Cashflow: BP most MISUNDERSTOOD term
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!
Seems like there may be some benefit to splitting the definitions of "cash flow".
In one hand, we have "steady state monthly cashflow".
On the other hand, we have "all other cash flow not captured in the previous definition".
I think it's easier to talk about the summation of the two, after first splitting them apart from a definition perspective.
Originally posted by @Johann Jells:
Originally posted by @Cody L.:Originally posted by @Johann Jells:
Originally posted by @Cody L.:One of my best friends invests in the same market as me (Houston). His cash flow was $3.1 MILLION last year after all expenses.
Ask me what his appreciation was? Who knows. Who cares
(actually Houston has been on a rocket ship up so my guess is he made $10m+ on paper. But in terms of money in his account each month, that $250k+/month of pure cash flow is hard to beat)That sounds awesome, if he's capitalized at $10m. If he's capitalized at $100m, not as great. This is why just citing raw cashflow numbers are meaningless. I just saw an article calling Houston one of the 4 biggest bubbles in the country.
He started about when I did. 14 years ago. Him and a partner both put up $1m. The portfolio was built up by smart buying/selling/refinancing. Their initial money in has been paid back long ago (and the partner bought out). So his annual cash flow is 300% of his original investment.
Not surprisingly, you miss my point. I did not doubt he has done well, I'm just pointing out the weakness of cashflow as dollars rather than as a percentage of capital, AKA IRR. A far more interesting metric of his portfolio would be his yearly return on that year's capitalization, not what he started with. Is his money still working hard or not? No right answer, since high returns usually are accompanied by high risk.
Look, I'm not a smart man. So it's obvious that I'd miss your point.
@Kai Van Leuven says “I would rather invest in something that has a huge payout in 30 years.”
Sorry- not a chance. My REI is for cash today. And my multi-families by definition appreciate, and I can control appreciation rather than the whim of the SFH market.
30 years! Yikes. That is what my 401k, pension and Social security are doing.
Look, if I was operating at a negative cash flow I would want to redefine cash flow too. ;)
Originally posted by :
my multi-families by definition appreciate, and I can control appreciation rather than the whim of the SFH market.
I don't understand any of that. I saw plenty of multi families depreciate in 2008, including my own. One just needs to ride it out, but there's no guarantees. The only guarantee is that when you retire the mortgage you now own it outright.
@Patrick M. Yes Sir, 30 years I will get the largest cashflow of them all.
What is funny is that you discredit that style of investing but then participate in it through your 401K, pension and social security... Seems like something you believe in but you also believe in "BP cashflow Kool-aid".
@Cody L. Brough to light the fact that monthly cashflows can make so much sense that who cares about the underlying asset. I totally agree with that. The only thing you have to consider is wether or not those cashflows are outpacing inflation (discounted cashflows). If you are outpacing inflation than "rock on", if not, overtime the cashflow goes down from a real dollars (adjusted for inflation) perspective. That is so much money in todays dollars that by the time inflation eats up his gains...he will probably be in the ground!
The spectrum looks something like this;
You treat your investment like it is a blue chip stock that does not pay a dividend and pays off when you sell. The asset has to, no doubt, outpace inflation or this model makes no sense.
OR
Your property model is based on a rental car agency. You buy an asset (car), transactional cashflows are really high (renting it out), and then you sell it, or more accurately, dispose of it (sell to general public after is been depreciated). The asset in this case is just a means for generating transactional cashflow. The largest risk in this situation is that your monthly cashflow will not outpace inflation. If you have an asset that does not outpace inflation and rents that do not outpace inflation... well, you are screwed!
Either way you are trying to park your money and not have it erode away.
@Kai Van Leuven my pension and 401k are not speculative and several added benefits from decreasing my present tax liability to employer contribution. I’ll allow that social security may be means tested if socialism does take hold in the US- but I have no choice with that.
I do discredit your dreams of a 30 year payday when you are sinking today’s cash into a speculative investment which “may” return in 30 years.
Read up on compound interest and inflation. The $200 you are losing today is a whole lot more of a loss 30 years from now.
Investment opportunities which will pay today abound. Locking away dollars in today’s economy is foolish IMHO.