Is cash flow overrated?

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation?

I hear folks talk about investing in the mid-west in high cash flowing areas, but in general (don't look at the last 2 years), these properties appreciate very poorly compared to "high appreciation" areas.

I'm curious if any investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market such as Coastal CA, Orange County, San Francisco, Coronado Island San Diego, Lower Manhattan, Miami beach, etc., that was purchased around the same time.

I'd be interested to see an analysis at the end of, let's say 30 years later to see when the dust settled which property made more money. Assuming that both properties were purchased at approximately the same time and sold roughly 30-years later. I know there are a ton of variables, but could it be possible that the obsession for cash flow is instant gratification and will actually profit less than a high appreciation property in the long run?

Also, I'm not arguing against cash flow or saying that people shouldn't be focusing on it. This question is very specific to a long-term analysis.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

How can cash flow be overrated if the goal is to make money? Last time I checked, cash was still money. If you don't have cash flow, you have negative cash flow, which means you are adding to your cost.

Also, collecting equity in the same property is actually losing money.

Bottom line is this, negative cash flow costs you money, and equity build up in the same property (as in the closer that property gets to 100% equity) is in fact losing money...not making it. So, the combination of the two, is deadly...and bad math.

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Llewelyn A.
Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
4y
I think I'm very highly qualified on this topic to share my experience.

Here is a true story.

A fiend, let's call him "Bob", and I invested at the same time, in 2004.

He bought Cash Flowing properties in CT and I invested the same amount into a 3 Family Brooklyn, NYC property.

We both spent about $200k for our Investments.

This is an 18 year history of the comparison.

Bob's CT properties cash flows approximately $1,000 per month for all of this time.

My Brooklyn, NYC property didn't cash flow in 2004, but today, it cash flows $5,000 per month.

Bob's CT Property did get some appreciation, but the increase is something like $300k more than what he paid for it.

My Brooklyn, NYC property is worth $3 Million more than what I paid for it.

The one issue that is not being talked about is where do you want to live? This needs to be factored in.

Bob, unfortunately, in 2004, loved living in Manhattan. He rented an apartment for about $2k at that time when he made the purchase of his CT cash flowing properties.

Bob thought it was great that his $2k apartment was being subsidized by the $1k cash flow he was making per month from these CT properties.

HOWEVER, what Bob didn't take into account was the rent appreciation that would have eventually happened in NYC.

Bob's CT properties did not significantly increase over the 18 years.

HOWEVER, Bob's rent where he lived DID skyrocketed over the 18 years!

Bob, who was paying $2k a month in Rent in Manhattan, is now pay $5k per month today.

He went from a net of $2k rent minus $1k of Cash Flow to $5k rent minus $1k cash flow.

In other words, Bob's impact to his living costs went in exactly the wrong direction.

Not only that, Bob became priced out of the market in NYC.

He could have afforded to buy a property in 2004. But today, that is completely impossible.

Contrasting this with my own scenario, I am not only cash flowing $5k more than what I was in 2004, but my Appreciation is approximately $3 Million more.

The theme here is that if you really want to live in a highly appreciating City, which now seems to be EVERY desireable City everywhere around the US and the world, from NYC to Austin, even cheap places in PA and the boondocks of Florida seems to be completely priced out for many of the CASH FLOW Investors here, you should FIRST buy in the place you want to live in forever.

The problem with buying out of the area you wish to eventually settle roots into is that you may get priced out completely, even if you are building a cash flowing portfolio.

Something to think about.

Buy your first property, rental or otherwise, in the area where you are most likely to build your Roots.

There is a huge difference between those of my family, 90% of them, that did not invest or buy their home in the area where they live, and myself.

My Partners and I own 10 small multi-family properties in Brooklyn, NYC. This is where our families settled down.

The 10% of us who bought in Brooklyn, are incredibly lucky. We secured our homes forever. WE cannot be priced out.

The 90% is like "Bob".

My advice, don't be like "Bob."

At least buy the home you want in the area you want.

Investor Llew
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David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
4y
Quote from @Llewelyn A.:

I think I'm very highly qualified on this topic to share my experience.

Here is a true story.

A fiend, let's call him "Bob", and I invested at the same time, in 2004.

He bought Cash Flowing properties in CT and I invested the same amount into a 3 Family Brooklyn, NYC property.

We both spent about $200k for our Investments.

This is an 18 year history of the comparison.

Bob's CT properties cash flows approximately $1,000 per month for all of this time.

My Brooklyn, NYC property didn't cash flow in 2004, but today, it cash flows $5,000 per month.

Bob's CT Property did get some appreciation, but the increase is something like $300k more than what he paid for it.

My Brooklyn, NYC property is worth $3 Million more than what I paid for it.

The one issue that is not being talked about is where do you want to live? This needs to be factored in.

Bob, unfortunately, in 2004, loved living in Manhattan. He rented an apartment for about $2k at that time when he made the purchase of his CT cash flowing properties.

Bob thought it was great that his $2k apartment was being subsidized by the $1k cash flow he was making per month from these CT properties.

HOWEVER, what Bob didn't take into account was the rent appreciation that would have eventually happened in NYC.

Bob's CT properties did not significantly increase over the 18 years.

HOWEVER, Bob's rent where he lived DID skyrocketed over the 18 years!

Bob, who was paying $2k a month in Rent in Manhattan, is now pay $5k per month today.

He went from a net of $2k rent minus $1k of Cash Flow to $5k rent minus $1k cash flow.

In other words, Bob's impact to his living costs went in exactly the wrong direction.

Not only that, Bob became priced out of the market in NYC.

He could have afforded to buy a property in 2004. But today, that is completely impossible.

Contrasting this with my own scenario, I am not only cash flowing $5k more than what I was in 2004, but my Appreciation is approximately $3 Million more.

The theme here is that if you really want to live in a highly appreciating City, which now seems to be EVERY desireable City everywhere around the US and the world, from NYC to Austin, even cheap places in PA and the boondocks of Florida seems to be completely priced out for many of the CASH FLOW Investors here, you should FIRST buy in the place you want to live in forever.

The problem with buying out of the area you wish to eventually settle roots into is that you may get priced out completely, even if you are building a cash flowing portfolio.

Something to think about.

Buy your first property, rental or otherwise, in the area where you are most likely to build your Roots.

There is a huge difference between those of my family, 90% of them, that did not invest or buy their home in the area where they live, and myself.

My Partners and I own 10 small multi-family properties in Brooklyn, NYC. This is where our families settled down.

The 10% of us who bought in Brooklyn, are incredibly lucky. We secured our homes forever. WE cannot be priced out.

The 90% is like "Bob".

My advice, don't be like "Bob."

At least buy the home you want in the area you want.

Investor Llew

LOL. Too many Bob, in 2004, 2012, today, and 10 years from now. By the time they realize they made the wrong choice, it’s too late.
2 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @David M.:

@Joe Villeneuve
Sorry my confusion: you did say “move it” in your post. Yes I understand point. Thanks
Yes. When you sell the property, and reinvest to equity in a different property (or properties), you are "moving" the equity from one property to another.
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Jonathan BombaciBusiness Member
Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
4y
Quote from @Joe Villeneuve:

Quote from @Jonathan Bombaci:

In my opinion you buy for cashflow you hold for appreciation. That’s what I think when we say we’re “buy & hold” investors. To your point $100 per door per month is great but the true wealth is made over 30 years where you have a paid off property with none, or very little, of your own money in it. Even if you sell it for what you bought it for you make out with that lump sum cash out more than you ever did on the cashflow. Then add in the fact that even in the lowest appreciation markets you’d expect inflation to run its course and you’ll be selling it for significantly more than you paid for it 30 years ago.
If you let a property get to 100% equity from appreciation, the property value will be much larger than the cash you put into it. However, you will have lost at least 10-20 times more than that. The longer your equity stays in the same property, the more money you lose.
Respectfully disagree. It’s all about opportunity cost and risk tolerance. Real estate is fun because there is no one size or one strategy that fits all. There are many very rich people and very large firms that buy properties in cash or with 50% leverage right out of the gate and hold to maturity. It’s not because they like to lose money, it’s because it makes sense based on their cash position and investment strategy.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Jonathan Bombaci:

Quote from @Joe Villeneuve:

Quote from @Jonathan Bombaci:

In my opinion you buy for cashflow you hold for appreciation. That’s what I think when we say we’re “buy & hold” investors. To your point $100 per door per month is great but the true wealth is made over 30 years where you have a paid off property with none, or very little, of your own money in it. Even if you sell it for what you bought it for you make out with that lump sum cash out more than you ever did on the cashflow. Then add in the fact that even in the lowest appreciation markets you’d expect inflation to run its course and you’ll be selling it for significantly more than you paid for it 30 years ago.
If you let a property get to 100% equity from appreciation, the property value will be much larger than the cash you put into it. However, you will have lost at least 10-20 times more than that. The longer your equity stays in the same property, the more money you lose.
Respectfully disagree. It’s all about opportunity cost and risk tolerance. Real estate is fun because there is no one size or one strategy that fits all. There are many very rich people and very large firms that buy properties in cash or with 50% leverage right out of the gate and hold to maturity. It’s not because they like to lose money, it’s because it makes sense based on their cash position and investment strategy.
...and my explanation just flew right over your head. If you read what I said carefully, you'll see I did say you made money,...but you lost more than you made.
The more cash you put into a property, the more the property costs you. That's not debatable. Profits in RE, like any business, doesn't happen until you've recovered ALL of your costs. This means, the more cash/cost you put into a property, the more you have to recover...and the longer it takes you to recover it. While you're spending all that extra time recovering your costs, your money could have been making more.
As far as risk goes, one of the three parts of risk is "what is AT risk". This answer is always the same, it's the cash that's put into the deal...and the person at risk is the person that put in the cash. The more cash they put into a deal, the more they have at risk. Just ask any lender. Why do banks want you to put "skin in the game"? They want you to have something at risk.
2 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
4y
Quote from @Jonathan Bombaci:

Quote from @Joe Villeneuve:

Quote from @Jonathan Bombaci:

In my opinion you buy for cashflow you hold for appreciation. That’s what I think when we say we’re “buy & hold” investors. To your point $100 per door per month is great but the true wealth is made over 30 years where you have a paid off property with none, or very little, of your own money in it. Even if you sell it for what you bought it for you make out with that lump sum cash out more than you ever did on the cashflow. Then add in the fact that even in the lowest appreciation markets you’d expect inflation to run its course and you’ll be selling it for significantly more than you paid for it 30 years ago.
If you let a property get to 100% equity from appreciation, the property value will be much larger than the cash you put into it. However, you will have lost at least 10-20 times more than that. The longer your equity stays in the same property, the more money you lose.
Respectfully disagree. It’s all about opportunity cost and risk tolerance. Real estate is fun because there is no one size or one strategy that fits all. There are many very rich people and very large firms that buy properties in cash or with 50% leverage right out of the gate and hold to maturity. It’s not because they like to lose money, it’s because it makes sense based on their cash position and investment strategy.

Jonathan EXACLTY its all about risk tolerance there is investing for math and then there is personal choice. I brokered a 5 mil dollar MF back in 2005 ish to a family from Hawaii that was selling a property in Vegas.. when working through the deal It came to my attention that they were paying cash.. I said why are you doing that your return is higher with some debt.. Answer: well you cant lose it in cash and this property is one of about 100 mil we own in cash and our cash flow is sufficient as is we dont need debt.. that always got me thinking and changed my views max debt to max equity.. and the fine line between them all.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
4y
Quote from @Greg R.:

While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation?
investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market

So I've had both over 20 years. Both in the same 'market', but different sectors/ classes and property types.

As for houses, I graduated from 1% cheaper cash-flow houses to nicer equity capture houses as I could afford them. While both doubled+ in value over 10 year holds, it was easier to buy nicer places enough below market value to capture 10 years worth of cash flow of a cheaper place. My average equity capture at the buy nicer places was $43k. For years.

And obviously a $250k-$500k house that doubles is a lot more absolute dollars than a $75k house that doubles.

I bought cash-flow for lunch money, equity for real wealth. Yes, cash-flow can be overrated.

Selling the cash-flow houses to first time buyers also was a lot more rewarding than the move-up houses to the better to do.

For others that are in generally expensive markets, we can diversify into multis for cash-flow. These we have more control over asset value than residential, but your buyers eventually will also be investors vs emotional home buyers.

We can invest for appreciation and cf in pretty much any market.
2 Reply
Martin LaBelle
Rental Property Investor · Sanford, NC · Member since 2017 · 39 posts · 35 votes
4y
Cash flow is a metric, not an end in and of itself. Investment requires multi-variable analysis. In certain situations cash-flow is an utterly dominant variable, in other situations cash-flow is less important.
Consider a large property that one purchases in order to offset their income with depreciation, in this situation we might expect cash-flow to be pretty tight (unless we are very lucky). Others have covered the low cash flow high appreciation scenario, but the point remains that in a competitive market we probably shouldn't expect to get the best of both worlds on every deal.
Sure more cash-flow is better, but making all your decisions based only on cash-flow may cause you to miss opportunities that might forward other goals.
2 Reply
Roland Brown
Realtor · McKinney, TX · Member since 2016 · 106 posts · 90 votes
4y
@Greg R. As a resident Realtor anytime an investor wants to look here in DFW I review this question:
Are you investing to get more income this year, or are you looking to build wealth?
The strategies aren’t mutually exclusive but it does make a difference where you buy. If an investor needs income wealth creation is the by product, but investing in the Midwest or other similar areas is needed, wealth creation happens through equity pay down, depreciation, and 1031exchange.
For a high income earner who want wealth creation through appreciation, depreciation and equity pay down by tenants, then cashflow is the eventual outcome.
Strong economic markets like DFW, Austin, and other similar markets make a lot of sense for this second group.
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Greg R.

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

Quote from @Mike Dymski:

Quote from @Greg R.:

Not sure if you understood the point of the post. I'm asking if anyone has real-life data so we can evaluate these scenarios.

Let's say back in 1990 someone were to purchase a a 4-plex in the mid-west for 200k. This same investor bought a cottage on the coast, let's say La Jolla San Diego for 200k as well. In this scenario let's assume that the 4-plex generated 700k cash flow over the life of the loan. Let's say that the beach house didn't make anything for the first 5 years of the loan and made modest cash flow from year 6 forward, totaling in 200k positive cash flow throughout the life of the loan.

At this point you can conclude that the 4-plex made 500k more than the beach house over the life of the loan through cash flow. Let's say that we go to sell and the 4-plex is worth 800k and the beach house is worth 1.7 million.

Which property made more money for the investor?

Using the assumptions...

IRR 4-plex - 47%
IRR Beach - 15%

	4-plex	Beach
Down	$ (50,000)	$ (50,000)
Year 1	$ 23,333	$ -
Year 2	$ 23,333	$ -
Year 3	$ 23,333	$ -
Year 4	$ 23,333	$ -
Year 5	$ 23,333	$ -
Year 6	$ 23,333	$ 8,000
Year 7	$ 23,333	$ 8,000
Year 8	$ 23,333	$ 8,000
Year 9	$ 23,333	$ 8,000
Year 10	$ 23,333	$ 8,000
Year 11	$ 23,333	$ 8,000
Year 12	$ 23,333	$ 8,000
Year 13	$ 23,333	$ 8,000
Year 14	$ 23,333	$ 8,000
Year 15	$ 23,333	$ 8,000
Year 16	$ 23,333	$ 8,000
Year 17	$ 23,333	$ 8,000
Year 18	$ 23,333	$ 8,000
Year 19	$ 23,333	$ 8,000
Year 20	$ 23,333	$ 8,000
Year 21	$ 23,333	$ 8,000
Year 22	$ 23,333	$ 8,000
Year 23	$ 23,333	$ 8,000
Year 24	$ 23,333	$ 8,000
Year 25	$ 23,333	$ 8,000
Year 26	$ 23,333	$ 8,000
Year 27	$ 23,333	$ 8,000
Year 28	$ 23,333	$ 8,000
Year 29	$ 23,333	$ 8,000
Year 30	$ 823,333	$ 1,708,000
IRR	46.7%	15.2%

Thank you Mike!

1 Reply

Greg R.
OP
Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
4y
Quote from @Jay Hinrichs:

Quote from @Greg R.:

While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation?
I hear folks talk about investing in the mid-west in high cash flowing areas, but in general (don't look at the last 2 years), these properties appreciate very poorly compared to "high appreciation" areas.
I'm curious if any investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market such as Coastal CA, Orange County, San Francisco, Coronado Island San Diego, Lower Manhattan, Miami beach, etc., that was purchased around the same time.
I'd be interested to see an analysis at the end of, let's say 30 years later to see when the dust settled which property made more money. Assuming that both properties were purchased at approximately the same time and sold roughly 30-years later. I know there are a ton of variables, but could it be possible that the obsession for cash flow is instant gratification and will actually profit less than a high appreciation property in the long run?
Also, I'm not arguing against cash flow or saying that people shouldn't be focusing on it. This question is very specific to a long-term analysis.
heres one.. I bought 3 acres in Sonoma county CA in 1995 for 30k and let it sit paid taxs of 300 a year for all those years field mowed it about every 3 years or so when it got nasty.. so maybe another 15k into it. never made any cash flow never tried really sold in 2020 or just a tad over 2 mil.
Only property i could have bought as a rental in 95 for 30k would have been a hood rat type property so lets say it made 400 a month for 25 years or 100k in net cash flow probably would have had to put at least 30k back into cap ex etc.. and value today maybe 80k maybe 100k so thats one example. But if you look at the west coast there is NO way any low end cash flow market in the country would have out performed anything from San Deigo to north of Seattle and most of the Eastern side of the Sierras and Cascades. And over time rents would have went from a little negative in the high priced markets to very nice positive over those same years.

Now lets look at the reality of the situation you have very few investors from the mid west or cash flow markets come looking to buy anything on the West coast given the price to enter barriers.. and lets face it as investors we simply have to invest / or play the cards that are dealt us. There are plenty of mid west investors who have done very very well over the years especially the ones who paid cash and started stacking up the inexpensive rental houses that you can find there.
Thanks much for the example Jay. Sounds like you got an outstanding return on that deal, good for you!!
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Greg R.
OP
Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
4y
Quote from @Joe Villeneuve:

Quote from @Amir Navabpour:

@Joe Villeneuve can you please expand on what you mean when you say collecting equity in the same property is losing money? Do you mean to say that the opportunity cost of that equity hills up through cash flow equates to a loss?
Scenario:
Property (assuming positive CF)
Purchase Price $100k
DP (20%) = $20k
Initial Equity (paid for with DP): $20k
Cost to REI: $20k
Value of Equity: $100k (5 to 1)

After Purchase (leaving equity in property)
Property Appreciates to $120k
Equity increase to: $40k
Value of Equity: $120k (3 to 1)...it went down

Selling Property (Moving equity to next property)
Equity converted to Cash: $40k
Value of Equity: $200k (5 to 1...again)...it went back up

The value of your equity isn't the face value of your equity...it's the buying power of it. When a property appreciates, the equity grows on a 1 to 1 ratio with it. When you buy the property, the initial equity (Down Pmt) buys a property at a 5 to 1 ratio.
In the above example, the face value of the equity doubled, but the true value of the equity could/should have been Higher. The equity lost $80k in buying power.
Don't fall in love with your property, REI isn't property collecting...it's money collecting. Specifically cash investing. Equity isn't cash, and it isn't yours...the property owns the equity, and you own the property. Not the same thing.
The role of cash flow should be to recover your cost ASAP. Your cost is ONLY the cash that comes out of your pocket. This includes DP, negative CF, rehab, outside loans, added payments made towards the principle (this doesn't save you money...it costs you money), etc...
The role of equity is to grow through appreciation, and to move when it doubles to the next investment.
The role of the REI should be to manage all of this.
Cash flow and equity are both forms of cash. Cash flow is real, and liquid. Equity frozen and isn't real until it's defrosted.
Excellent info. Thank you Joe.
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Greg R.:

Quote from @Joe Villeneuve:

Quote from @Amir Navabpour:

@Joe Villeneuve can you please expand on what you mean when you say collecting equity in the same property is losing money? Do you mean to say that the opportunity cost of that equity hills up through cash flow equates to a loss?
Scenario:
Property (assuming positive CF)
Purchase Price $100k
DP (20%) = $20k
Initial Equity (paid for with DP): $20k
Cost to REI: $20k
Value of Equity: $100k (5 to 1)

After Purchase (leaving equity in property)
Property Appreciates to $120k
Equity increase to: $40k
Value of Equity: $120k (3 to 1)...it went down

Selling Property (Moving equity to next property)
Equity converted to Cash: $40k
Value of Equity: $200k (5 to 1...again)...it went back up

The value of your equity isn't the face value of your equity...it's the buying power of it. When a property appreciates, the equity grows on a 1 to 1 ratio with it. When you buy the property, the initial equity (Down Pmt) buys a property at a 5 to 1 ratio.
In the above example, the face value of the equity doubled, but the true value of the equity could/should have been Higher. The equity lost $80k in buying power.
Don't fall in love with your property, REI isn't property collecting...it's money collecting. Specifically cash investing. Equity isn't cash, and it isn't yours...the property owns the equity, and you own the property. Not the same thing.
The role of cash flow should be to recover your cost ASAP. Your cost is ONLY the cash that comes out of your pocket. This includes DP, negative CF, rehab, outside loans, added payments made towards the principle (this doesn't save you money...it costs you money), etc...
The role of equity is to grow through appreciation, and to move when it doubles to the next investment.
The role of the REI should be to manage all of this.
Cash flow and equity are both forms of cash. Cash flow is real, and liquid. Equity frozen and isn't real until it's defrosted.
Excellent info. Thank you Joe.
Did it make ~~sense~~, ~~cents,~~ dollars? I zig zagged around a little more than I usually do.
2 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
4y
Cash Flow - Often overstated. Rarely overrated!
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Greg R.
OP
Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
4y
Quote from @Joe Villeneuve:

Quote from @Greg R.:

Quote from @Joe Villeneuve:

Quote from @Amir Navabpour:

@Joe Villeneuve can you please expand on what you mean when you say collecting equity in the same property is losing money? Do you mean to say that the opportunity cost of that equity hills up through cash flow equates to a loss?
Scenario:
Property (assuming positive CF)
Purchase Price $100k
DP (20%) = $20k
Initial Equity (paid for with DP): $20k
Cost to REI: $20k
Value of Equity: $100k (5 to 1)

After Purchase (leaving equity in property)
Property Appreciates to $120k
Equity increase to: $40k
Value of Equity: $120k (3 to 1)...it went down

Selling Property (Moving equity to next property)
Equity converted to Cash: $40k
Value of Equity: $200k (5 to 1...again)...it went back up

The value of your equity isn't the face value of your equity...it's the buying power of it. When a property appreciates, the equity grows on a 1 to 1 ratio with it. When you buy the property, the initial equity (Down Pmt) buys a property at a 5 to 1 ratio.
In the above example, the face value of the equity doubled, but the true value of the equity could/should have been Higher. The equity lost $80k in buying power.
Don't fall in love with your property, REI isn't property collecting...it's money collecting. Specifically cash investing. Equity isn't cash, and it isn't yours...the property owns the equity, and you own the property. Not the same thing.
The role of cash flow should be to recover your cost ASAP. Your cost is ONLY the cash that comes out of your pocket. This includes DP, negative CF, rehab, outside loans, added payments made towards the principle (this doesn't save you money...it costs you money), etc...
The role of equity is to grow through appreciation, and to move when it doubles to the next investment.
The role of the REI should be to manage all of this.
Cash flow and equity are both forms of cash. Cash flow is real, and liquid. Equity frozen and isn't real until it's defrosted.
Excellent info. Thank you Joe.
Did it make ~~sense~~, ~~cents,~~ dollars? I zig zagged around a little more than I usually do.
Makes complete sense. Your posts in this thread have been tremendously helpful to me, probably much more than you know.
Much appreciated!!
1 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
4y
Quote from @Greg R.:

While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation?
I hear folks talk about investing in the mid-west in high cash flowing areas, but in general (don't look at the last 2 years), these properties appreciate very poorly compared to "high appreciation" areas.
I'm curious if any investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market such as Coastal CA, Orange County, San Francisco, Coronado Island San Diego, Lower Manhattan, Miami beach, etc., that was purchased around the same time.
I'd be interested to see an analysis at the end of, let's say 30 years later to see when the dust settled which property made more money. Assuming that both properties were purchased at approximately the same time and sold roughly 30-years later. I know there are a ton of variables, but could it be possible that the obsession for cash flow is instant gratification and will actually profit less than a high appreciation property in the long run?
Also, I'm not arguing against cash flow or saying that people shouldn't be focusing on it. This question is very specific to a long-term analysis.

I'm not going to read the whole tread as I'm too late here but ... say WHAT?

No. Cash flow isn't overrated. It's why you buy income property. I have almost 2000 units. I love the fact that the portfolio increases in value by x%. While rates were going down, that equity gain allowed me to refinance like a mad man. Pull out gobs of cash, and keep growing.

But it was the CASH FLOW that allowed that to happen. Do you think banks would have refinanced that equity if the cash flow wasn't there to back it up?

There is no equity gain (you can realize), outside of selling via greater-fool, without cash flow. Period period end of story.
1 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
4y
Quote from @Greg R.:

Not sure if you understood the point of the post. I'm asking if anyone has real-life data so we can evaluate these scenarios.
Let's say back in 1990 someone were to purchase a a 4-plex in the mid-west for 200k. This same investor bought a cottage on the coast, let's say La Jolla San Diego for 200k as well. In this scenario let's assume that the 4-plex generated 700k cash flow over the life of the loan. Let's say that the beach house didn't make anything for the first 5 years of the loan and made modest cash flow from year 6 forward, totaling in 200k positive cash flow throughout the life of the loan.
At this point you can conclude that the 4-plex made 500k more than the beach house over the life of the loan through cash flow. Let's say that we go to sell and the 4-plex is worth 800k and the beach house is worth 1.7 million.
Which property made more money for the investor?

Except it's easy to get your answer if you're looking at a specific exhibit A vs. exhibit B back in time. That doesn't give you a "cash flow or appreciation" answer.

Also since when can't you get both? EVERY PROPERTY I've bought has increased in value a lot. And they all cash flow a lot (Houston TX btw)
1 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
4y
Quote from @Jay Hinrichs:

Quote from @Greg R.:

While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation?
I hear folks talk about investing in the mid-west in high cash flowing areas, but in general (don't look at the last 2 years), these properties appreciate very poorly compared to "high appreciation" areas.
I'm curious if any investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market such as Coastal CA, Orange County, San Francisco, Coronado Island San Diego, Lower Manhattan, Miami beach, etc., that was purchased around the same time.
I'd be interested to see an analysis at the end of, let's say 30 years later to see when the dust settled which property made more money. Assuming that both properties were purchased at approximately the same time and sold roughly 30-years later. I know there are a ton of variables, but could it be possible that the obsession for cash flow is instant gratification and will actually profit less than a high appreciation property in the long run?
Also, I'm not arguing against cash flow or saying that people shouldn't be focusing on it. This question is very specific to a long-term analysis.
heres one.. I bought 3 acres in Sonoma county CA in 1995 for 30k and let it sit paid taxs of 300 a year for all those years field mowed it about every 3 years or so when it got nasty.. so maybe another 15k into it. never made any cash flow never tried really sold in 2020 or just a tad over 2 mil.
Only property i could have bought as a rental in 95 for 30k would have been a hood rat type property so lets say it made 400 a month for 25 years or 100k in net cash flow probably would have had to put at least 30k back into cap ex etc.. and value today maybe 80k maybe 100k so thats one example. But if you look at the west coast there is NO way any low end cash flow market in the country would have out performed anything from San Deigo to north of Seattle and most of the Eastern side of the Sierras and Cascades. And over time rents would have went from a little negative in the high priced markets to very nice positive over those same years.

Now lets look at the reality of the situation you have very few investors from the mid west or cash flow markets come looking to buy anything on the West coast given the price to enter barriers.. and lets face it as investors we simply have to invest / or play the cards that are dealt us. There are plenty of mid west investors who have done very very well over the years especially the ones who paid cash and started stacking up the inexpensive rental houses that you can find there.

I enjoy reading your take when I actually get around to browsing the site. I think what's lost is when people say "appreciation" it's almost code for 3-4 different markets that have a past of high appreciation. And when people say "cash flow" they have this idea of junk warzones where you buy a $20k home and rent it for $600/month.

There is a GIANT middle ground where you can find both. You may not get PEAK appreciation or PEAK cash flow but you get enough of both to get the advantages of both.

Not many investors would like to buy in San Diego more than me. I grew up here. But I'm not going to go negative on a property when I know I can make gobs of cash flow in Houston -- in areas that I know have had strong appreciations ("A" locations near downtown, med center, etc). So for me, San Diego (and areas like it) are out. Plus it's the cash flow that allows me to take advantage of the appreciation.
3 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Greg R.:

Quote from @Joe Villeneuve:

Quote from @Greg R.:

Quote from @Joe Villeneuve:

Quote from @Amir Navabpour:

@Joe Villeneuve can you please expand on what you mean when you say collecting equity in the same property is losing money? Do you mean to say that the opportunity cost of that equity hills up through cash flow equates to a loss?
Scenario:
Property (assuming positive CF)
Purchase Price $100k
DP (20%) = $20k
Initial Equity (paid for with DP): $20k
Cost to REI: $20k
Value of Equity: $100k (5 to 1)

After Purchase (leaving equity in property)
Property Appreciates to $120k
Equity increase to: $40k
Value of Equity: $120k (3 to 1)...it went down

Selling Property (Moving equity to next property)
Equity converted to Cash: $40k
Value of Equity: $200k (5 to 1...again)...it went back up

The value of your equity isn't the face value of your equity...it's the buying power of it. When a property appreciates, the equity grows on a 1 to 1 ratio with it. When you buy the property, the initial equity (Down Pmt) buys a property at a 5 to 1 ratio.
In the above example, the face value of the equity doubled, but the true value of the equity could/should have been Higher. The equity lost $80k in buying power.
Don't fall in love with your property, REI isn't property collecting...it's money collecting. Specifically cash investing. Equity isn't cash, and it isn't yours...the property owns the equity, and you own the property. Not the same thing.
The role of cash flow should be to recover your cost ASAP. Your cost is ONLY the cash that comes out of your pocket. This includes DP, negative CF, rehab, outside loans, added payments made towards the principle (this doesn't save you money...it costs you money), etc...
The role of equity is to grow through appreciation, and to move when it doubles to the next investment.
The role of the REI should be to manage all of this.
Cash flow and equity are both forms of cash. Cash flow is real, and liquid. Equity frozen and isn't real until it's defrosted.
Excellent info. Thank you Joe.
Did it make ~~sense~~, ~~cents,~~ dollars? I zig zagged around a little more than I usually do.
Makes complete sense. Your posts in this thread have been tremendously helpful to me, probably much more than you know.
Much appreciated!!
Glad to hear that. I humbly thank you.
1 Reply
John Clark
Member since 2018 · 1k+ posts · 1k+ votes
4y
As I am sure others have said: Make sure you add the negative cash flow to your basis for the property and then use that resulting number to determine how much your appreciation was and the rate of your appreciation.
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @John Clark:

As I am sure others have said: Make sure you add the negative cash flow to your basis for the property and then use that resulting number to determine how much your appreciation was and the rate of your appreciation.

Cash flow, positive or negative, isn't the same as appreciation. Appreciation impacts your equity...which isn't real (yet), and you don't own...your property owns it. You own the property, and the cash flow that comes with it. Cash flow and the equity built up from appreciation are NOT the same thing. You can't offset negative CF with appreciation. At some point, that negative CF adds up, taking real money away from you...and adds to the cost of the property. The more your property costs you (total cash put in), the more you have to recover before you start making a profit...and the longer it takes to get there.
Combining negative CF and appreciation/equity together may look good on an accounting sheet, but in real life, until you tap into that equity, it's a future promise that has yet to be realized, and will always remain a future promise as long as it remains in the property's control.
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Cody L.:

Quote from @Jay Hinrichs:

Quote from @Greg R.:

While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation?
I hear folks talk about investing in the mid-west in high cash flowing areas, but in general (don't look at the last 2 years), these properties appreciate very poorly compared to "high appreciation" areas.
I'm curious if any investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market such as Coastal CA, Orange County, San Francisco, Coronado Island San Diego, Lower Manhattan, Miami beach, etc., that was purchased around the same time.
I'd be interested to see an analysis at the end of, let's say 30 years later to see when the dust settled which property made more money. Assuming that both properties were purchased at approximately the same time and sold roughly 30-years later. I know there are a ton of variables, but could it be possible that the obsession for cash flow is instant gratification and will actually profit less than a high appreciation property in the long run?
Also, I'm not arguing against cash flow or saying that people shouldn't be focusing on it. This question is very specific to a long-term analysis.
heres one.. I bought 3 acres in Sonoma county CA in 1995 for 30k and let it sit paid taxs of 300 a year for all those years field mowed it about every 3 years or so when it got nasty.. so maybe another 15k into it. never made any cash flow never tried really sold in 2020 or just a tad over 2 mil.
Only property i could have bought as a rental in 95 for 30k would have been a hood rat type property so lets say it made 400 a month for 25 years or 100k in net cash flow probably would have had to put at least 30k back into cap ex etc.. and value today maybe 80k maybe 100k so thats one example. But if you look at the west coast there is NO way any low end cash flow market in the country would have out performed anything from San Deigo to north of Seattle and most of the Eastern side of the Sierras and Cascades. And over time rents would have went from a little negative in the high priced markets to very nice positive over those same years.

Now lets look at the reality of the situation you have very few investors from the mid west or cash flow markets come looking to buy anything on the West coast given the price to enter barriers.. and lets face it as investors we simply have to invest / or play the cards that are dealt us. There are plenty of mid west investors who have done very very well over the years especially the ones who paid cash and started stacking up the inexpensive rental houses that you can find there.

I enjoy reading your take when I actually get around to browsing the site. I think what's lost is when people say "appreciation" it's almost code for 3-4 different markets that have a past of high appreciation. And when people say "cash flow" they have this idea of junk warzones where you buy a $20k home and rent it for $600/month.

There is a GIANT middle ground where you can find both. You may not get PEAK appreciation or PEAK cash flow but you get enough of both to get the advantages of both.

Not many investors would like to buy in San Diego more than me. I grew up here. But I'm not going to go negative on a property when I know I can make gobs of cash flow in Houston -- in areas that I know have had strong appreciations ("A" locations near downtown, med center, etc). So for me, San Diego (and areas like it) are out. Plus it's the cash flow that allows me to take advantage of the appreciation.
Brilliantly stated. Particularly your last sentence.
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
4y
Quote from @Cody L.:

Quote from @Jay Hinrichs:

Quote from @Greg R.:

While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation?
I hear folks talk about investing in the mid-west in high cash flowing areas, but in general (don't look at the last 2 years), these properties appreciate very poorly compared to "high appreciation" areas.
I'm curious if any investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market such as Coastal CA, Orange County, San Francisco, Coronado Island San Diego, Lower Manhattan, Miami beach, etc., that was purchased around the same time.
I'd be interested to see an analysis at the end of, let's say 30 years later to see when the dust settled which property made more money. Assuming that both properties were purchased at approximately the same time and sold roughly 30-years later. I know there are a ton of variables, but could it be possible that the obsession for cash flow is instant gratification and will actually profit less than a high appreciation property in the long run?
Also, I'm not arguing against cash flow or saying that people shouldn't be focusing on it. This question is very specific to a long-term analysis.
heres one.. I bought 3 acres in Sonoma county CA in 1995 for 30k and let it sit paid taxs of 300 a year for all those years field mowed it about every 3 years or so when it got nasty.. so maybe another 15k into it. never made any cash flow never tried really sold in 2020 or just a tad over 2 mil.
Only property i could have bought as a rental in 95 for 30k would have been a hood rat type property so lets say it made 400 a month for 25 years or 100k in net cash flow probably would have had to put at least 30k back into cap ex etc.. and value today maybe 80k maybe 100k so thats one example. But if you look at the west coast there is NO way any low end cash flow market in the country would have out performed anything from San Deigo to north of Seattle and most of the Eastern side of the Sierras and Cascades. And over time rents would have went from a little negative in the high priced markets to very nice positive over those same years.

Now lets look at the reality of the situation you have very few investors from the mid west or cash flow markets come looking to buy anything on the West coast given the price to enter barriers.. and lets face it as investors we simply have to invest / or play the cards that are dealt us. There are plenty of mid west investors who have done very very well over the years especially the ones who paid cash and started stacking up the inexpensive rental houses that you can find there.

I enjoy reading your take when I actually get around to browsing the site. I think what's lost is when people say "appreciation" it's almost code for 3-4 different markets that have a past of high appreciation. And when people say "cash flow" they have this idea of junk warzones where you buy a $20k home and rent it for $600/month.

There is a GIANT middle ground where you can find both. You may not get PEAK appreciation or PEAK cash flow but you get enough of both to get the advantages of both.

Not many investors would like to buy in San Diego more than me. I grew up here. But I'm not going to go negative on a property when I know I can make gobs of cash flow in Houston -- in areas that I know have had strong appreciations ("A" locations near downtown, med center, etc). So for me, San Diego (and areas like it) are out. Plus it's the cash flow that allows me to take advantage of the appreciation.

I agree cash flow allows you to hold till you get appreciation. does not have to be massive cash flow or can be break even and when your in a market that moves up IE rents move up so your values move up with the rental income you create you then create your wealth.. It pretty hard for the average BP investor starting out to get wealthy buying a rental that makes 200 a month if they are lucky but values do not rise significantly over lets say a 10 year period. And like you say if its a low value assets of ( to throw a number out there ) 100k if it appreciates 3% a year for 10 years its now worth 130k still not a staggering sum when you take dispo costs into account. I think its a matter of scale which us who have followed you on BP know you have scaled massively in your market.
I just threw my land deal in there as an example case of real world no cash flow made money on a small investment that I made in the path of progress. Many ways to skin those cats I bet there are some farmers in many areas of Texas that are making killings selling their farms they paid next to nothing for decades ago to these companies moving their facilities to TX. thereby creating jobs etc.
No real right answer here just personal preference.
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Martin LaBelle
Rental Property Investor · Sanford, NC · Member since 2017 · 39 posts · 35 votes
4y
Another angle to my last post, cash flow is a metric, not a goal. Consider a fully liquid portfolio (every house owned outright) - how does the cash flow look ?- Well it looks awesome because there is not a mortgage in sight - sweet right?... Well hang on a minute.

Are we REALLY interested in cash flow, at this point in my career I'm interested in growing wealth. While cash purchasing all your properties makes your cash flow look great, your wealth production is bound to plateau when you run out of cash.

So the question really isn't "How many dollars does this property make me a year?" (i.e. cash flow) The question is "How many dollars does this property produce in relation to the equity in the property?".This "Return on Equity" metric can help you decide if the property is worth owning or continuing to own with your current equity position.

I currently have a property that I own outright. Since 2020 local rent has gone up quite a bit - HOWEVER the house also appreciated so much that the the rent to value ratio has gone down overall. My analysis says the appreciation and rent in the area will level off, and I assess low risk of backslide: What should I do?

If you look at my original investment and the current cash flow, I'm absolutely crushing it in terms of cash flow and RoI. I suppose I could just sit back and let my purchase from a few years ago pay me, however a return on equity analysis tells me I would be better off moving that equity (or some of it) to a different property using refinancing or a sale (1031 exchange).

Precisely how I might move that equity depends on the specifics. The point is that cash flow alone cannot inform your analysis, you need to know how much you are making with the wealth at your command, and you need to compare that to the the opportunities within your reach.
0 Reply
Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
4y
@Greg R.
Cash flow is an essential component in real estate investing. Positive cash flow is vital if you are planning to grow your portfolio and obtain wealth through real estate investing.

It is also something that is subjective, can be easily manipulated and honestly highly overrated when it comes to evaluating rental property potential.
Remember, cash flow is important, but it shouldn’t be an absolute essential metric. Wealth through real estate investing isn’t solely reliant on cash flow. Look at your cash-on-cash return, cap rate and returns on investment.
All the best!
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