Cashflow: BP most MISUNDERSTOOD term

56 Replies

I read too many posts from investors about "cashflow per door" or "that house does not have a positive cashflow", ect. I feel like the prevailing thought is that it is about "cashflow", singular, when real estate investing is about a series of "cashflows", both positive and negative. I will point to a property I purchased;

Purchase Price: 185,000

Downpayment: 46,250 (Negative)

Monthly Cashflow: 200/month for 5 years (Positive)

Refinance: 75,000 (Positive)

Refinance: 115,000 (Positive)

Monthly Cashflow: -75/month for last year (Negative)

I would say the property is cash flowing great! Over the years I have been able to pull out around $150K to buy other properties, along with some MONTHLY cashflow. 

Why focus solely on monthly cashflow? If you do not have appreciation, all the depreciation of the property will eat up the gains when you sell. I would rather invest in something that has a huge payout in 30 years, or 9 for this case study. That is the final cashflow for any asset, when you sell! 

Originally posted by @Kai Van Leuven :

I read too many posts from investors about "cashflow per door" or "that house does not have a positive cashflow", ect. I feel like the prevailing thought is that it is about "cashflow", singular, when real estate investing is about a series of "cashflows", both positive and negative. I will point to a property I purchased;

Purchase Price: 185,000

Downpayment: 46,250 (Negative)

Monthly Cashflow: 200/month for 5 years (Positive)

Refinance: 75,000 (Positive)

Refinance: 115,000 (Positive)

Monthly Cashflow: -75/month for last year (Negative)

I would say the property is cash flowing great! Over the years I have been able to pull out around $150K to buy other properties, along with some MONTHLY cashflow. 

Why focus solely on monthly cashflow? If you do not have appreciation, all the depreciation of the property will eat up the gains when you sell. I would rather invest in something that has a huge payout in 30 years, or 9 for this case study. That is the final cashflow for any asset, when you sell! 

 You lost me after "Monthly Cashflow: 200/month for 5 years (Positive)"

Originally posted by @Joe Villeneuve :
Originally posted by @Kai Van Leuven:

I read too many posts from investors about "cashflow per door" or "that house does not have a positive cashflow", ect. I feel like the prevailing thought is that it is about "cashflow", singular, when real estate investing is about a series of "cashflows", both positive and negative. I will point to a property I purchased;

Purchase Price: 185,000

Downpayment: 46,250 (Negative)

Monthly Cashflow: 200/month for 5 years (Positive)

Refinance: 75,000 (Positive)

Refinance: 115,000 (Positive)

Monthly Cashflow: -75/month for last year (Negative)

I would say the property is cash flowing great! Over the years I have been able to pull out around $150K to buy other properties, along with some MONTHLY cashflow. 

Why focus solely on monthly cashflow? If you do not have appreciation, all the depreciation of the property will eat up the gains when you sell. I would rather invest in something that has a huge payout in 30 years, or 9 for this case study. That is the final cashflow for any asset, when you sell! 

 You lost me after "Monthly Cashflow: 200/month for 5 years (Positive)"

 And the top BP “echo chamber” poster responds...^^^^

@Kai Van Leuven Cash flow is a very well defined term. Let’s not muddy up the misunderstandings further by trying to redefine it. 

Cash flow is the the net income (or loss) after all expenses and mortgage (principal and interest) payments.

That is hardly the whole whole picture in investing but it does mean something.  Your definition does nothing to clear that matter up. You even use it yourself in the way you day it shouldn’t be used. 

It sounds like you want to talk about infernal rate of return (IRR). That does give a fuller picture of investing and cash flow is a component of it. But it is a fairly advanced concept and difficult to formally mathematically define. Most people don't need to define it formally and like you can see the benefit of it in a more free handed way.

Originally posted by @Kai Van Leuven :
Originally posted by @Joe Villeneuve:
Originally posted by @Kai Van Leuven:

I read too many posts from investors about "cashflow per door" or "that house does not have a positive cashflow", ect. I feel like the prevailing thought is that it is about "cashflow", singular, when real estate investing is about a series of "cashflows", both positive and negative. I will point to a property I purchased;

Purchase Price: 185,000

Downpayment: 46,250 (Negative)

Monthly Cashflow: 200/month for 5 years (Positive)

Refinance: 75,000 (Positive)

Refinance: 115,000 (Positive)

Monthly Cashflow: -75/month for last year (Negative)

I would say the property is cash flowing great! Over the years I have been able to pull out around $150K to buy other properties, along with some MONTHLY cashflow. 

Why focus solely on monthly cashflow? If you do not have appreciation, all the depreciation of the property will eat up the gains when you sell. I would rather invest in something that has a huge payout in 30 years, or 9 for this case study. That is the final cashflow for any asset, when you sell! 

 You lost me after "Monthly Cashflow: 200/month for 5 years (Positive)"

 And the top BP “echo chamber” poster responds...^^^^

 Excellent reply.

@Joe Villeneuve it’s a new day  man. 

Frankly I am in your comp  the idea of buying a rental that never goes up but if it all goes right makes 200 a door.. the only way that works is if you never sell.   and of course most that buy these are never going to sell.. but of course most do within 7 to 8 years that's a fact.. LOL..

Why is the assumption, that when a property has positive cash flow, it can't appreciate?

All cash flows matter, especially the big ones. Tracking all of them using IRR (instead of just the monthly cash flows) is commonplace in the business world and in commercial real estate. What you find on BP is a lot of my-way-or-the-highway strategy talk. Reality - both high and low GRM strategies, done properly, work.

@Larry T. -I guess in the rest of the financial world it is defined how I see it... I was just trying to clear up the "tribal knowledge" that is spread.

The reason I have a problem with it is because there are so many folks on here looking for information. They see $100-300/door and they jump all over it. They are not taking into account the whole picture. 

I have a friend who was given a house by the city in the roughest area of Ta'compton, I mean Tacoma. He made it super nice, replaced all the windows (shot out), and rented it out. His monthly cashflow was off the charts!!! Then he realized he was spending more in evicting people and trying to make it nice than he ever made. He quickly sold for a loss and moved on. 

My main problem with it is that potential investors come on BP for information. I think they are fed this idea that the midwest is the only place to make money. I have lived in the midwest. There is a reason prices are low... Jobs do not pay enough for homes to appreciate. 

If you look at the big picture, which is what I am trying to convey, you will see that real-estate can only be seen through that lens. IMO

@Mike Dymski I could not agree with you more.

Originally posted by @Kai Van Leuven :

I read too many posts from investors about "cashflow per door" or "that house does not have a positive cashflow", ect. I feel like the prevailing thought is that it is about "cashflow", singular, when real estate investing is about a series of "cashflows", both positive and negative. I will point to a property I purchased;

Purchase Price: 185,000

Downpayment: 46,250 (Negative)

Monthly Cashflow: 200/month for 5 years (Positive)

Refinance: 75,000 (Positive)

Refinance: 115,000 (Positive)

Monthly Cashflow: -75/month for last year (Negative)

I would say the property is cash flowing great! Over the years I have been able to pull out around $150K to buy other properties, along with some MONTHLY cashflow. 

Why focus solely on monthly cashflow? If you do not have appreciation, all the depreciation of the property will eat up the gains when you sell. I would rather invest in something that has a huge payout in 30 years, or 9 for this case study. That is the final cashflow for any asset, when you sell! 

The title and content here don't match. Not arguing your what you state, but IRR and cashflow are 2 chickens of very different flocks. This is really more of a cashflow vs. appreciation vs. overall return thread.

@Matthew Olszak  

Are they really that different? I think one of the big differences with real estate and any other business is the series of cashflows exist over a long period of time. Take a normal retailer. They buy the product, market it, sell, pay expenses and collect monthly cashflow. A REI does the same thing but if you are investing for equity, it takes a long time to complete that transaction, maybe 5-30 years.

Look at owning 20 houses for $200/month...uh making 4K a month for 20 headaches. No thanks from an administrative perspective. Then when you go to offload it and the GOV wants the recapture on the depreciation. You will have a hefty tax bill with little to no appreciation. 

Why did Morris Invest grow exponentially overnight. Is it because folks took a real look at the big picture? Or were they just chasing their "Freedom Number"?

@Joe Villeneuve

I think, as a general rule the areas that cash flow well aren’t known for massive appreciation. Midwest/southern homes that you buy for 100k have a fairly high probability of keeping up with inflation....maybe.... obviously, there are a lot of factors that play into that. People in those markets don’t generally look at their homes as investments the way people in high dollar markets/appreciation markets do.

That said, I think there is some middle ground.

The only real issues i've seen so far about "cash flow"  is people might not be calculating all the hidden costs that could happen in a 365 day period.

- minor/ major repairs

- Vacancy ( sometimes in your control, sometimes up to the market, which is somewhat saturated with rentals in Houston right now)

- MLS, agents costs that can cost $1000+

- HOA dues

- tax appraisal bumps every 2 years or so

Those little things add up.    I've only got 1 rental right now, but I can foresee these things creeping up. I'm trying to stay alert.

@Kai Van Leuven

I agree with Kai to a LARGE extent. But this discussion should ultimately wind up being a discussion on what is Internal Rate of Returns (IRR).

Here is the dictionary definition of Cash Flow:

"The Total Amount of money being transferred into and out of a business, especially as affecting liquidity."

As Kai is pointing out, the majority of BP posters use a definition of something that goes like this: "Rents minus expenses = Cash Flow."

However, when you boil it down to the REAL definition, The amount you paid out of your pocket for the purchase is a Cash Flow as well. So is the Sales Proceeds when you sell.

When an Investor believes that the definition of Cash Flow has ONLY (and I want to make sure you see the emphasis on ONLY) to do with how much monthly cash he puts into his pockets on a monthly basis and ignores all other cash flows, the the statement "X property makes $xxx amount of cash flow" is FLAWED at best.

As Kai pointed out, you can be at ZERO monthly cash flow but if you sell at a huge profit, meaning your LAST cash flow which is your Sales Proceeds is HUGE.... your overall Return is GREAT, if you count EVERY Cash Flow.

Similarly, if you were making, say, $200 per month in year 1, which may be a 10% Cash on Cash Return if you invested $24,000 out of your pocket, BUT, if you were forced to sell the property after Year 1 for a LOSS of $3,000 in Seller's Closing Costs, then your DEAL was BAD because you lost money overall. The Cash on Cash Return is at BEST misleading.

To do proper analysis, you need to take into account at LEAST the following:

1) The initial Capital Investment to get the Investment

2) All the Cash Flow during the holding period

3) The proceeds after the Sale EVEN if its in the FUTURE

The last point, 3).... makes the point that you should be doing PROJECTED Sale Price. Then you will REALLY know if you have a good deal.

But if all you do is calculate the 1st year Cash Flow versus your initial investment and come up with a Cash on Cash Return, that's hardly an analysis. It is FLAWED at best.

The weird part about any of these Numerous discussions is that it really points to doing better analysis than just CoCR. But for whatever the reasons (sticking our heads in the sand because you just don't want to understand), there really seems to be a prevalent amount of posters who only do a very simplistic CoCR analysis.

This is DESPITE the fact that the Calculators, including the BRRRR Calculator on this Website, includes an IRR calculation. It really demonstrates that the majority of BPers who may even use that Calculator may not even understand the depth of the calculation and will miss the assumptions it makes, for instance, what appreciation rate did it use to get to the final Sale Price so it can calculate the last Cash Flow?!

For those that are reading this and have an open mind that yes, the Cash on Cash Return analysis is flawed and you need to get a handle on a more sophisticated analysis, then do READ What Every Real Estate Investor Needs to Know about Cash Flow

... do notice that this book is ALL about Cash Flow, and it is FAR different than the Cash on Cash Return most people use in BP.

Originally posted by @Kai Van Leuven :

@Larry T. -I guess in the rest of the financial world it is defined how I see it... I was just trying to clear up the "tribal knowledge" that is spread.

The reason I have a problem with it is because there are so many folks on here looking for information. They see $100-300/door and they jump all over it. They are not taking into account the whole picture. 

I have a friend who was given a house by the city in the roughest area of Ta'compton, I mean Tacoma. He made it super nice, replaced all the windows (shot out), and rented it out. His monthly cashflow was off the charts!!! Then he realized he was spending more in evicting people and trying to make it nice than he ever made. He quickly sold for a loss and moved on. 

My main problem with it is that potential investors come on BP for information. I think they are fed this idea that the midwest is the only place to make money. I have lived in the midwest. There is a reason prices are low... Jobs do not pay enough for homes to appreciate. 

If you look at the big picture, which is what I am trying to convey, you will see that real-estate can only be seen through that lens. IMO

@Mike Dymski I could not agree with you more.

 Henry Ford said "you can have any color car as long as it's black". I'm not sure how that applies but it's what comes to mind.

Originally posted by @Kai Van Leuven :

I read too many posts from investors about "cashflow per door" or "that house does not have a positive cashflow", ect. I feel like the prevailing thought is that it is about "cashflow", singular, when real estate investing is about a series of "cashflows", both positive and negative. I will point to a property I purchased;

poo-poo-on-a-stick?

In a previous post you wrote; "I think that most of the analytics that are tossed around on this site are worthless and should be taken behind the barn." and now you're telling us that "Cashflow is the most misunderstood term."

It appears, according to you, that how BP members calculate numbers are poo-poo-on-a-stick.  So, enlighten us... define the analytics, and by which plumbline should BP members use to measure the success of their RE investments?  

I'm not being facetious.  It's a sincere question. 

@Matthew McNeil Real Estate is a pretty simple game. I gauge my success on two factors; Net Worth and Total Monthly Cashflow.

Net Worth- Not because I really care what it is, but because bankers want to know and will lend me money based off of it.

Monthly Cashflow- Do I have enough to grow the business and live a comfortable lifestyle.

I like a "secret admirer", Matthew. You may also notice that I have said I buy based purely off of equity. I know my own personal market well and buy below it. I think that is what it takes, not all these silly metrics that make you feel like you are getting something great because you really don't know what you are doing...

Originally posted by @Tanner Marsey :

@Joe Villeneuve

I think, as a general rule the areas that cash flow well aren’t known for massive appreciation. Midwest/southern homes that you buy for 100k have a fairly high probability of keeping up with inflation....maybe.... obviously, there are a lot of factors that play into that. People in those markets don’t generally look at their homes as investments the way people in high dollar markets/appreciation markets do.

That said, I think there is some middle ground.

 All properties in any general market (i.e.Midwest, West, South, et...) can't be grouped together. They're not all the same. There are micro-markets within all of these markets.  The key is to invest in the micro-markets that do work for both cash flow and appreciation...and they do exist, in many places.

@Kai Van Leuven

I'm still pretty green but I think you are missing an important part of this discussion.

Cash flow vs. appreciation is discussed quite a bit on the podcast. The general idea is cash flow is a hedge against the risk of real estate cycles. A property with good cash flow can be held indefinitely (even if rent reduction is necessary to maintain occupancy). A property with negative monthly cash flow is a liability which costs money every month. Unless someone has major reserves and a bulletproof source of income in the case of an economic downturn this type of investing is risky. A lot of people invested in 2005,6,7 assuming values will always go up. Instead they were cut in half and they lost everything. Maybe they lost their job or just didn't have the reserves to cover the monthly loss.

Sure, if everyone could've held that property until now they would be doing just fine. But obviously that didn't happen.

The thing is none of us have a crystal ball. We don't know for sure property values in a certain area will go up. We can make an educated guess but that's about it.

All that being said, yes there should be a balance between cash flow and looking at appreciation. A property in a D area will probably have monster cash flow(maybe, depending on turn over costs etc...), but little if any appreciation. A property in LA may have negative cash flow but the chance of big appreciation. But there is a middle ground where cash flow can be positive and appreciation can be a nice bonus.

The way I look at it is cash flow is guaranteed income (more or less) And appreciation is a nice bonus but never a guarantee.

Originally posted by @Matthew Olszak :
Originally posted by @Kai Van Leuven:

The title and content here don't match. Not arguing your what you state, but IRR and cashflow are 2 chickens of very different flocks. This is really more of a cashflow vs. appreciation vs. overall return thread.

You are making Kai's point.  He (and most of the business world) do not delineate between monthly cash inflows and other cash inflows and outflows like down payments, refinances, and capital injections.  They are ALL "cash flows"...and the big ones matter a lot more than the little ones.  This is not a monthly cash flow vs appreciation debate...this is a thread about the definition of cash flow.

So many BP investors don't consider a down payment a cash flow...or a refinance a cash flow...or the purchase of a heat pump a cash flow...but bank accounts tell a different story and the business world uses Kai's definition. Much of the BP membership uses a different reality.

@Kai Van Leuven

I believe what most BPers refer to when saying cashflow is operating cashflow from an accounting/finance point of view. You seem to be referring to overall cashflow (which includes cashflow from financing activities as well as cashflow from investing activities).

I agree with you that there is more than the simple calculation of rent - expenses to calculate total cashflow and maybe the crowd on BP isnt too familiar with the financial terms mentionned above. 

If BPers want to run their REI ventures as a business, it is my opinion that they should get familiar with those principles as sometimes if you take into account all the numbers, your investment might be costing you money!

Cashflow should pertain only to operational profits.  Rents after expenses, including mortgage.

What you did was take on more debt.  And those refinance proceeds are not taxable because it is not income and you will have to pay it back.   Creating high leverage situations to buy more properties could be a house of cards.  

There could be some logic to what you are doing in hot markets like Seattle, which is where you seem to be from.   In markets that are appreciating rapidly, you will not find many small rental properties that have positive cash flow.  However, holding appreciating properties at the right time will make you positive equity.

In addition to cash flow, we all should be striving to create equity in our properties.  Buying right, buying an add-value property, paying down the mortgage, buying an appreciating property - -all creates equity.   And this is wealth.

Your strategy is difficult for lenders though.  You can use a personal mortgage to do this type of deal, but you will not be able to scale up with those loans.  When you approach a commercial bank, they will want to see a conservative debt coverage ratio.  Losing $75 a month is not a situation that they would lend. 

Looking at the regular monthly inflows/outflows is nice to use as a rule of thumb guide, when doing some kind of initial back-of-the-envelope examination... a bit like the 1% rule or 50% rule.

But clearly there is a lot more to it than just a simple look at inflows minus outflows.  So I always kinda just assumed that these little guides are not meant to be full-on strategies.

It is useful to understand that monthly cash flows do not necessary equal profits (thus the allowances for repairs, etc.), but clearly there are a few other parameters to take in to account - downpayment, taxes, appreciation, effects of financing later on, and so on.

I mean, I guess any property 'cash flows' if you put enough money down, right? 

 

Cash flow is one part of the REI equation. SFR hedge funds average 60/40 favoring appreciation on their returns. Where as BP posters seem to be in a 90/10 % favoring CF. This may be just a matter of location when unpacked entirely.

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