How you can profit from a Big Mortgage

117 Replies

Interesting, if not confusing, post, but I don't learn much from his conclusions.  He does discuss the benefits of a high appreciation market, which in the end, often creates more wealth than cash flow.  He misses that properties in most areas of the country do experience some appreciation.  For long term holders, their returns are enhanced by their equity gains when selling.  

The root of the "appreciation"  market is that demand outpaced supply.  California, Hawaii, Seattle and top East Coast Cities experienced this during the last real estate cycle. (which is over, by the way!)

I've consistently posted to California investors that are looking for advice for a good market to invest in - "Stay at home!"  

Yet most of these markets weren't always good.  Seattle was not the city it was today in the 70s.  New York was a city in trouble in the early 80s.  Los Angeles had the steepest prices decreases during the recession of 1992.  But during the last 20 years, the knowledge economy centered around these cities, combined with housing stock that could not grow with demand.  Total winners.

Investing for appreciation has its defined cycle.  And that cycle is now over.  Investing for appreciation is tricky, because you don't have strong cash flow.  Investing in high appreciating markets means buying more expensive properties and needing more capital to participate in that market.

We are now in a recession that certainly affects these markets too.  Brooklyn, the poster child for gentrification, is dead center for the Coronavirus outbreak. California is on lockdown too.   California people are losing their jobs.

Problem with his ideas #1:  The game was over last year in these markets.  Prices were sky high and appreciation was going to curtail.  The values already priced-in the scarcity of this real estate.  In other words, appreciation was not growing fast anymore.

Problem with his ideas #2:  BAM.  Those who owned property for awhile in a hot location certainly did very well.  They got the appreciation.  But their success did not rely on BAM.  Overleveraged investors, in any market, are going to be sweating it today.  His stellar rental growth and appreciation assumptions are last weeks news.  You are now working for the bank.

We are shifting to a weaker real estate market.  Some call it a buyer's market.  This is the time for savvy investors to start looking for bargains.  It is way too early to predict the trajectory of the economy and capital markets.  

Next real estate cycle, Andrey Y model continues to have merit.  I'd expect hot cities, those with new economy jobs or finance like NYC, to continue their prominence.  

Problem with his ideas #3:  There are operators who make great money in interior cities.  Even declining regions.  But they know how to invest and create value throughout the whole investment chain.  They are not turnkey buyers.  If returns are truly awful in these areas, the market has a funny way of adjusting.  Prices go down, and returns go up, attracting new investors.  Capital also has a funny way of allocating itself to opportunities, wherever they may be.  As the unlikely city of Detroit has experienced a modest renaissance, not surprisingly new investment capital is following.

Originally posted by @Brian Ploszay :

Interesting, if not confusing, post, but I don't learn much from his conclusions.  He does discuss the benefits of a high appreciation market, which in the end, often creates more wealth than cash flow.  He misses that properties in most areas of the country do experience some appreciation.  For long term holders, their returns are enhanced by their equity gains when selling.  

The root of the "appreciation"  market is that demand outpaced supply.  California, Hawaii, Seattle and top East Coast Cities experienced this during the last real estate cycle. (which is over, by the way!)

I've consistently posted to California investors that are looking for advice for a good market to invest in - "Stay at home!"  

Yet most of these markets weren't always good.  Seattle was not the city it was today in the 70s.  New York was a city in trouble in the early 80s.  Los Angeles had the steepest prices decreases during the recession of 1992.  But during the last 20 years, the knowledge economy centered around these cities, combined with housing stock that could not grow with demand.  Total winners.

Investing for appreciation has its defined cycle.  And that cycle is now over.  Investing for appreciation is tricky, because you don't have strong cash flow.  Investing in high appreciating markets means buying more expensive properties and needing more capital to participate in that market.

We are now in a recession that certainly affects these markets too.  Brooklyn, the poster child for gentrification, is dead center for the Coronavirus outbreak. California is on lockdown too.   California people are losing their jobs.

Problem with his ideas #1:  The game was over last year in these markets.  Prices were sky high and appreciation was going to curtail.  The values already priced-in the scarcity of this real estate.  In other words, appreciation was not growing fast anymore.

Problem with his ideas #2:  BAM.  Those who owned property for awhile in a hot location certainly did very well.  They got the appreciation.  But their success did not rely on BAM.  Overleveraged investors, in any market, are going to be sweating it today.  His stellar rental growth and appreciation assumptions are last weeks news.  You are now working for the bank.

We are shifting to a weaker real estate market.  Some call it a buyer's market.  This is the time for savvy investors to start looking for bargains.  It is way too early to predict the trajectory of the economy and capital markets.  

Next real estate cycle, Andrey Y model continues to have merit.  I'd expect hot cities, those with new economy jobs or finance like NYC, to continue their prominence.  

Problem with his ideas #3:  There are operators who make great money in interior cities.  Even declining regions.  But they know how to invest and create value throughout the whole investment chain.  They are not turnkey buyers.  If returns are truly awful in these areas, the market has a funny way of adjusting.  Prices go down, and returns go up, attracting new investors.  Capital also has a funny way of allocating itself to opportunities, wherever they may be.  As the unlikely city of Detroit has experienced a modest renaissance, not surprisingly new investment capital is following.

 The problem with your "Problem with.." posts is that my model includes the downturns. The data and examples I and others have detailed in this thread INCLUDE THE DOWNTURNS AND MARKET CYCLES !

I don't see how we can be any less clear. This data goes back to the 1960s where people made all the same arguments you did, convinced themselves they were smart and didnt jump in. They missed out! They missed their chance to get wealthy. While owning assets with less management intensive tenants to boot

The data is clear, most of the profit comes from appreciation. Sure you can make some peanuts from $30K properties in Detroit but do you want to work 50 hours a week to manage 30 of these rentals for $200 "cash flow"? I don't !

Don't even start with Brooklyn lol you'll have a bunch more people on BP who will chime in and break it down for you how much WEALTH they made by investing for profit rather than cash faux.

As usual, your comparison is that of the best example from your end...and the worst case from the other.  Where do you get the numbers for Detroit?  Must be the news media...or some chart that gives the average numbers.  Just don't by "average"...I'm sure you don't.

You don't need to work "50 hours a week to manage 30 of these rentals"...and I assume you are talking about $200/month per property...so the 30 Detroit rentals you are talking about would be CF at $6,000/month = $72k/year.  Take out 10% (actually 8% with 30 properties), and you end up with $5,760/month...using a PM.

First, the idea of getting only $200/month is ridiculous.  Try at least $400...and no, not all properties can do that.  Just don't buy them unless they do.  Oh wait, my bad, that's not allowed (your rules for comparison).  I have to use the worst case.

@Andrey Y. - I'm following your points - and although they may sound a bit harsh, i see how your point-of-view is relevant to the bay area and similar markets.

I'm generally a worrier though - and that's stopped me from taking action :-(. As an example, following your guidance - if I have 3-4 highly leveraged properties in the bay-area, minimal cash-flow and if an earthquake (1989-like) were to cause major damage - then I'd be SOL. or is there a way out? thoughts?

Originally posted by @Andrey Y. :
Originally posted by @Brian Ploszay:

Interesting, if not confusing, post, but I don't learn much from his conclusions.  He does discuss the benefits of a high appreciation market, which in the end, often creates more wealth than cash flow.  He misses that properties in most areas of the country do experience some appreciation.  For long term holders, their returns are enhanced by their equity gains when selling.  

The root of the "appreciation"  market is that demand outpaced supply.  California, Hawaii, Seattle and top East Coast Cities experienced this during the last real estate cycle. (which is over, by the way!)

I've consistently posted to California investors that are looking for advice for a good market to invest in - "Stay at home!"  

Yet most of these markets weren't always good.  Seattle was not the city it was today in the 70s.  New York was a city in trouble in the early 80s.  Los Angeles had the steepest prices decreases during the recession of 1992.  But during the last 20 years, the knowledge economy centered around these cities, combined with housing stock that could not grow with demand.  Total winners.

Investing for appreciation has its defined cycle.  And that cycle is now over.  Investing for appreciation is tricky, because you don't have strong cash flow.  Investing in high appreciating markets means buying more expensive properties and needing more capital to participate in that market.

We are now in a recession that certainly affects these markets too.  Brooklyn, the poster child for gentrification, is dead center for the Coronavirus outbreak. California is on lockdown too.   California people are losing their jobs.

Problem with his ideas #1:  The game was over last year in these markets.  Prices were sky high and appreciation was going to curtail.  The values already priced-in the scarcity of this real estate.  In other words, appreciation was not growing fast anymore.

Problem with his ideas #2:  BAM.  Those who owned property for awhile in a hot location certainly did very well.  They got the appreciation.  But their success did not rely on BAM.  Overleveraged investors, in any market, are going to be sweating it today.  His stellar rental growth and appreciation assumptions are last weeks news.  You are now working for the bank.

We are shifting to a weaker real estate market.  Some call it a buyer's market.  This is the time for savvy investors to start looking for bargains.  It is way too early to predict the trajectory of the economy and capital markets.  

Next real estate cycle, Andrey Y model continues to have merit.  I'd expect hot cities, those with new economy jobs or finance like NYC, to continue their prominence.  

Problem with his ideas #3:  There are operators who make great money in interior cities.  Even declining regions.  But they know how to invest and create value throughout the whole investment chain.  They are not turnkey buyers.  If returns are truly awful in these areas, the market has a funny way of adjusting.  Prices go down, and returns go up, attracting new investors.  Capital also has a funny way of allocating itself to opportunities, wherever they may be.  As the unlikely city of Detroit has experienced a modest renaissance, not surprisingly new investment capital is following.

 The problem with your "Problem with.." posts is that my model includes the downturns. The data and examples I and others have detailed in this thread INCLUDE THE DOWNTURNS AND MARKET CYCLES !

I don't see how we can be any less clear. This data goes back to the 1960s where people made all the same arguments you did, convinced themselves they were smart and didnt jump in. They missed out! They missed their chance to get wealthy. While owning assets with less management intensive tenants to boot

The data is clear, most of the profit comes from appreciation. Sure you can make some peanuts from $30K properties in Detroit but do you want to work 50 hours a week to manage 30 of these rentals for $200 "cash flow"? I don't !

Don't even start with Brooklyn lol you'll have a bunch more people on BP who will chime in and break it down for you how much WEALTH they made by investing for profit rather than cash faux.

I agree with your overall principle, but I just don't necessarily think there should be such a strong dichotomy between these two strategies. Without a doubt, my greatest wealth generator was capital appreciation, but that doesn't mean folks in the Midwest also did not benefit from the same thing. Their strategy might have been to earn a certain amount per door, but I'm sure they also experienced some very nice increases in their net worth as most of the country experienced some very nice capital appreciation the past ten years.  

Also, while my goal is also long-term capital appreciation, it IS really nice to have all this extra cash-flow coming in on a monthly basis. It has allowed us a lot of flexibility (i.e., my wife quit her job a few weeks ago without blinking) and helps with acquiring additional properties. 


Considering that literally millions of people making money in real estate, it seems a little naive to make this kind of a proclamation. 

I live in a market where small multifamily properties trade for 60-150k/unit. I own a duplex that I paid $300k for, have $10.3k in taxes, pay all utilities, services, and repairs, and I still have over $25k year of cash flow with headroom. The property has also appreciated by about 10% in the past two years.

Your post and replies really came across as arrogant, but I will give it another try.  Because the topic is interesting to me.

I will use California as an example because I have experience in that market.  It has been an "appreciation" oriented market, probably for the last 50 years.  And lots of folks made tremendous wealth during the last cycle.  You're right, far more than the cash flow folks.  

You are also right that high leverage loans totally work, if you find yourself in a fast appreciating market.

I always like to consider the downside.  And the downside has arrived.

1.  California has historically had some deeper recessions.  

2.  Overleverage sucks when the market stops growing.  That moment is now.

3.  The prices became sky high, so highly leveraged investors who bought in the last 24 months are not in good shape today.  Because the growth in rents and appreciation has stopped.   Watch new capital disappear from places like California, because the fundamentals have changed.  Just like the stock market saw participants run towards the exit door.

The market has turned so abruptly, that to argue for appreciation doesn't make sense.  The mortgage market is changing rapidly and high leverage loans will become a rarity for awhile.  Hawaii is dependent upon tourism.  Interstate commerce is dependent upon flights.  Sorry, but rent appreciation is done there for awhile.  And values will stagnate or decline.

Apply your theory for the next cycle.  Buy right in the next couple of years in prime markets, and you'll do well.  All of us need to be shifting our strategies.

And you should acknowledge that many cash flowing properties also have an appreciation component.  Most of my properties went up significantly in value during the last cycle.  And I am not in CA, HI or Brooklyn.  

 

@Brian Ploszay you're making assumptions that CA investors do not cash flow. I am part of a local mastermind group, in total we own over $100M in local multifamily real estate. Every single one of us cash flows well over $300-500/door, by putting ~20% down, and the majority of our properties were purchased in the last 5 years. And yes, we're in the #1 appreciation market in the country, the SF Bay Area. It's almost hard not to cash flow here with the rent growth that we have, year in and year out. 

Several of us bought in the last 24 months. There is an 8 unit that I bought with 20% down just 9 months ago. When I'm done with the value add it will cash flow $1,000/door/month and will be worth $1M more than I paid for it. That is impossible anywhere else. 

I agree 100% and like to look for a mix of some cashflow and a nice area/low down mortgage. I always teach my clients that the % you allocate for cap/ex/reserves changes drastically the cheaper/lower income the tenants. Once people re-run numbers using differance vacancy rates, growth rates, cap/ex, etc. for lower income properties they quickly see how the class B is more profitable in real life. 


Looking backward its ALWAYS easy to know where, when and what to invest in.  Looking forward, not so much.

in the 1970s investing in NYC wasn't a slam dunk.  600,000 properties in the Bronx were forfeited for taxes.  Co ops on the lower east side were going for $500.  Criminals overran the city, it was bankrupt, and policeman didn't want to patrol the streets.

One of the people who decided to invest during this period of time was Donald Trump.  He bought, renovated, and reopened a closed down hotel in Grand Central Terminal.  Most critics thought it was folly at the time.

Detroit had just built the Renaissance Center and articles were being published about how bright Detroits future looked, once Coleman Young was ousted as mayor.  Family friends owned a 6500 square foot house in Bloomfield Hills, one of Detroits richest suburbs.  Their house was appraised at $1,850,000 in 1998 when they got a home equity loan.  They sold the house in 2010 for $485,000 in a short sale.  How well did appreciation work out for them?

We truly don't know the future.  Areas popular today may be tomorrows slums.  Trends reverse, jobs move, areas have natural disasters.  But I do know ONE truth.  When people start believing that cash flow doesn't matter because appreciation will make you rich, WE HAVE REACHED THE TOP of the market cycle.  And when people with absolutely no knowledge or grasp of investment start offering their opinion as if they're the worlds greatest expert, we've gone one step beyond peak.  

@Andrey Y. I love this! I invest the same way, because I’m in Los Angeles. My properties here have so much more appreciation but some times cash flow negative. I have a house in Texas and it is always cash flow positive but has had very little appreciation. I could care less about cash flow right now, I’m young and healthy and I can work to pay my bills.

Originally posted by @Brian Ploszay :

Interesting, if not confusing, post, but I don't learn much from his conclusions.  He does discuss the benefits of a high appreciation market, which in the end, often creates more wealth than cash flow.  He misses that properties in most areas of the country do experience some appreciation.  For long term holders, their returns are enhanced by their equity gains when selling.  

The root of the "appreciation"  market is that demand outpaced supply.  California, Hawaii, Seattle and top East Coast Cities experienced this during the last real estate cycle. (which is over, by the way!)

I've consistently posted to California investors that are looking for advice for a good market to invest in - "Stay at home!"  

Yet most of these markets weren't always good.  Seattle was not the city it was today in the 70s.  New York was a city in trouble in the early 80s.  Los Angeles had the steepest prices decreases during the recession of 1992.  But during the last 20 years, the knowledge economy centered around these cities, combined with housing stock that could not grow with demand.  Total winners.

Investing for appreciation has its defined cycle.  And that cycle is now over.  Investing for appreciation is tricky, because you don't have strong cash flow.  Investing in high appreciating markets means buying more expensive properties and needing more capital to participate in that market.

We are now in a recession that certainly affects these markets too.  Brooklyn, the poster child for gentrification, is dead center for the Coronavirus outbreak. California is on lockdown too.   California people are losing their jobs.

Problem with his ideas #1:  The game was over last year in these markets.  Prices were sky high and appreciation was going to curtail.  The values already priced-in the scarcity of this real estate.  In other words, appreciation was not growing fast anymore.

Problem with his ideas #2:  BAM.  Those who owned property for awhile in a hot location certainly did very well.  They got the appreciation.  But their success did not rely on BAM.  Overleveraged investors, in any market, are going to be sweating it today.  His stellar rental growth and appreciation assumptions are last weeks news.  You are now working for the bank.

We are shifting to a weaker real estate market.  Some call it a buyer's market.  This is the time for savvy investors to start looking for bargains.  It is way too early to predict the trajectory of the economy and capital markets.  

Next real estate cycle, Andrey Y model continues to have merit.  I'd expect hot cities, those with new economy jobs or finance like NYC, to continue their prominence.  

Problem with his ideas #3:  There are operators who make great money in interior cities.  Even declining regions.  But they know how to invest and create value throughout the whole investment chain.  They are not turnkey buyers.  If returns are truly awful in these areas, the market has a funny way of adjusting.  Prices go down, and returns go up, attracting new investors.  Capital also has a funny way of allocating itself to opportunities, wherever they may be.  As the unlikely city of Detroit has experienced a modest renaissance, not surprisingly new investment capital is following.

To me, the decline of a once-thriving Detroit seems like somewhat of an anomaly. I'm sure there are certain areas in Baltimore and Philly and Ohio that over time, experienced some serious decline. However, I'm having difficulty coming up with cities that experienced significant decline in areas that are traditionally considered high-appreciation areas. 

Sure, California was hit hard in '08, but it has come back stronger than ever. I 1031'd into a 4 plex in South Central Los Angeles in Dec 2018 as a cash-flow play, but that property has actually gone up in value by enough to conservatively give me an IRR of around 35%. Of course, I don't expect this to continue, but I think what I'm trying to ask is, is it really gambling when investing for appreciation in areas where there is 50+ years worth of data?

Even when the Mid-Wilshire area of Los Angeles went stagnant from the mid-century due to changing demographics, the neighborhood did get 'rougher', but property values certainly did not go down. 

The mid-wilshire/Koreatown area is now becoming somewhat of a residential/commercial/transportation hub with the development of public transportation in the area in preparation for the '28 games. UCLA projects the Wilshire corridor becoming the epicenter of a model of sustainability for the city. 

I don't know... If you ask me, I think this is a good area to invest....it just depends on what your definition of cash flow is. If you want the high IRR, then yes (and Brian, based on your posts, I think this is something that you're very well tuned into). If you want the steady monthly rent checks with minimal money down...then perhaps not.

@Tony Kim    I've been thinking about this post for awhile.  Because it doesn't really explain what I've experienced.   IRRs reflect leveraged returns, so they are not easily comparable.  So I prefer to use Cap Rates, which is a non-leveraged rate of return.

Assume I have properties that have a 9 percent rate of return (cap rate) plus 4 percent annual appreciation.  That might theoretically be equivalent to a Los Angeles 3 Cap property that has an annual 10 percent annual appreciation.

Money inevitably flows pretty quickly to good opportunities, flattening out yield curves.  In other words, prices go up, and the next crop of buyers don't get that super yield anymore.

50 years of data of Southern California actually need to be interpreted.  It hasn't always been the same economy.  What is more interesting is what is happening now.

The boom that you experienced is wholly due to the super high building constraints that California faces for new housing stock.  For 20, maybe 30 years, they haven't been able to build to keep up with demand.  So housing is expensive now, in a region that certainly has a lot of land and ability to grow vertically.  The high prices have driven some middle class out of the State, created growth of homelessness, etc...

Back to rates of return.  For sure, a place like Southern California had outsized returns, probably from the years 2012 to 2018.  These are appreciation returns mainly.  But there was real rental growth.

But these investments are tough. Lots of smaller rentals would have negative amortization if I bought them. Feeding investments is risky in my opinion. For larger deals, banks still would require LTV ratios, so you will have to put down large downpayments. That impedes your IRR. And using that much capital restricts your growth.

My conclusion is that legacy owners have golden properties.  Newcomers bought risk, that is amplifying the last two weeks.  

Few more observations:  I see lots of California investors looking outside of their state for returns.  Novice investors are buying quasi toxic turn key properties in areas with regional decline.  This will not turn out well for them.  I heard a statistic that the far majority of turnkey buyers were from California.  On a larger scale, cash flush real estate investors from California have definitely targeted other states, including my City.  Probably they correctly feel that relying on a appreciation only model has risks.

The real game in California residential real estate is development.  And it is a tough to do.  The ability to get approval / zoning changes to build apartment buildings.  Drive around Echo Park and you'll see a new neighborhood emerging.  Wealth is being created through building housing stock that is totally in demand.  

Proposed Law SB50 would have been a game changer.  It would create the biggest building boom since the 1960s.  Instead there is a water down law that got passed, basically allowing people to convert garages to mini apartments, etc..

Originally posted by @Andrey Y. :

In light of all the recent threads about COVID-19, worrying about tenants not being able to pay rent, legislation that seems to screw over landlords month after month, and ethical dilemmas about where it is our obligation as landlords (or God's children) to cover the bills of tenants because of (fill in the blank)

Cash flow is for poor investors or investors that are poor (Apologize in advance to the BP / GRE / Turnkey advertisers)

Let me introduce to you a concept that is not often talk about, and probably frowned upon over the last 11 year bull market:

Big A** Mortgage (BAM)

Things most investors foolishly ignore..

  1. - Historic rent growth
  2. - Historic appreciation rate.
  3. - NOI per square foot
  4. - Operating expenses per sf
  5. - Capex per sf

Cash flow is for poor investors or investors that are poor.

If you need or hoped for cash flow to pay your cable bill then you probably should not be investing in real estate. The only reason I'm not cash flowing is because of a BAM that I am paying down because I am in a high appreciation market vs. a market where the only reason I may get cash flow is because the prices are so cheap because sellers are trying to unload unprofitable properties, this is by design.

So-called cash flow gets eaten up by CapEx and by pesky critters like the coronavirus. EVERY. SINGLE. TIME. I know that "cash flow" has been shoved down our throats because it makes money for advertisers and those companies selling it.

Its time to wake up and start thinking like the big boys (family offices, hedge funds, and billionaires). They are buying 3.5 caps in NY, London, HK, LA, and SF.. FOR A REASON. That reason is not the dream of cash flow.

 

Originally posted by @Wyatt Franta :

Hey Andrey,

I can't help but notice you've taken one approach to real estate investing and decided that's the end-all-be-all of successful portfolios. Forced appreciation. While that may work in certain states, you need to also understand your appreciation strategy takes the BIGGEST hit when markets collapse. Renters will always rent, but sellers will only sell when they're:

1.) Forced into a corner

2.) Have a sizable equity to cash in on.

When the next recession hits, you'll be forced to sit on worthless properties until markets recover. House prices in CA just reached 2008 numbers last year in 2019. If you invested here, you'd be stuck for over a decade before you even had an opportunity to break even.

You've also, by the context of this post, trashed the core investment strategies of Blackstone, NRZ, Fundrise and countless other REITs who undoubtedly would run circles around 95% of the members on this forum. 

It sounds as if you're just investing in real estate during one of the longest bull markets in the history of the US. You literally couldn't lose for the past decade, invest in something and you win. 

Regardless, I hope we all pull through this pandemic. Very few of us are going to be sleeping easy for the next few months.

>House prices in CA just reached 2008 numbers last year in 2019. If you invested here, you'd be stuck for over a decade before you even had an opportunity to break even.

Most sources show Ca prices recovered on a Median level in 2017 (some show 2016).  OC was 2017.  OC: 2006 (highest prior to GR) $751K, 2017 $755K.  LA: 2017, San Diego: 2017.  There are a few counties (at least one: Riverside, not sure about Fresno) though that have not yet recovered.  Similarly there are some counties that recovered prior to 2017 (mostly smaller density counties).  Case Shiller shows San Fran was recovered ~2013 (San Fran only declined 27% according to Case Shiller and was virtually recovered by 2013).

Most sources show the recovery post GR as the longest RE recovery time in CA in at least 70 years.

www.laalmanac.com/economy/ec37.php for So Cal home values by large cities by year.  

Originally posted by @Andrey Y. :
Originally posted by @Joe Villeneuve:

So, to summarize your long winded whining, Cash Flow is a bad reason/way to invest because:

1 - You have chosen a market to invest in, that has poor cash flow
2 - Nobody can successfully cash flow because you can't do it in your market of choice.

 I am actually cash flowing AND profiting in Hawaii specifically because rental income growth goes hand in hand with appreciation.  I would STILL profit even if my rentals were unoccupied. You cannot say the same thing.

The reason I can cover missed rent payments is because I focus on profitable markets, not to be confused with "cash flow" markets on paper.

Landlords are freaking out all over this forum due to the anticipation of 1-2 missed rent payments.  But they purchased fantastic assets in cash flow markets with dreams of cash flow right. Why are these landlords getting so nervous, I thought "cash flow" would help them in times of trouble?

The chickens are now coming home to roost. We will see which investors understand the difference between cash flow and profit.

 I try to avoid drama on this site, but this might be the dumbest comment I've seen on here. 

Originally posted by @Andrey Y. :
Originally posted by @Joe Villeneuve:

Cash Flow is a great goal...if your analysis and decision making (choosing markets and properties) is solid.  Accepting low CF, just because it's CF, is just as foolish as increasing your DP in order to CF higher due to the lower loan payment.  Thinking that way is a result of a lack of understanding of basic math.  It's a result of focusing on the answer...instead of the formula itself.

It's also a complete lack of understanding of the difference between Total Cost and Actual Cost...and why the Actual Cost is the only one that matters.

Cash flow is a great goal. Totally agree there. How do you think CapEx is paid for. By your cash flow!

My markets have  great cash flow over time because of the high rent growth. Real estate is not a one year investment.

You ("cash flow investors") are speculating that your tenant is going to come up with the rent EACH and EVERY month so you can get your cash faux.

I can be the worst landlord ever but I still end up with a property worth double my purchase price in 10 years. An investor who spent their entire time on BP and podcasts ingesting thousands of hours of CASH FLOW advertising, their property (midwest home worth $75K now that was worth $50K in 1988), inflation adjusted is worth the same.

Appreciation and rent growth is the key.

Going to remove my previous comment as I really don't feel like participating 

Originally posted by @Justin Tahilramani :
Originally posted by @Andrey Y.:
Originally posted by @John Collins:
Originally posted by @Andrey Y.:

 I am actually cash flowing AND profiting in Hawaii specifically because rental income growth goes hand in hand with appreciation.  I would STILL profit even if my rentals were unoccupied. You cannot say the same thing.

The reason I can cover missed rent payments is because I focus on profitable markets, not to be confused with "cash flow" markets on paper.

What the hell are you talking about? You can cash flow without rental income? At what price point, what mortgage did you take out and how much interest are you paying on it? Simple math is all I ask for.  

 Very simple example. An investor owns a $800K home in a city in California. They earn $60K per year appreciation over the long term (which is $5K per month), which the Turnkey operators will tell you you should accept a $250 per month "cash flow", more than half of which will go to fixing up your boiler, or roof down the line, while the property value doesn't even keep up with inflation.

Do you think @Minh Le @Matt R. @Jay Hinrichs @Amit M. (investors who invest for PROFIT) are worried about their tenant not making the April and May mortgage payments? Because all of the people I see worried on all the threads popping up, are not invested in profitable markets. They are invested for "cash flow" because that is what they have been hearing and reading about for the last 10 years.

This is intended to teach, so we can all learn from something like this. At the end of the day, we are all trying to become better investors. Leave the advertising to those who are trying to sell you something. 

This is total BS speculation. Homes in CA do not appreciate long term at the rate of $5,000/month. You are out of your mind if you think that is the normal rate of appreciation. You are the one that is going to get hammered when tenants cant afford to pay their high dollar rents. Also - you are WAY off base about cash flow rentals. Affordable housing is probably the #1 issue facing America today. There are 1000 Americans that are barely able to keep up and need affordable housing for every 1 American who can afford to live in a HCOL area. You can have your own opinion, but dont share it in public forums like its the gospel.

Everyone of my RE that I have purchased has appreciated at least $1.1K/month.  The purchase from 2004 is the worse ($1.1K/month) as it was shortly before the GR.  The best is at ~$6.5K/month (purchased in 2000).  

So you are correct that many/most RE has appreciated $5K/month and likely only RE worth multi millions has appreciated that much over the holding period. However, the appreciation has been outstanding even when purchased shortly before the GR. With that appreciation what do you think the rents have done. Unfortunately, I do not remember what the rents started at for the one with $6.5K/month of appreciation to use. However, one of the RE that has appreciated on the order of $1.5K/month (so one of the worse monthly appreciation in terms of dollars) has had its rent increase from $900/month to $2700/month. It is almost a 2% ratio property now which considering it is a SFR in San Diego is amazing (multiplexes have better ratios).


Originally posted by @Justin Tahilramani :

@Jay Hinrichs - I completely agree with your example, but it's not the "norm" in a lot of CA. Both my parents homes in OC have appreciated nicely over that past 25 years, but not at the rate of $5000/month. There is also the fact that while one may enjoy hyper appreciation during a defined period of time - at some point it will climax. My parents places reached their peak years ago and have only slightly increased in value over the past 5 years (more or less stagnant). The OP makes it sound like you can bank on $5K appreciation per month. That's just not true in my opinion.

Median OC values have risen $103K over the last 5 years or $1.7k/month appreciation.  They certainly have not peaked.  Source

http://www.laalmanac.com/econo...

Originally posted by @Brian Ploszay :

@Tony Kim    I've been thinking about this post for awhile.  Because it doesn't really explain what I've experienced.   IRRs reflect leveraged returns, so they are not easily comparable.  So I prefer to use Cap Rates, which is a non-leveraged rate of return.

Assume I have properties that have a 9 percent rate of return (cap rate) plus 4 percent annual appreciation.  That might theoretically be equivalent to a Los Angeles 3 Cap property that has an annual 10 percent annual appreciation.

Money inevitably flows pretty quickly to good opportunities, flattening out yield curves.  In other words, prices go up, and the next crop of buyers don't get that super yield anymore.

50 years of data of Southern California actually need to be interpreted.  It hasn't always been the same economy.  What is more interesting is what is happening now.

The boom that you experienced is wholly due to the super high building constraints that California faces for new housing stock.  For 20, maybe 30 years, they haven't been able to build to keep up with demand.  So housing is expensive now, in a region that certainly has a lot of land and ability to grow vertically.  The high prices have driven some middle class out of the State, created growth of homelessness, etc...

Back to rates of return.  For sure, a place like Southern California had outsized returns, probably from the years 2012 to 2018.  These are appreciation returns mainly.  But there was real rental growth.

But these investments are tough. Lots of smaller rentals would have negative amortization if I bought them. Feeding investments is risky in my opinion. For larger deals, banks still would require LTV ratios, so you will have to put down large downpayments. That impedes your IRR. And using that much capital restricts your growth.

My conclusion is that legacy owners have golden properties.  Newcomers bought risk, that is amplifying the last two weeks.  

Few more observations:  I see lots of California investors looking outside of their state for returns.  Novice investors are buying quasi toxic turn key properties in areas with regional decline.  This will not turn out well for them.  I heard a statistic that the far majority of turnkey buyers were from California.  On a larger scale, cash flush real estate investors from California have definitely targeted other states, including my City.  Probably they correctly feel that relying on a appreciation only model has risks.

The real game in California residential real estate is development.  And it is a tough to do.  The ability to get approval / zoning changes to build apartment buildings.  Drive around Echo Park and you'll see a new neighborhood emerging.  Wealth is being created through building housing stock that is totally in demand.  

Proposed Law SB50 would have been a game changer.  It would create the biggest building boom since the 1960s.  Instead there is a water down law that got passed, basically allowing people to convert garages to mini apartments, etc..

Hi Brian,

I appreciate the well thought out response. As I read each one of your points, I can't say there is anything that I would particularly take issue with as I believe that most of what you say is in line with how I perceive the local market here in So Cal. There is definitely a housing constraint which I don't think will ever go away. From '02 to '06, people were building new houses like madmen. Of course, we know what happened after that and the housing shortage disappeared overnight. But what has happened since then? There is still a severe shortage of housing, but it has also been combined with a strong trend toward living in the city instead of dealing with a 2 hour commute everyday. Los Angeles is getting denser and denser. My point? There is always be a housing constraint here in LA. Every city has housing constraints and red tape when it comes to new construction. Are you saying that this is artificially propping up values in Los Angeles?  Maybe, but that is certainly never going to change here. 

I think the more compelling reason for the real estate dynamic here in CA has been the economic prosperity (or for some people, the growing divide in class wealth).  Basically, there are a lot of people out here that make a crapload of money (not me!) and they can afford to pay expensive rent and expensive mortgages, thereby driving up the desire to construct class A apts and sell nice houses at a premium.

One thing that did stand out is your take on CA folks investing OOS. I own a small portfolio of homes in the Midwest...all of which cashflow really nicely and have also appreciated in value somewhat. However, when I compare the performance of these properties to the ones I own locally, including the one I bought as recently as Dec 2018, I've pretty much come to the firm conclusion that my potential to generate wealth is much greater by investing locally. 

I'm still actively buying here in Los Angeles. Am I buying risk? Probably, but I'm extremely selective on what I buy and generally put down around 35 to 40%. But then again, I HAVE lost out on a bunch of properties that I placed offers for. Maybe this is a blessing in disguise...who knows. I think folks are crazy to buy multis at 100 to 600K above list price right now, considering most of the world thinks we are headed toward a recession.

Originally posted by @Joe Villeneuve :

I thought about this last night.  Here is a poll I would like to take regarding the security and returns from cash flow properties over the last 5 years.  

The question is simple and in 3 parts:  Over the last five years, adding up all of your "doors", a)- how many months of vacancy did you have, and b) how many months of income (cf) did you have, and c) - did the other rental income (CF) cover the vacancies?

Example: An investor had 100 doors (mix of multi and sf). Over the past 5 years, the REI averaged 10 vacancies/month. The answer to my 3 part question would then be -
a) - 10 vacancies/mo x 12 months x 5 years = 600 vacancies
b) - 90 non-V/mo x 12 mo x  5 years = 5400 NV
c) - Yes (if no)

In order to participate, you must have had at least 5 doors avg/year over the last 5 years.

I play but will up front state I have 2 units down due to fire since Oct (and construction has been stopped) but we had lost rent insurance so they are the same as rented and will be counted as rented.  4 of the vacancies were extended duration due to rehab, but I will count the entire vacant period.

18 units, 16 LTR units.  Only counting the LTR units.

a) We had a total of 15 vacancies, 11 were a month or less, 4 (with rehabs) averaged around 3.5 months each = ~25 months

b) 16*5*12=960 - 25 - 60 months (2 units purchased Oct 2017) - 24 months (one duplex projected cash neutral at purchase) = 851 months of income

C) of course the cash flow covers the vacancies.

I think it is missing part D: was this a primary cash flow (Midwest like), primary appreciation (NY city area, So Cal, San Fran, boston, Hawaii, Seattle, etc.), mixed (Texas, Florida, Colorado, etc.).  Answer: Primary appreciation market.