Million dollar cash flow question!

56 Replies

My biggest question in real estate investing is which has kept me from moving forward is: I keep hearing how so many people target a $100 per door positive cash flow goal per month. How do you scale such a small amount into financial freedom without driving yourself crazy with so many doors??? Also, without having millions to invest up front, how can someone scale to 15k per month of cash flow in several years and not take 20 years?

First, if $100.door is a goal, you'll lose money.  That's negative CF waiting to happen.  If all I got was $100/door, I'd be selling those properties as fast as I could.

Second, you have to understand that the property isn't your asset, the CF and equity in those properties are.  In order to scale, you have to keep your assets moving forward into new properties...on a regular basis.  Each time you move it forward, you should be increasing both CF and property values, as well as equity by default.  The faster your assets move, the faster (and larger) your assets will grow.

@Joe Villeneuve

Joe thanks for the reply. I agree with the 1st part bc $100 door is very low. As far as second part, are you saying to pretty much do the brrr method and just keep refinancing and buying more property? At what point is it too much leverage?

Originally posted by @Gerard Aliberti :

@Joe Villeneuve

Joe thanks for the reply. I agree with the 1st part bc $100 door is very low. As far as second part, are you saying to pretty much do the brrr method and just keep refinancing and buying more property? At what point is it too much leverage?

I'm not suggesting the BRRRR method at all, nor will I ever. What I do is sell the property, and move the entire asset forward. Too much leverage is for you to decide. One definition is when each property can't sustain itself.

@Gerard Aliberti - I think the concept Joe is trying to exemplify is utilizing the appreciation and equity of his current properties to leverage into more property. Joe sells his assets and transfers the equity into new properties. I follow the same mythology however I take a different strategy. I utilize HELOCs and lines of credit on existing property to leverage the equity into buying more properties. Properties buy more properties. And the effects compound over time just like a stock portfolio. That's how you scale, its a slow game over time. 

Originally posted by @Gerard Aliberti :

@Joe Villeneuve

Also, sounds like the only way to get enough positive cash flow that I can support myself and family on is by having a large cash down payment?

 No, no and NO.  The larger the DP, the more you are paying for the property.  The way you increase your CF is by moving the assets forward.

When you buy a property, and pay 20% down (say a $100k property with $20k down), that initial DP represents your equity...and the asset.  The property value is 5 times the equity...at that point.  If that property appreciated 5% per year for the next 4 years, the PV would be worth over $120k...and the new equity would be worth $40k.  The problem here is when you bought the property, your was worth 5 times the equity, but after 4 years (in this example) the PV was only worth 3 times the equity...and the equity represents cash that is frozen.  Also, your CF would remain the same over those 4 years.

However, if you were to sell that property, and take out the entire $40k (before you mention closing costs, that's paid for by the added equity from 4 yrs of paydown...thank you tenant), and use that as a 20% DP, the new PV would go back to 5 times the equity...in this case it would now go up to $200k, instead of just $120k...and, if you bought 2 of the same property you bought originally, your cash flow would double too.

Then, when your equity doubled again, you buy more or larger properties just like you just did.

Keep repeating this and you should get where you need to be...in far less than 20 years.

Originally posted by @Gerard Aliberti :

@Joe Villeneuve

So you buy and hold for several years, then sell and keep buying a larger investment? I'm assuming you keep putting all your positive cash flow into your mortgage payment?

 Why would I add to the cost of the properties by spending my CF on them?

Originally posted by @Andrew Freed :

@Gerard Aliberti - I think the concept Joe is trying to exemplify is utilizing the appreciation and equity of his current properties to leverage into more property. Joe sells his assets and transfers the equity into new properties. I follow the same mythology however I take a different strategy. I utilize HELOCs and lines of credit on existing property to leverage the equity into buying more properties. Properties buy more properties. And the effects compound over time just like a stock portfolio. That's how you scale, its a slow game over time. 

Using HELOCS and LOC's are not the same thing. All that does in decrease your CF and cost you more money. That equity is your money....frozen. Much like refinancing, you're NOT accessing your money. You're using your money (equity) as collateral so the bank can sell you new money. That refi and/or HELOC money you're getting isn't your money...it's the bank's. If it was yours, you wouldn't have to pay for it.

Also, when you do the REFI/HELOC, your CF goes down because of the added payments. When you sell the property, you double the CF, dramatically increase the total PV, all with the same equity.

@Andrew Freed

Thanks Andrew. Its very critical to understand the markets and trends for those areas to really magnify assets. Its interesting how so many people invest in markets far from where they live. This market is crazy!

@Joe Villeneuve I appreciate both your responses in explaining your strategy and thought process. It challenges my current way of thinking about refis & BRRRR.

Is there a case where you see the refi making sense when increasing the value & rent of the property? In your example of the $20k DP & $100K property, if the value can be increased along with the rental income, could that improve or at least maintain the same level of cash flow even with additional debt (refi/HELOC) while providing a higher PV in 5 years? For example, $20k DP, $15K rehab, increase to $175k value. Rent increases from $1,000 to $1,750.

I hope to learn a little more about your strategy. I've been reluctant to sell as my goal is to accumulate wealth through rentals for my children & descendants.

I have 8 rentals & thought of selling one, but chose not to as there wasn't any multifamily available to put the money into in my area.

Your thoughts are appreciated.

The answer to your initial question is no.  Don't lose sight of the fact that your cost of the property is all of the cash you spend.  As long as the property has positive CF, your DP is your ONLY cost.  If you take money out (Refi), then put the money back in, that's adding to the cost.  If the increase in PV is equal to the added cost, all you've done is buy it...you've gained nothing...you just transferred cash from one location to another.  When that cash was in the bank, it was free to use.  When you put it into the property, you just froze it...and, when you want to access it again, you can't unless you sell it.

Also, since that added equity is equal to the added PV, you're decreasing the value of the equity.  When you bought the property, that equity had a value of 5 to 1.  If the PV and equity goes up the same amount, it increases at a 1 to 1 value, thus decreasing the value of that equity.

Unless, you sold the property, took your equity, and used it once again at a 5 to 1 value.

Originally posted by @Jonathan Stone :

@Joe Villeneuve

Okay Joe. I know I e asked you about this as well. But it sounds like you try and maintain a leveraged ration fo 4-1 on your property any when you get to 3-1 you sell and look for a new deal.

 I'm using those ratios to prove a point about the increase in equity because of appreciation is actually holding back more value than it is increasing.  The actual ratio depends on your ability to find the next deal.  Don't just sell because you hit a certain number. set that ratio number based on the next step you are going to take...and the sooner the better.  Time is money.

Originally posted by @Joe Villeneuve :
Originally posted by @Jonathan Stone:

@Joe Villeneuve

Okay Joe. I know I e asked you about this as well. But it sounds like you try and maintain a leveraged ration fo 4-1 on your property any when you get to 3-1 you sell and look for a new deal.

 I'm using those ratios to prove a point about the increase in equity because of appreciation is actually holding back more value than it is increasing.  The actual ratio depends on your ability to find the next deal.  Don't just sell because you hit a certain number. set that ratio number based on the next step you are going to take...and the sooner the better.  Time is money.

So if your goal was say 10% CoC return you include any equity you have into the property not just the initial investment. Therefore if you can take that equity and find a suitable deal with the same CoC return you move it forward. This sounds very close to those who keep their cash moving with flips as that seems like about the fastest version of this. I realize there are significant risks and work included in flips but I remember a recent post where the author was discussing flips and reinvesting the profits repeatedly.

Not sure I follow your explanation, but as far as flips are concerned, I don't think of flipping as flipping the property.  I think of flipping as flipping my cash, the property is just the vehicle, and the strategy is the fuel.

Originally posted by @Gerard Aliberti :

@Dominic Olguin

Thanks, problem is the insane prices of homes in the suburbs of NYC its hard to even find positive CF properties.

Hey Dominic, I haven’t found this to be the case with my clients down here in NYC. Different than Westchester of course. I have 4 of them that are cash flowing at least 500/month here that have closed in the last 2 months. With 20% down you could do the same.
I guess the difference is that maybe your Westchester sales market had inflated and the rentals haven’t caught up yet? Hard to say without live examples.
It can be exhausting running numbers all day, comparing real time rental comps to your purchase price and expenses, then getting outbid lol.
I’m open to connect if youre looking for a different process.

@Joe Villeneuve quick question: if you sell the property or use a HELOC/refi, either way you are paying someone to access the equity, either the realtor/title company/etc in the former or the bank in the latter. How do you determine that selling is the better choice? In my view you could view the tenants as bankrolling these costs in either scenario, not just selling. Thanks.

@Gerard Aliberti I’m somewhere between an amateur & a pro but I’d say the answer lies in the calendar. If you’re cash flowing above ALL expenses then a 100 or two a month per is probably ok. Don’t forget, real estate pays off in more ways than just cash flow. The longer you do this you will learn to make it run more & more on processes you put in place & then it takes on its own inertia & it won’t be so daunting a prospect. By the time you get to that point all that crap has sorted itself out & you wonder why you ever worried.

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