Investing or buying cashflow?

33 Replies

Originally posted by @Jay Hinrichs :

@Chase Gochnauer  that's my exact point your STUCK.. small value assets are hard to sell.. in non appreciating markets.. and harder to 1031 since you have so little money coming out of them.

Also the major issue is many folks have no experience being landlords become landlords and don't care for it.. so it really does not matter they just want out... I know I fund a whole heck of a lot of burned out landlord transactions for my teams in 14 states.. I see the huds.. LOL..

and those folks don't post on BP.. on BP its all blue sky rentals are the way to financial freedom quit your day job.. live the life you deserve etc etc.. well for some for sure.. for many NOPE.. they are like why did I do that.. and they exit no matter the loss.

now this is more prevelant in the lower value asset markets.. not all markets are like this.

But I look at when I started hard money lending in 01 for turn key and I started in Detroit.. the homes there appraised at that time for 120 to 140 each rented for what they rent for today 800 to 900 in those days the .05% rule was fine.. we loan 80k as a HML .. well those homes tanked as you probably know many went down to less than 10k in value.. thankfully the 200 plus I did there I got refinanced out of them all. but you know long term lender lost their lunch and so did most of the investors in those days.

I am not prediciting another major meltdown.. but even  break even is not a good position to be in with rental properties in my humble opinion the risk/reward and hassle factor just weights on you.. but I know I am in the VAST minority in my thinking.

So my thought is you really need to get these things paid for and keep them forever.. but life happens and I would say 80% of people that have that thought process going in never make it past about 7 or 8 years.

 Very true. I suppose I have the mentality that I'm in it for the long haul, and being only 32 that makes sense for me.

I'm in Iowa, Midwest market, I wouldn't say no apprecation, but it's not like the coastal areas. Most of my smaller value properties have been rehabs that I held, BRRR basically. So I'm into a property mentioned above for $60-80k out of pocket and it's rehabbed, so low risk for capex surprises for awhile and I have no cash in the deal once I refi. This is really the only way to do it in my book. Buying a property at market value that still has the potential for some cap ex items just doesn't make much sense. A lot of part-time landlords aren't wanting a property they have to rehab, though.


I'm sure there will be a correction at some point, but not as severe. The types of loans being given out now aren't nearly as crazy as they were. Stated income, huge cash back at closing essentially buying a 20% down property with no money down, appraisals inflated to the moon, etc. Being in the Midwest, I don't believe a downturn here would not be enough to make me be upside down on an 80% LTV loan, in my opinion. Maybe breakeven, but I don't know that I'd go upside down. Even if I did, I think rents would still support my debt. Besides, my other business is maintaining foreclosed properties so I'm hedged well :)

@Chase Gochnauer   your the perfect guy to make this work in that asset class. you live there work there probably self manage.. your in the industry etc etc.

although the BRRR is still no money in the deal.. and those that do that if they got a problem they will walk to.. its only their credit they lose no cash. Just saying.

again why I like to get these things paid for in 10 years or less.. your in it 7 years you kind of burnt out but you look at your mortgage and see you only have 3 more years not 23 years and you tend to stick it out  :)

Investing is always buying cash flow, unless you are only purchasing for appreciation. Let's ignore real estate for a minute. Let's say you buy a stock that pays a dividend yield of 4%. Your cash on cash return is 4%. Put your money into a bank account that pays 1.35% and your cash on cash return is 1.35%. If you put in more money, your percentage return generally the same, but cash amount is greater.

The only difference in real estate is you have the option to use leverage. This means with less cash invested, you can see a higher cash on cash return. 

The universal performance measure of real estate investments is cap rate. Cap rate is the pure way to measure investments, because it removes financing. Cap rate gives you your cash on cash return if you pay 100% cash.

Generally the reason you don't want to pay 100% cash is to improve your cash on cash return. For example, maybe your cap rate is 7% using 100% cash. If you can reduce your down payment to 20%, maybe that increases your return to 12%. By using leverage, you have increased your cash on cash return. Now using 20% down payments, you can buy five times the number of properties as you could paying 100%: 

1 property 100% cash / 7% return

5 properties 20% down / 12% return

Your wealth will grow faster using leverage. Not only because of a better return, but you also now have 5X the total value of property.  Of course, this assumes you want to buy 5 properties. Let's say you only want to purchase 1 property, so you put just 20% down. Now you have to find a place for the other 80% of your money. If your plan is to put that 80% of the money in a bank account earning 1.35%, then you would better off just paying off the entire property.

This is where the absolute "leverage is better" statements can fall short. Leverage is only better if that money is put to work getting a better return than avoiding debt. For example, if you take out a 5% loan and then invest that money in a savings account making 1.35%, then you are worse off. 

I don't really care for the term "buying cash flow". A better way to look at it is investing more cash at a guaranteed return. 

Let's say you took out a loan in 1996 at 8.5% interest rate 30 year loan and you are still paying it today. You can pay off that mortgage and "avoid" 8.5% interest for the remainder of the loan. Avoiding interest is very much like earning interest, so you are essentially guaranteeing a return of 8.5% on your cash. 

This is more a discussion of the best place to invest your money. "Buying cash flow" may be the best decision for some people. For example, if you were 65 years old, paying off properties and getting a guaranteed return may be a better decision than doing a cash out refi and buying more properties. In this case you are prioritizing a lower guaranteed return over a higher risk / higher return.

Using leverage when you are growing your business is a great idea to maximize return. Once you have reached your income objectives, there is nothing wrong with paying down debt. This is no different than stock investors allocating more of their portfolio to bonds and cash as they get older. I have trouble believing that all these "leverage" investors on BP plan to continue taking cash out of their properties to buy more properties until the day they day. At some point, every investor shifts their strategy away from leverage. Yes it is lower return, but also lower risk.

Originally posted by @Jay Hinrichs :

@Chase Gochnauer  your the perfect guy to make this work in that asset class. you live there work there probably self manage.. your in the industry etc etc.

although the BRRR is still no money in the deal.. and those that do that if they got a problem they will walk to.. its only their credit they lose no cash. Just saying.

again why I like to get these things paid for in 10 years or less.. your in it 7 years you kind of burnt out but you look at your mortgage and see you only have 3 more years not 23 years and you tend to stick it out  :)

I don't like the management part so I hired a PM when I had 6 units. I'm at 130 now. About 30 SFR, 30-40 in 2-12 units, and one large 72 unit. I like finding the deals and do enjoy managing the rehabs. I get them rent-ready and then hand off to PM and generally don't deal with them anymore unless there's any major cap-ex type issues. Then it's just a matter of looking at your P&L each month to ensure repairs aren't eating you alive. It definitely reduces my burn-out. Delegation is key.

Originally posted by @Chase Gochnauer :
Originally posted by @Jay Hinrichs:

@Chase Gochnauer  your the perfect guy to make this work in that asset class. you live there work there probably self manage.. your in the industry etc etc.

although the BRRR is still no money in the deal.. and those that do that if they got a problem they will walk to.. its only their credit they lose no cash. Just saying.

again why I like to get these things paid for in 10 years or less.. your in it 7 years you kind of burnt out but you look at your mortgage and see you only have 3 more years not 23 years and you tend to stick it out  :)

I don't like the management part so I hired a PM when I had 6 units. I'm at 130 now. About 30 SFR, 30-40 in 2-12 units, and one large 72 unit. I like finding the deals and do enjoy managing the rehabs. I get them rent-ready and then hand off to PM and generally don't deal with them anymore unless there's any major cap-ex type issues. Then it's just a matter of looking at your P&L each month to ensure repairs aren't eating you alive. It definitely reduces my burn-out. Delegation is key.

 Can you please give the abbreviated road map [if you don't mind] from 6 to 130? That's great!

Originally posted by @Richelle Bryan :
Originally posted by @Chase Gochnauer:
Originally posted by @Jay Hinrichs:

@Chase Gochnauer  your the perfect guy to make this work in that asset class. you live there work there probably self manage.. your in the industry etc etc.

although the BRRR is still no money in the deal.. and those that do that if they got a problem they will walk to.. its only their credit they lose no cash. Just saying.

again why I like to get these things paid for in 10 years or less.. your in it 7 years you kind of burnt out but you look at your mortgage and see you only have 3 more years not 23 years and you tend to stick it out  :)

I don't like the management part so I hired a PM when I had 6 units. I'm at 130 now. About 30 SFR, 30-40 in 2-12 units, and one large 72 unit. I like finding the deals and do enjoy managing the rehabs. I get them rent-ready and then hand off to PM and generally don't deal with them anymore unless there's any major cap-ex type issues. Then it's just a matter of looking at your P&L each month to ensure repairs aren't eating you alive. It definitely reduces my burn-out. Delegation is key.

 Can you please give the abbreviated road map [if you don't mind] from 6 to 130? That's great!

I'll say that I'm pretty lucky to have another business that does well that allows me some solid working capital to continue to grow. I bought my first 9 houses cash. I then put together a small presentation for some local banks on where I sat today, where I wanted to be in a few years, and what I needed to do to get there. I picked the one I liked best and I then got a LOC on those 6 to start doing BRRR. I was doing 1-2 houses a month but still wasn't the speed I wanted, so every couple of months as the capital became available I would buy a duplex or something as well that didn't need much work to keep my unit growth up. I found a commercial property, 14k SF office building that I then purchased outright, spent a year rehabbing and renting and used the equity from that as my primary source for my 71 unit I just purchased. I was at 9 units only about 2.5 years ago. 95% of my financing is with local banks.

Do not neglect another source of solid income, whether that be a job or an alternate business. Tax returns are critical to getting loans, and seed money is also important. I think the BRRR method is great, but you have to be prepared to get your hands dirty. My background is primarily foreclosure maintenance, basic construction, and being a Realtor. Each area was great education for finding deals and rehabbing to rent, so this is the area I've chosen to really focus on.

My growth plan was ambitious, but having that goal is important to me. Each year I set a goal as to where I want to be at the end of that year.

Originally posted by @Chris Gordon :

@Brent Coombs I'm not questioning the use of leverage, however the more of your own cash you put into a deal the  better the cashflow looks. That's not investing to me, that's buying cashflow. If you accept that as fact then you really need to consider, hypothetically, what a 100% leveraged property looks like...does it cashflow after all expenses then? If it doesn't then it's probably not a good investment. Pretty much the opposite of cap rate.

...the wide variety of answers and points bring brought up has shown there's not agreement around this idea of buying cash flow vs investing in assets.  

You said it well earlier when you wrote "dependent on your goals". At 100% leverage, many good investments will have negative cash flow. So why might they be good? Because their value is rising at a faster rate than than the ongoing cost. [Similar to why having a mortgage that costs more than rent is often/usually still an excellent idea].

Naysayers might say: but their value won't always go up more than the ongoing costs!

Who's right?

The frustration/beauty of it is - nobody knows!

"Both the secant method and the improved formula rely on initial guesses for IRR"! [Wikipedia]...

Whatever turns your on. Generally if one can not get 12-15% return like liquid equity, it is probably not worth the trouble in real estate.  Interest rate will move up 3-4 times this year.  The feds are worrying about inflation some are predicting next recession. Some areas people speculate that home prices will go up forever. So you buy with negative cash flow.

Originally posted by @Chase Gochnauer :
Originally posted by @Richelle Bryan:
Originally posted by @Chase Gochnauer:
Originally posted by @Jay Hinrichs:

@Chase Gochnauer  your the perfect guy to make this work in that asset class. you live there work there probably self manage.. your in the industry etc etc.

although the BRRR is still no money in the deal.. and those that do that if they got a problem they will walk to.. its only their credit they lose no cash. Just saying.

again why I like to get these things paid for in 10 years or less.. your in it 7 years you kind of burnt out but you look at your mortgage and see you only have 3 more years not 23 years and you tend to stick it out  :)

I don't like the management part so I hired a PM when I had 6 units. I'm at 130 now. About 30 SFR, 30-40 in 2-12 units, and one large 72 unit. I like finding the deals and do enjoy managing the rehabs. I get them rent-ready and then hand off to PM and generally don't deal with them anymore unless there's any major cap-ex type issues. Then it's just a matter of looking at your P&L each month to ensure repairs aren't eating you alive. It definitely reduces my burn-out. Delegation is key.

 Can you please give the abbreviated road map [if you don't mind] from 6 to 130? That's great!

I'll say that I'm pretty lucky to have another business that does well that allows me some solid working capital to continue to grow. I bought my first 9 houses cash. I then put together a small presentation for some local banks on where I sat today, where I wanted to be in a few years, and what I needed to do to get there. I picked the one I liked best and I then got a LOC on those 6 to start doing BRRR. I was doing 1-2 houses a month but still wasn't the speed I wanted, so every couple of months as the capital became available I would buy a duplex or something as well that didn't need much work to keep my unit growth up. I found a commercial property, 14k SF office building that I then purchased outright, spent a year rehabbing and renting and used the equity from that as my primary source for my 71 unit I just purchased. I was at 9 units only about 2.5 years ago. 95% of my financing is with local banks.

Do not neglect another source of solid income, whether that be a job or an alternate business. Tax returns are critical to getting loans, and seed money is also important. I think the BRRR method is great, but you have to be prepared to get your hands dirty. My background is primarily foreclosure maintenance, basic construction, and being a Realtor. Each area was great education for finding deals and rehabbing to rent, so this is the area I've chosen to really focus on.

My growth plan was ambitious, but having that goal is important to me. Each year I set a goal as to where I want to be at the end of that year.

 Thanks so much Chase! You've done well!

Richelle

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