Is cash flow overrated?

Dallas, Texas
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Is cash flow overrated?

Greg R.
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
4y

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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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    4y
    Quote from @Martin LaBelle:

    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. 


     there was a large apartment owner in Portland OR.. who had equity run up by 2006 and saw vegas as a better option sold all his properties had about 25k mil in equity invested it with max leverage in Vegas in those years and by 2019 with 30% or better vacancy rate lost the entire portfolio and everything they had worked for .. his Portland portfolio was about 50% leveraged .. so thats a rare tail I know but it happened  .. I kind of like keeping some paid for assets regardless of math.. cant lose em when they are paid for.

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  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    4y

    @Greg R.- appreciation is the  key ...ideally a  property that  can  break  even or  cash flow positively  in a good  apprecaition  marketplace  is the property to  find in my book .......trying to  squeeze every dollar  out  via  monthly  rents to  make  the max  income monthly  can  lead to  turnover and  more stress than is worth the time 

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  • Eric Kesterson
    Member since 2022 · 9 posts · 8 votes
    4y

    It's tough to determine which areas are going to appreciate- ask someone in 1950 what the long-term prospects of Detroit were- or a Harlem or Williamsburg property investor in 1972...

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  • Kurt Burton
    Member since 2022 · 4 posts · 5 votes
    4y
    Quote from @Eric Kesterson:

    It's tough to determine which areas are going to appreciate- ask someone in 1950 what the long-term prospects of Detroit were- or a Harlem or Williamsburg property investor in 1972...


     Or a Las Vegas property owner in 1935?

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  • James Peters
    Rental Property Investor · Baltimore · Member since 2022 · 26 posts · 24 votes
    4y

    Appreciation is great until a meth clinic or subsidized housing project pops around the corner. 
    Also need to be making enough in your job to cover expenses like maintenance and turnovers.
    I have always felt safer investing with a cash flow returns. I think it would be hard to purchase multiple properties if they don’t cash flow and you need to be making enough to cover all your expenses in case of issues. Just my 2cents 

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  • Jordan Murrell
    Las Vegas, NV · Member since 2020 · 162 posts · 113 votes
    4y

    This is a great discussion. I purchased property in the midwest more specifically, Memphis TN. I purchased those properties for cashflow reasons all while living in Las Vegas. I look back on the properties I purchased, they have very little appreciation but good cashflow. Here in Vegas, my primary has appreciated more than 20% over the last year and a half. Now, as a more seasoned investor, I will be purchasing property for appreciation reasons, if I am able to positive cashflow a couple hundred dollars, then that will be ideal. 

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

    This is a great discussion. I purchased property in the midwest more specifically, Memphis TN. I purchased those properties for cashflow reasons all while living in Las Vegas. I look back on the properties I purchased, they have very little appreciation but good cashflow. Here in Vegas, my primary has appreciated more than 20% over the last year and a half. Now, as a more seasoned investor, I will be purchasing property for appreciation reasons, if I am able to positive cashflow a couple hundred dollars, then that will be ideal. 

    Thanks Jordan. I think that a lot of people come to that conclusion after gaining more experience. Cash flow is great, but you are going to build real wealth through appreciation not cash flow. 
    1Reply
  • Jack Seiden
    Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 654 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 all team apperception, its the easiest path to wealth especially because one day when I’m old I want to sell off the properties stick my money into an index fund/bond whatever and be done, that said the appreciation we saw with rates below 4% for nearly 15 years isn’t likely to continue at the same pace and it’s not totally clear to me what markets will see big price appreciation next decade (I’d bet against the pricey costal markets that we’ve seen the last decade.) So I value the safety of cash flow more that I used to, still try to look for some some combo though.

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  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    3y

    Hi @Greg R.! Well hats off to you my friend. You've kindled a wonderful fire here and a great conversation. For me it comes down to investing versus speculating. Let me step back before that even...in my mind, true wealth is having assets that generate cashflow. True wealth is not having a mansion, a yacht, or a fancy car, it's having cash-flowing assets. 

    So investing is when your principal is generally safe and you have a chance to make a return. Speculating is when your principal is not at all safe and you have a chance to make a return. 

    I don't think you have to make an absolute choice between cashflow and appreciation, and of course you didn't say that either. But given the choice, I would go for assets that produce reliable cashflow. Appreciation can come and go but it is more speculative in nature. 

    I'm in the commercial real estate fund world. I recently read about a guy who owned a commercial building in Tennessee. The value was about $3 million 6 months ago. Then interest rates went up and cap rates expanded. He now believes he could get about $2.4 million for that same building. Does he care? No, not at all. Why? Because he is still getting the same cashflow as before and next his lease will allow him to raise the rent a little more. He has an asset that produces cashflow and he's not selling it. 

    Now the problem for that same owner is if he has to refinance it in the short term. That's another discussion about the risk involved with taking on leverage, but beyond the scope of this post. Good luck and happy investing! 

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