because my expenses without PM were near 50% of stabilized rent (you do not want to know the expense ratio compared to rents at purchase but by far the worst of any of my purchases).
As for your comment on value adds on high value properties, in May I completed my most over budget rehab. I admit I was getting cocky and starting to think I would never significantly bust a rehab budget. Well I did. However, I was saved from a loss because the property has value far over $1k/ft. I added a half bathroom. The data shows half bathroom in that market is worth ~$50k. Adding a half bathroom is not much more costly in that market then adding one in a cheap market where half bathroom may not even add $10k. even though my rehab busted budget badly, I added enough value to were it was not something I would want to repeat but I did not lose money.
Best wishes
Location and time are the two biggest winners in RE. Those inputs are directly correlated to appreciation-- not just house value but also rental appreciation.
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