Investing or buying cashflow?
Rental Property Investor · Venetia, PA · Member since 2015 · 107 posts · 47 votes
Investing or buying cashflow?
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes@Chris Seveney that's interesting.. lets say you buy a rental for 100k with minimum down 20k.
you make 150 a month cash flow ( realistic numbers unless you value add or get some smokin deal)
something happens and you need to sell in 5 years
you bought for sake of argument in a non appreciating market as many on this site admit they are fine with..
now you go to sell.. 60 X 150 a month = 9k you have 10k in sales costs.. figure 6% plus closing cost plus seller credits and honey dews on the house plus it makes the math easy.
so you net 90k add in your 9k positive cash flow your at 99k... so just about break even but now your had to recapture 15k of deprecation and pay tax on that lets say 5k for easy math.. so now over a 5 year hold your 150 a month Coc really has a negative IRR since you lost right at 6K of actual cash and your only gain is whatever little principal pay down you got on your longer term note.
Do you think I have that right.. only reason I bring this up is I sold a bunch of my rentals and that recapture hit me hard personally.. but I just wanted to reposition to notes as I am not a very good landlord..
I think this is why if you think my numbers are correct.. that folks need to accelerate pay down so that you can pay these off quick so if U do need to sell and most people sell every 7 years stuff happens they have some true equity. or at least some cash coming out of the deals.
33 Replies
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@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 :)
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
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.
- Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes8y
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.
- Investor · Jackson Heights, NY · Member since 2017 · 74 posts · 21 votes8y
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!
- Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes8y
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.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes8y
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]...
- Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes8y
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.
- Investor · Jackson Heights, NY · Member since 2017 · 74 posts · 21 votes8y
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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