Quit your W2 with cash flow - wrong idea
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
Quit your W2 with cash flow - wrong idea
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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesYou have some valid points, but I would like to present a counter-argument.
I agree that people that only buy properties that have the highest pro-forma cashflow, often are buying in rough parts of town. They are management-intensive to operate and rarely does the predicted cashflow match the actual cashflow. Trying to get to the bare minimum cashflow number to leave your job is extremely risky. On this we are aligned.
On the other extreme, investing for pure equity growth can be equally disastrous. As you know, real estate goes through cycles. If you are relying on doing a re-finance every couple of years and you hit a dip in the cycle, you could be in trouble. You may be forced to sell in a down cycle and you may never be able to recover. This is happening to people in commercial real estate right now.
I like being somewhere in between. I want consistent cashflow to handle my day-to-day living expenses. I never want to be forced to sell in a down market. In an up market I can harvest gains and re-invest in further growth opportunities.
67 Replies
- 1yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
You have some valid points, but I would like to present a counter-argument.
I agree that people that only buy properties that have the highest pro-forma cashflow, often are buying in rough parts of town. They are management-intensive to operate and rarely does the predicted cashflow match the actual cashflow. Trying to get to the bare minimum cashflow number to leave your job is extremely risky. On this we are aligned.
On the other extreme, investing for pure equity growth can be equally disastrous. As you know, real estate goes through cycles. If you are relying on doing a re-finance every couple of years and you hit a dip in the cycle, you could be in trouble. You may be forced to sell in a down cycle and you may never be able to recover. This is happening to people in commercial real estate right now.
I like being somewhere in between. I want consistent cashflow to handle my day-to-day living expenses. I never want to be forced to sell in a down market. In an up market I can harvest gains and re-invest in further growth opportunities.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Greg Scott:
You have some valid points, but I would like to present a counter-argument.
I agree that people that only buy properties that have the highest pro-forma cashflow, often are buying in rough parts of town. They are management-intensive to operate and rarely does the predicted cashflow match the actual cashflow. Trying to get to the bare minimum cashflow number to leave your job is extremely risky. On this we are aligned.
On the other extreme, investing for pure equity growth can be equally disastrous. As you know, real estate goes through cycles. If you are relying on doing a re-finance every couple of years and you hit a dip in the cycle, you could be in trouble. You may be forced to sell in a down cycle and you may never be able to recover. This is happening to people in commercial real estate right now.
I like being somewhere in between. I want consistent cashflow to handle my day-to-day living expenses. I never want to be forced to sell in a down market. In an up market I can harvest gains and re-invest in further growth opportunities.
Agree, that's what I meant by stabilizing the portfolio - grow it and give it a few years. Once you get to about 50% LTV you should have solid cash flow anyway, so you have extra income and can actually afford to do some proactive improvements and updates.
There are two mindset mistakes I see people make: the first one is buying primarily for cash flow, the second one is spending the next 20 years to pay off every last mortgage. I just had a conversation with someone stuck on that pay-it-off mindset at age 65. They are almost there, and need maybe another 5 years, but they live so frugally and send every penny to the bank. They could have skimmed off 3% every (good) year as a cash-out refi and lived much better!
And if you know that and plan for it, you can set your goals accordingly from the beginning.
- Member since 2025 · 18 posts · 5 votes1y
@Marcus Auerbach "Agree, that's what I meant by stabilizing the portfolio - grow it and give it a few years"
So as a newbie I'm confused if you agree with @Greg Scott how you propose no landlording is involved. Would you be able to give a more detailed example of the kind of approach you are advocating? (and how it is tax free?)
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @JM Edward:
@Marcus Auerbach "Agree, that's what I meant by stabilizing the portfolio - grow it and give it a few years"
So as a newbie I'm confused if you agree with @Greg Scott how you propose no landlording is involved. Would you be able to give a more detailed example of the kind of approach you are advocating? (and how it is tax free?)
If you are building a typical cash flow portfolio (aka lower price point properties) you are creating a very maintenance-intensive business. You pay for that cash flow in the form of headaches. And giving it to a PM does not solve the problem entirely - ask anyone who has lived it for a decade.
Landlord burn-out is a thing.
If you buy one single-family home every year over the next 30 years and let's say they are all at or above median price for your city, you have a low maintenance portfolio with at least 50% to 70% equity. Do the math how much that would be.
If you were to cash-out refi every year an amount equal to the annual appreciation and not exceeding what your annual rent increase (rate of inflation) can support, your business is borrowing money.
And borrowing money is not income, it is not a taxable event.
- 1yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Marcus Auerbach:
Quote from @JM Edward:
@Marcus Auerbach "Agree, that's what I meant by stabilizing the portfolio - grow it and give it a few years"
So as a newbie I'm confused if you agree with @Greg Scott how you propose no landlording is involved. Would you be able to give a more detailed example of the kind of approach you are advocating? (and how it is tax free?)
If you are building a typical cash flow portfolio (aka lower price point properties) you are creating a very maintenance-intensive business. You pay for that cash flow in the form of headaches. And giving it to a PM does not solve the problem entirely - ask anyone who has lived it for a decade.
Landlord burn-out is a thing.
If you buy one single-family home every year over the next 30 years and let's say they are all at or above median price for your city, you have a low maintenance portfolio with at least 50% to 70% equity. Do the math how much that would be.
If you were to cash-out refi every year an amount equal to the annual appreciation and not exceeding what your annual rent increase (rate of inflation) can support, your business is borrowing money.
And borrowing money is not income, it is not a taxable event.
one slight comment on the refi its not tax free but it is TAX DEFERRED as long as you never sell then you dont pay tax. Also I think you cant write off interest on the portion that is above basis.. I could be wrong about that but I think I remember that.. But for long term wealth and hand it over to the kiddos or a Charitable remainder trust this works very well. !
- Member since 2024 · 222 posts · 161 votes1y
@Greg Scott I agree. This has been my approach. We have bought sound properties that had value add opportunities in good neighborhoods. Seeking appreciation and some cash flow initially. Over the years they have all appreciated well and now the cash flows are very good.
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
OP depends.
What is your refinancing cost- appraisal, loan fee?What are your interest rates- low going to high, staying the same, high going to low rates.
What stage are you personally at?- Risk tolerance, equity creation, cash flow needs, time management, etc.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
@Henry Clark this is the retirement scenario and it almost does not matter what the loan costs are. You only cash out the equity you gained and what the rent increase will fund - so your leverage and your cash flow remain unchanged.
I would argue it is a very conservative strategy, it's exactly what pretty much every financial advisor tells their clients to do with their 401k, live of the increase, maintain the principal.
Except, with RE it's tax free.
If you have bigger commercial properties, but also in general with a single family portfolio, you could even use a LOC and draw as you need, refi every few years. Its basically when you realize you have more properties than years to live even if you live to 100.
What's the point of trying to pay it all off? Start enjoying the cash flow and skim off the equity gains, and if it's more than you need personally, do something good for people around you - isn't that why we got into real estate into the first place?
- Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes1y
Interesting approach, thanks for sharing.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Paul Novak:
Interesting approach, thanks for sharing.
I believe you are doing it right. It's all about a good balance between equity and cash flow. Once you understand equity as the #1 long-term goal you start looking at real estate differently. I always tell people if you want cash flow, then buy or build a biz. Real estate's super power is NOT cash flow. It's equity.
- 1yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votesMarcus, I thought we invest in real estate because we don’t like working and prefer sleeping in and taking a three week vacation every other month.
Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Joe S.:
Marcus, I thought we invest in real estate because we don’t like working and prefer sleeping in and taking a three week vacation every other month.Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Well, kind of, but here is the thing. People who are cut out to build a RE portfolio of any significant size are not cut out for retirement. We need a project, because the emotional satisfaction comes from accomplishments. You get sick of slurping margaritas in latest after week 3. You can only watch so much daytime TV (while all your friends are working). Ask me how I know.
At the moment I work prob 60-80 hours a week as an agent (incl weekends), because it's spring market and we move a lot of deals, plus I generate most of the leads for my team and I host a YouTube channel about Milwaukee RE. But I''ll be on a plane to Europe on June 22 and won't come back for 3 weeks. Then I'll sprint again for the summer market and I am extremely excited for October, because I'll be riding a motorcycle across Africa.
Years ago I read a book about lifestyle-design and started asking the question how would I design my life if I could have it any way I wanted it and I found the idea fascinating. So this is what I've come up with so far.
- 1yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
Quote from @Marcus Auerbach:
Quote from @Joe S.:
Marcus, I thought we invest in real estate because we don’t like working and prefer sleeping in and taking a three week vacation every other month.Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Well, kind of, but here is the thing. People who are cut out to build a RE portfolio of any significant size are not cut out for retirement. We need a project, because the emotional satisfaction comes from accomplishments. You get sick of slurping margaritas in latest after week 3. You can only watch so much daytime TV (while all your friends are working). Ask me how I know.
At the moment I work prob 60-80 hours a week as an agent (incl weekends), because it's spring market and we move a lot of deals, plus I generate most of the leads for my team and I host a YouTube channel about Milwaukee RE. But I''ll be on a plane to Europe on June 22 and won't come back for 3 weeks. Then I'll sprint again for the summer market and I am extremely excited for October, because I'll be riding a motorcycle across Africa.
Years ago I read a book about lifestyle-design and started asking the question how would I design my life if I could have it any way I wanted it and I found the idea fascinating. So this is what I've come up with so far.
I hear you. My post wasn’t really meant to be serious. It was dry humor.
- Member since 2019 · 37 posts · 30 votes1yI reinvest every dollar I make in cash flow. I also save w-2 income as well for down payments. That is what I've done to get my portfolio to this point.
So you're suggesting keep doing that and no refi to pull out equity? What if I just do 75k? That would probably put my cash flow around $550 on that property still. Then I would have plenty of cash reserves, HELOC and would put my LTV around 64%.
- Rental Property Investor · Medford, OR · Member since 2017 · 94 posts · 115 votes1y
Respectfully disagree. Steady monthly cash flow beats a pile of cash in the bank all day, every day and for so many reasons. My husband and I were both able to quit our high paying w2 jobs before age 44, thanks to cash flow. We've been landlords for over 13 years now and it's really not as much work as people think. Maybe 3-5 hours a week. Not nearly what one is having to do at a full-time w2 job. When we choose to refi, it'll either be when we can increase our cash flow significantly due to the combination of a lower principle balance (thanks to the tenants paying that off) + a lower interest rate, or we will take that cash and buy more income-producing properties. Our strategy has been the latter and that's been instrumental in helping us scale our portfolio.
- 1yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
Quote from @Christine Mulkins:
Respectfully disagree. Steady monthly cash flow beats a pile of cash in the bank all day, every day and for so many reasons. My husband and I were both able to quit our high paying w2 jobs before age 44, thanks to cash flow. We've been landlords for over 13 years now and it's really not as much work as people think. Maybe 3-5 hours a week. Not nearly what one is having to do at a full-time w2 job. When we choose to refi, it'll either be when we can increase our cash flow significantly due to the combination of a lower principle balance (thanks to the tenants paying that off) + a lower interest rate, or we will take that cash and buy more income-producing properties. Our strategy has been the latter and that's been instrumental in helping us scale our portfolio.
It sounds like you did keep your W2 job until your rentals could support you. 13 years as a landlord is quite an accomplishment these days. Your success story is NOT common so congrats.😊
- Rental Property Investor · Medford, OR · Member since 2017 · 94 posts · 115 votes1y
@Joe S. Thank you, Joe! :) yes, kept the job until the cash flow supported our living expenses and then some. Retired 1.5 years ago and am enjoying my much easier schedule as just a landlord :)
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Christine Mulkins:
Respectfully disagree. Steady monthly cash flow beats a pile of cash in the bank all day, every day and for so many reasons. My husband and I were both able to quit our high paying w2 jobs before age 44, thanks to cash flow. We've been landlords for over 13 years now and it's really not as much work as people think. Maybe 3-5 hours a week. Not nearly what one is having to do at a full-time w2 job. When we choose to refi, it'll either be when we can increase our cash flow significantly due to the combination of a lower principle balance (thanks to the tenants paying that off) + a lower interest rate, or we will take that cash and buy more income-producing properties. Our strategy has been the latter and that's been instrumental in helping us scale our portfolio.
Congratulations, well done! This is not a case against cash flow, I like it very much! You live in OR, with West coast appreciation you are generating a lot of equity with a sizeable portfolio over 13 years. My guess is you also have better than average tenants (and higher rents). So this is not a case against cash flow, but pointing out that cash flow is second to equity. Meaning it's great, but the real wealth comes from equity.
Once you get to the question when is enough enough and you ponder exit strategies, then keeping your tapping into your equity by keeping the leverage flat is huge. Nothing wrong with what you are doing and either growing or paying leverage down to zero are both great strategies - and personal preference.
But have you done the math with your current portfolio value?
3% of portfolio value per year tax-free?
I am not suggesting that this is what everyone should be doing, but once you realize the potential, it makes buying "cash flow properties in the hood" a lot less attractive.
- Rental Property Investor · Medford, OR · Member since 2017 · 94 posts · 115 votes1y
@Marcus Auerbach thank you! And fair points you make. I would love to tap into the equity right now but with how high the rates are compared to what I've locked in at, it just wouldn't make sense. If/when rates drop a bit, cashing out some equity will be great! :)
- 1yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Christine Mulkins:
Respectfully disagree. Steady monthly cash flow beats a pile of cash in the bank all day, every day and for so many reasons. My husband and I were both able to quit our high paying w2 jobs before age 44, thanks to cash flow. We've been landlords for over 13 years now and it's really not as much work as people think. Maybe 3-5 hours a week. Not nearly what one is having to do at a full-time w2 job. When we choose to refi, it'll either be when we can increase our cash flow significantly due to the combination of a lower principle balance (thanks to the tenants paying that off) + a lower interest rate, or we will take that cash and buy more income-producing properties. Our strategy has been the latter and that's been instrumental in helping us scale our portfolio.
Advice for people today must be actualized not against realized investments from the yesteryears. That's comparing apples to oranges.
With that said...
In today's world if you want to "invest for cash flow", that's perfectly fine it means being less levered, picking higher quality properties, owning the debt as a hedge, and having 3rd parties facilitate most of the work for you. There's inherent risk going the opposite direction-- less cash in the deal, more properties instead of better one's, and self-managing. The question is which do you believe will be superior, I choose the former.
1) More equity in deal=less debt=more cash flow. Less cash in the bank today. Cost of capital is 7.5% give or take a little versus less equity in the deal=more debt=less cash flow. More cash in bank today. You're cost of capital needs to exceed 11-12% to get a tax-adjusted better rate of return(good luck).
2) Pick 5 great properties not 10-12 **** one's. Better tenants, better cash allocation to capex(1 roof in the hood is the same cost as 1 roof in primo areas). Scale of capex with more scarcity in trades will test your budget. Add in higher opex, too. Good luck battling both.
3) Quit self managing, have proper teams in place. Always deflect liability and save time. By choosing to manage yourself, you're opening a can of worms. If you want to save that 10% monthly or that 1 month rent, etc., or spend those extra hours working-- go for it. Just know the rate of return isn't as high as you think. In fact, you're likely negative.
4) Manage Risk--- it's what you pay, not necessarily just what you buy. Learn to underwrite properly. If you haven't by now, and you just got into real estate post 2022 you'll learn the hard way. If you are pre 2022, you got lucky. You're not skilled. If you got nothing going forward, be heavy with cash and underwrite well. It's not for the faint of heart.
5) Hedge your bets-- maybe if you own as much equity to get the house intrinsic, rather than scale to house 6 & 7 and you're at 5. Go buy debt.
- Oak Park, IL · Member since 2014 · 285 posts · 114 votes1y
I think a combination will work well. I have half of the properties e., 6 unit, 2-3 Flats, stores, condos, etc. paid off. That is cash flow and all emergencies repairs, vacancies, cap projects in rentals. Started in RE investing in 2003. Some of the properties eg. a few single family homes in A, B, neighborhoods (3 Homes in total) are equity heavy and have zero cash flow (not negative) when calculated together as 3 single family homes.
- Member since 2019 · 37 posts · 30 votes1y
Marcus,
My LTV is 60% (850k owed, total value of 1.38M), with approx. $2,000/month cashflow. Should I cash-out refinance my paid off property to scale faster? If I take out 100k, It'll still be cash flowing approx. $435 per month. Seems like a no brainer and goes with your original post. I'm in my early 30's and plan to keep w-2 to support portfolio.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Sounds like you are in a very early growth stage and I think in the beginning you should grow your portfolio wide and not deep.
That means, acquire as many properties as you can as fast as you can (and without compromising quality too much). That is growing "wide''. The growing deep part comes later, when you decrease leverage and increase equity.
The question is basically where do you direct your free cash flow at: downpayments for new properties or paying off existing loans.
Personally I have always used cash flow + W2 income for downpayments and never taped into equity for acquisitions (I also have never taken cash flow out of the biz).
60% is good but not great, I would probably leave it alone.
I was lucky to start in 2009 when RE was doom and gloom. If I would have to start over again in 2025 I would look to buy or build a business for additional cash flow. Biz is much better at cash flow than RE. There is a huge opportunity online, live selling is probably one of the lowest-hanging fruit. Watch some Gary Ve.
Biz for cashflow + REI for equity (and tax shelter) is the dream team.
- Member since 2023 · 9 posts · 3 votes1y
@Marcus Auerbach I love the grow wide strategy. I'm just starting out with $170k cash and ~$120k I can contribute annually through my W2. Plan is to buy 3 bed / 2 bath SFH in the $250k - $300k range. Ideally I can do this for 10 years and then manage what I've accumulated. Thoughts on my 10 year strategy?
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Ryan Sherring:
@Marcus Auerbach I love the grow wide strategy. I'm just starting out with $170k cash and ~$120k I can contribute annually through my W2. Plan is to buy 3 bed / 2 bath SFH in the $250k - $300k range. Ideally I can do this for 10 years and then manage what I've accumulated. Thoughts on my 10 year strategy?
Good plan. Apply sensible leverage. You only need about 60k to buy a 250 SFR, so you can probably swing 2 of them every year. With your strong cash flow from your W2 you don't need cash flow from your rentals, so you can cut it tighter the break-even, if you are getting a better quality in exchange. Let the cash flow accumulate in a business account and re-invest into property upgrades. US real estate has historically doubled in value every 10-15 years, reducing your leverage down to below 40% without doing much extra. You can probably scale to 20-30 SF in 10 years, worth about 450k each at that point.
- Member since 2019 · 37 posts · 30 votes1y
Quote from @Marcus Auerbach:
Sounds like you are in a very early growth stage and I think in the beginning you should grow your portfolio wide and not deep.
That means, acquire as many properties as you can as fast as you can (and without compromising quality too much). That is growing "wide''. The growing deep part comes later, when you decrease leverage and increase equity.
The question is basically where do you direct your free cash flow at: downpayments for new properties or paying off existing loans.
Personally I have always used cash flow + W2 income for downpayments and never taped into equity for acquisitions (I also have never taken cash flow out of the biz).
60% is good but not great, I would probably leave it alone.
I was lucky to start in 2009 when RE was doom and gloom. If I would have to start over again in 2025 I would look to buy or build a business for additional cash flow. Biz is much better at cash flow than RE. There is a huge opportunity online, live selling is probably one of the lowest-hanging fruit. Watch some Gary Ve.
Biz for cashflow + REI for equity (and tax shelter) is the dream team.
So no go on cash out to refinance to fund another buy? That property would still be cash flowing over $400 per month. I turn 33 this summer and if I just continue to do what I'm doing, should be able to buy another again by end of 2026. If I do that, then that would be four properties in a little under 5 years pace.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Jordan Blanton:
Quote from @Marcus Auerbach:
Sounds like you are in a very early growth stage and I think in the beginning you should grow your portfolio wide and not deep.
That means, acquire as many properties as you can as fast as you can (and without compromising quality too much). That is growing "wide''. The growing deep part comes later, when you decrease leverage and increase equity.
The question is basically where do you direct your free cash flow at: downpayments for new properties or paying off existing loans.
Personally I have always used cash flow + W2 income for downpayments and never taped into equity for acquisitions (I also have never taken cash flow out of the biz).
60% is good but not great, I would probably leave it alone.
I was lucky to start in 2009 when RE was doom and gloom. If I would have to start over again in 2025 I would look to buy or build a business for additional cash flow. Biz is much better at cash flow than RE. There is a huge opportunity online, live selling is probably one of the lowest-hanging fruit. Watch some Gary Ve.
Biz for cashflow + REI for equity (and tax shelter) is the dream team.
So no go on cash out to refinance to fund another buy? That property would still be cash flowing over $400 per month. I turn 33 this summer and if I just continue to do what I'm doing, should be able to buy another again by end of 2026. If I do that, then that would be four properties in a little under 5 years pace.
That's really a judgement call, depends on your personal context. You are on track to owning a million in real estate, that is a huge achievement by 33. At that point if real estate goes up by 10% your net worth grows 100k. How many people at your age can say that? For most investors, the growth curve looks like a hockey stick, slow at first and then suddenly steeper. So I would not be surprised if you double or triple your acquisition rate at some point.
- 1yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Jordan Blanton
I would tap into that equity and do a cash out refi on your paid off property if you haven’t hit your financial goal yet. I’ve done cash outs on 5 paid off properties and used that cash to scale up and buy many more properties to ramp up my cash flow much more than it was with paid off properties. It feels like buying houses for free since all the new properties didn’t cost me a penny out of pocket. Then my cash flow multiplied after I got the new houses.
- Rental Property Investor · Rocklin, CA · Member since 2018 · 42 posts · 9 votes1y
@John Morgan this is a great perpective
- Member since 2019 · 37 posts · 30 votes1yThat's what I'm leaning towards. With current markets and rates, it's giving me around $150 cash flow per property for a 300k house (if you can even call that monthly cash flow). But with my age, I'm targeting appreciation so I do not mind.
Quote from @John Morgan:
- Member since 2019 · 37 posts · 30 votes1y
Quote from @John Morgan:
@Jordan Blanton
I would tap into that equity and do a cash out refi on your paid off property if you haven’t hit your financial goal yet. I’ve done cash outs on 5 paid off properties and used that cash to scale up and buy many more properties to ramp up my cash flow much more than it was with paid off properties. It feels like buying houses for free since all the new properties didn’t cost me a penny out of pocket. Then my cash flow multiplied after I got the new houses.
That sounds great but it is hard to find properties where the cash flow would be larger than the cash out refi payment. I think given the current market it seems to be a good idea if I have a good deal lined up.
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
OP just thinking thru the number mechanics I don’t see this approach working for 99% of investors. Technically it is a path but not for most people.
Change assumptions as needed:
1. Interest rate of 7.5%
2. Even no refi cost3. 2025 equity appreciation of 5%. 2001 equity appreciation of say 10%. Not using any value add approaches with 400% cash on cash%.
4. Lifestyle $100,000 after tax per year.5. Cashflow return of say $200 per month on a $300,000 valuation
6. PI terms 30 year with no 5 year commercial balloon and new terms. Loan collateralization at 65%.
Without doing the actual math. In 2025 or even 2001 appreciation levels. At 7.5% interest. I don't see a new or existing REI person achieving $100,000 after tax living mode. They would need, just throwing a number out of say $20mm in equity to do that. Don't even think $20mm equity would achieve that. The $100,000 would eat into their cashflow from renting and any future appreciation even at 10% pretax.
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
My logic may be wrong. Been drinking a lot of vino lately.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
@Henry Clark, happy to see I am not the only person to order red with fish :-)
Let me run with your numbers: $300,000 valuation, 65% LTV, $200/mo cash flow, rent $2,600, 7.5% interest, 5% appreciation.
Your PITI is about $1,800 monthly, 5% appreciation comes out to $15,000 per year, a 3% rent increase comes out to $78 per month.
If you take out $10,000 as a cash-out refi, principal and interest are $69, cash-flow still increases by $9 and your LTV is still slightly improving (You took out 10k and had 15k of appreciation). Compared to $200x12=$2,400 in cash flow, that's peanuts compared.
To take out $100,000 annually, you need 10 of those properties. The cash-out is not a taxable event.
In my mind, this is a retirement strategy for a mature portfolio. Typically, your LTV at that point is below 50%, maybe down to 30% or less. If your LTV is very low, you could even increase leverage 1 or 2% per year - basically like a reverse mortgage.
Traditional retirement advice is to take 4% out of your 401k every year so your stock portfolio should last you indefinitely. This is the same idea, but in real estate: your portfolio leverage does not increase, your cash flow does not degrade, you just maintain them both at a stable level.
Here is my point to new investors: equity really matters, keep that in mind when you buy property!
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votesOP change my summary as needed. To use this approach for $100,000 after tax lifestyle:
Quote from @Marcus Auerbach:
@Henry Clark, happy to see I am not the only person to order red with fish :-)
Let me run with your numbers: $300,000 valuation, 65% LTV, $200/mo cash flow, rent $2,600, 7.5% interest, 5% appreciation.
Your PITI is about $1,800 monthly, 5% appreciation comes out to $15,000 per year, a 3% rent increase comes out to $78 per month.
If you take out $10,000 as a cash-out refi, principal and interest are $69, cash-flow still increases by $9 and your LTV is still slightly improving (You took out 10k and had 15k of appreciation). Compared to $200x12=$2,400 in cash flow, that's peanuts compared.
To take out $100,000 annually, you need 10 of those properties. The cash-out is not a taxable event.
In my mind, this is a retirement strategy for a mature portfolio. Typically, your LTV at that point is below 50%, maybe down to 30% or less. If your LTV is very low, you could even increase leverage 1 or 2% per year - basically like a reverse mortgage.
Traditional retirement advice is to take 4% out of your 401k every year so your stock portfolio should last you indefinitely. This is the same idea, but in real estate: your portfolio leverage does not increase, your cash flow does not degrade, you just maintain them both at a stable level.
Here is my point to new investors: equity really matters, keep that in mind when you buy property!
1. LTV should be lower than say 55%. To cover bank loan LTV of 65%.
2. 10 properties or equivalents at $300,000, 5% annual appreciation, PITI using 7.5%. $200 after tax monthly cashflow.
Somewhere in the above area REI should be able say this will or won’t work generally speaking.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Henry Clark:
OP change my summary as needed. To use this approach for $100,000 after tax lifestyle:Quote from @Marcus Auerbach:
@Henry Clark, happy to see I am not the only person to order red with fish :-)
Let me run with your numbers: $300,000 valuation, 65% LTV, $200/mo cash flow, rent $2,600, 7.5% interest, 5% appreciation.
Your PITI is about $1,800 monthly, 5% appreciation comes out to $15,000 per year, a 3% rent increase comes out to $78 per month.
If you take out $10,000 as a cash-out refi, principal and interest are $69, cash-flow still increases by $9 and your LTV is still slightly improving (You took out 10k and had 15k of appreciation). Compared to $200x12=$2,400 in cash flow, that's peanuts compared.
To take out $100,000 annually, you need 10 of those properties. The cash-out is not a taxable event.
In my mind, this is a retirement strategy for a mature portfolio. Typically, your LTV at that point is below 50%, maybe down to 30% or less. If your LTV is very low, you could even increase leverage 1 or 2% per year - basically like a reverse mortgage.
Traditional retirement advice is to take 4% out of your 401k every year so your stock portfolio should last you indefinitely. This is the same idea, but in real estate: your portfolio leverage does not increase, your cash flow does not degrade, you just maintain them both at a stable level.
Here is my point to new investors: equity really matters, keep that in mind when you buy property!
1. LTV should be lower than say 55%. To cover bank loan LTV of 65%.
2. 10 properties or equivalents at $300,000, 5% annual appreciation, PITI using 7.5%. $200 after tax monthly cashflow.
Somewhere in the above area REI should be able say this will or won’t work generally speaking.Nice 2CV on the right! And then a Puch500?
France or Italy?
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votesNot sure. We have a 51 dodge truck. Was fun looking thru their cars. Montecantini Italy. Couldnt relate to them.
Quote from @Marcus Auerbach:
Quote from @Henry Clark:
OP change my summary as needed. To use this approach for $100,000 after tax lifestyle:Quote from @Marcus Auerbach:
@Henry Clark, happy to see I am not the only person to order red with fish :-)
Let me run with your numbers: $300,000 valuation, 65% LTV, $200/mo cash flow, rent $2,600, 7.5% interest, 5% appreciation.
Your PITI is about $1,800 monthly, 5% appreciation comes out to $15,000 per year, a 3% rent increase comes out to $78 per month.
If you take out $10,000 as a cash-out refi, principal and interest are $69, cash-flow still increases by $9 and your LTV is still slightly improving (You took out 10k and had 15k of appreciation). Compared to $200x12=$2,400 in cash flow, that's peanuts compared.
To take out $100,000 annually, you need 10 of those properties. The cash-out is not a taxable event.
In my mind, this is a retirement strategy for a mature portfolio. Typically, your LTV at that point is below 50%, maybe down to 30% or less. If your LTV is very low, you could even increase leverage 1 or 2% per year - basically like a reverse mortgage.
Traditional retirement advice is to take 4% out of your 401k every year so your stock portfolio should last you indefinitely. This is the same idea, but in real estate: your portfolio leverage does not increase, your cash flow does not degrade, you just maintain them both at a stable level.
Here is my point to new investors: equity really matters, keep that in mind when you buy property!
1. LTV should be lower than say 55%. To cover bank loan LTV of 65%.
2. 10 properties or equivalents at $300,000, 5% annual appreciation, PITI using 7.5%. $200 after tax monthly cashflow.
Somewhere in the above area REI should be able say this will or won’t work generally speaking.Nice 2CV on the right! And then a Puch500?
France or Italy?
What I get a kick out over here are the rental cars. 500 miles, not km per tank full on a small rv. Great pickup speed with diesel. Over 50 mpg. Not litres. People are worried about pollution in the US. Just need to build like in Europe. Even with epa and safety these cars should beat our pollution and safety issues.
- Member since 2020 · 351 posts · 329 votes1yUltimately, you are borrowing against the future cash flow of your property, so I think it is hard to argue that you aren't investing for cash flow, you're just bringing the cash flow forward (at a cost of 7-8%) with the loan.
Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Are you actually doing this? I can think of several snags
1.) your interest on the cash out portion is no longer a business expense. So your cash flow after taxes should decrease. Which is more of a headache than anything else.
2.) The cost of refinancing seems like it would be prohibitive. I can't remember the details of my last cash out refinance, but it seems to me it was 3-5k + .4% of cash out value. If you have a 1 million dollar property at 3% growth, that's a significant chunk. I suppose this works well if you have an apartment complex, but if you have say 10 properties, that's ten refinances. There are several ways to work around it, but you would need a lender who is okay with giving you cash out at a higher value than the last appraisal without an appraisal. I suppose DSCR loans could work I just expect the fees on yearly cash out refinances to be significant. (If you have 10 properties you could just stagger one refinance every 10 years so there are clearly workarounds).
3.) Interest rate and appreciation risk-- I invest in real estate primarily as a hedge against inflation, but if interest rates rise 1% you might end up reducing your cash flow from the cash out or if you have lower than expected appreciation you might end up not being able to pull cash out. This might be a once in 10 year type situation but for those living in the sunbelt for instance, they have seen rates go from 4-5% to 7%+ and stagnant home values from 2024- probably into 2026 or 2027. I know where I live, we saw limited appreciation (< 1%YoY) from about 2004 when xerox and Kodak started having issues until the pandemic--even in the class A areas of the city and suburbs.
You run into similar issues with drawdowns of stock investing, if you had pulled out 4% of initial value of your stock portfolio from 2000 to 2020, you would have lost it all despite the stock market being up like 10x or something ridiculous.
In both cases you need to have sufficient cash flow and reserves so that you don't have to sell or don't have to refinance to live if the market hits a rough couple of years.
With that said, you are touching important points,
• Cash flow isn't everything, it's important, but so is total return and your risk profile.
• The unstated assumption in your post is that a "cash flow portfolio" means investing in high risk areas as those have higher cash flow returns on paper.
• Having and keeping a high LTV keeps your returns much higher.
• Tapping into your equity to pull cash flow forward can be worthwhile for your quality of life (or to boost investment returns).- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Peter W.:
Ultimately, you are borrowing against the future cash flow of your property, so I think it is hard to argue that you aren't investing for cash flow, you're just bringing the cash flow forward (at a cost of 7-8%) with the loan.Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Are you actually doing this? I can think of several snags
1.) your interest on the cash out portion is no longer a business expense. So your cash flow after taxes should decrease. Which is more of a headache than anything else.
2.) The cost of refinancing seems like it would be prohibitive. I can't remember the details of my last cash out refinance, but it seems to me it was 3-5k + .4% of cash out value. If you have a 1 million dollar property at 3% growth, that's a significant chunk. I suppose this works well if you have an apartment complex, but if you have say 10 properties, that's ten refinances. There are several ways to work around it, but you would need a lender who is okay with giving you cash out at a higher value than the last appraisal without an appraisal. I suppose DSCR loans could work I just expect the fees on yearly cash out refinances to be significant. (If you have 10 properties you could just stagger one refinance every 10 years so there are clearly workarounds).
3.) Interest rate and appreciation risk-- I invest in real estate primarily as a hedge against inflation, but if interest rates rise 1% you might end up reducing your cash flow from the cash out or if you have lower than expected appreciation you might end up not being able to pull cash out. This might be a once in 10 year type situation but for those living in the sunbelt for instance, they have seen rates go from 4-5% to 7%+ and stagnant home values from 2024- probably into 2026 or 2027. I know where I live, we saw limited appreciation (< 1%YoY) from about 2004 when xerox and Kodak started having issues until the pandemic--even in the class A areas of the city and suburbs.
You run into similar issues with drawdowns of stock investing, if you had pulled out 4% of initial value of your stock portfolio from 2000 to 2020, you would have lost it all despite the stock market being up like 10x or something ridiculous.
In both cases you need to have sufficient cash flow and reserves so that you don't have to sell or don't have to refinance to live if the market hits a rough couple of years.
With that said, you are touching important points,
• Cash flow isn't everything, it's important, but so is total return and your risk profile.
• The unstated assumption in your post is that a "cash flow portfolio" means investing in high risk areas as those have higher cash flow returns on paper.
• Having and keeping a high LTV keeps your returns much higher.
• Tapping into your equity to pull cash flow forward can be worthwhile for your quality of life (or to boost investment returns).You are absolutely right, the assumption is that a "cash flow portfolio" scenario, as the anti-example is investing in cheap areas, ultimately a low equity, low appreciation. And yes high cash flow - ON PAPER.
We had a long-time Milwaukee landlord at one of the RPA-workshops and at the end he basically told me he is doing this for 30 years, has been his own handyman, did some cash-out refi along the way to pay for large capex items that come with a portfolio of 100 year old properties and now he is 65 and is caught in this treadmill with not much to show for after a life of landlording. That was a pretty sobering conversation.
Of course you would not do that with ONE unit; a 10k refi is certainly cost-prohibitive! That was just to illustrate the math conceptually.
After a life of investing, you should have hopefully grown to several dozen properties, some of them free and clear. You refi one (or multiple) properties every year, then the cost of re-fi becomes marginal. If you want to preserve your cash flow, you have to stay on top of annual rent increases, otherwise, you are eating into cash flow.
Interest expenses are not tax-deductible anymore if you use the funds for lifestyle, but you are not subject to income tax, that's the main point.
And if you want to play it conservative you just keep your rate of refi lower than the rate of appreciation. I just see too many investors in the 70s still trying to pay off their last 5 properties and I ask them - why? What's the end goal?
We all got into REI for a better life, but many of us get stuck in the grind phase, at some point you have to switch gears.
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
OP to get around the refinancing costs and work. Are you doing a working line of credit? With a little higher Interest rate than a 5 year balloon or a 30 year amort fixed?
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Henry Clark:
OP to get around the refinancing costs and work. Are you doing a working line of credit? With a little higher Interest rate than a 5 year balloon or a 30 year amort fixed?
You could do this with a business line of credit and then refi a property periodically to pay off the BLOC. This would actually be more cost-effective as you only pay interest on what you have taken out.
You are in a different model with stortage units, I am thinking about the guy who has accumulated 30 duplxes over 30 years and is still trying to pay off the last 5.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes1y
Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Not saying your wrong, but that how it's all conceptualized needs adjusting.
Cash-Flow is NOT a thing in and of itself. So buying 4 cash-flow will always 100% of the time betray a person. ALWAYS.
Buy for/on APPRECIATION & EQUITY.
Appreciation & Equity = cash-flow.
Cash-flow is a RESULT of Equity and Appreciation.
Appreciation 7 Equity is the catalyst of cash-flow.
Cash-flow is the catalyst of nothing except maybe deferred maintenance, cap-X, which are catalysts too cash-flow and equity DESTRUCTION.
The #1 most repetitive failing investors make is to buy for, or based upon, cash-flow. I have seen it play out literally more times than I can recount.
When you BUY for/on Equity and Appreciation, a spread is created/present and that SPREAD, that is how investors make $.
Investing in Real Estate is not unlike virtually any other investment in existence that the profit is in the spread. So all focus and weight need be given on the spread.
This is why price truly does not matter. It doesn't. The spread is all that matters. And in real estate we call the spread equity, and the growth of that spread appreciation. The result of a profitable spread cash-flow.
So if your goal is a cash-flow to replace your W2, you are seeking to buy for Equity & Appreciation.
Because reality is nobody is dumb enough to just give away big spreads for free. The market has priced the spread to a razor thin level. The stock market has done the exact same. Nobody is getting Tesla stock of $50 anymore. That is the reality of the market.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @James Hamling:
Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Not saying your wrong, but that how it's all conceptualized needs adjusting.
Cash-Flow is NOT a thing in and of itself. So buying 4 cash-flow will always 100% of the time betray a person. ALWAYS.
Buy for/on APPRECIATION & EQUITY.
Appreciation & Equity = cash-flow.
Cash-flow is a RESULT of Equity and Appreciation.
Appreciation 7 Equity is the catalyst of cash-flow.
Cash-flow is the catalyst of nothing except maybe deferred maintenance, cap-X, which are catalysts too cash-flow and equity DESTRUCTION.
The #1 most repetitive failing investors make is to buy for, or based upon, cash-flow. I have seen it play out literally more times than I can recount.
When you BUY for/on Equity and Appreciation, a spread is created/present and that SPREAD, that is how investors make $.
Investing in Real Estate is not unlike virtually any other investment in existence that the profit is in the spread. So all focus and weight need be given on the spread.
This is why price truly does not matter. It doesn't. The spread is all that matters. And in real estate we call the spread equity, and the growth of that spread appreciation. The result of a profitable spread cash-flow.
So if your goal is a cash-flow to replace your W2, you are seeking to buy for Equity & Appreciation.
Because reality is nobody is dumb enough to just give away big spreads for free. The market has priced the spread to a razor thin level. The stock market has done the exact same. Nobody is getting Tesla stock of $50 anymore. That is the reality of the market.
New investors don't get that. Josh Dorkin was banging the cashflow drum long before Brandon Turner came on board. And the reason Josh did that is because he personally got burned investing for appreciation - without equity or cash flow.
So now BP has been chanting CASH-FLOW CASH-FLOWfor over a decade and the next time a noob calls me and tells me all he cares about is cash flow I'm going to jump out the window :-)
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes1y
Quote from @Marcus Auerbach:
Quote from @James Hamling:
Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Not saying your wrong, but that how it's all conceptualized needs adjusting.
Cash-Flow is NOT a thing in and of itself. So buying 4 cash-flow will always 100% of the time betray a person. ALWAYS.
Buy for/on APPRECIATION & EQUITY.
Appreciation & Equity = cash-flow.
Cash-flow is a RESULT of Equity and Appreciation.
Appreciation 7 Equity is the catalyst of cash-flow.
Cash-flow is the catalyst of nothing except maybe deferred maintenance, cap-X, which are catalysts too cash-flow and equity DESTRUCTION.
The #1 most repetitive failing investors make is to buy for, or based upon, cash-flow. I have seen it play out literally more times than I can recount.
When you BUY for/on Equity and Appreciation, a spread is created/present and that SPREAD, that is how investors make $.
Investing in Real Estate is not unlike virtually any other investment in existence that the profit is in the spread. So all focus and weight need be given on the spread.
This is why price truly does not matter. It doesn't. The spread is all that matters. And in real estate we call the spread equity, and the growth of that spread appreciation. The result of a profitable spread cash-flow.
So if your goal is a cash-flow to replace your W2, you are seeking to buy for Equity & Appreciation.
Because reality is nobody is dumb enough to just give away big spreads for free. The market has priced the spread to a razor thin level. The stock market has done the exact same. Nobody is getting Tesla stock of $50 anymore. That is the reality of the market.
New investors don't get that. Josh Dorkin was banging the cashflow drum long before Brandon Turner came on board. And the reason Josh did that is because he personally got burned investing for appreciation - without equity or cash flow.
So now BP has been chanting CASH-FLOW CASH-FLOWfor over a decade and the next time a noob calls me and tells me all he cares about is cash flow I'm going to jump out the window :-)
Lol. I am right there with you asking if we should jump from this window or go another flight higher.
Ya-know, it kind of makes me think of diet fad's to be honest.
There was the no-fat fad, don't eat any fat, none, 0, and that is the "magic trick".
Then there was the what, the French diet of just eating all the bread.
Then the keto thing.
Then the, then the, then the.......
There is no good healthy 1-trick-pony to it.
If you blindly chase appreciation and ONLY look at appreciation with blinders on to literally everything else, it's a set-up for failure.
Same as blindly staring at just a cash-flow "promise" removed of any context.
I think of it in terms of auto-racing.
Imagine people asking which is the singular thing to focus on to win-win-win, speed or fuel.
Well..... NEITHER.
Speed (cash-flow) is a result of other things. And fuel (appreciation) is just 1 factor that yeah it can be great but if you need to, ya know TURN (capx), it could leave you a smear on a wall.....
But if ya gotta focus on 1 and 1 alone, I say the MOTOR (equity) because if you got that right it will be a situation to best makeup for short fallings in other aspects.
But reality is, it takes the WHOLE picture of things if you want to be great, professional, longevity, consistency, PERFORMANCE.
But yeah, if ya gotta do it with blinders and can only think on 1 thing and 1 only, make it EQUITY.
You can buy equity, create equity, or earn equity over time. But without it, your f'd.
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
@James Hamling. How do the following play into your approach above?
1. Commercial value is based on NOI, to a large degree cash flow. The more NOI the higher the appreciation in value.
2. Housing. Say negative $50 per month cash flow. But say 5% appreciation per year. With 7.5% interest rate. Change parameters to help understandThanks. As OP mentioned he is approaching this from a retirement standpoint.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes1y
Quote from @Henry Clark:
@James Hamling. How do the following play into your approach above?
1. Commercial value is based on NOI, to a large degree cash flow. The more NOI the higher the appreciation in value.
2. Housing. Say negative $50 per month cash flow. But say 5% appreciation per year. With 7.5% interest rate. Change parameters to help understandThanks. As OP mentioned he is approaching this from a retirement standpoint.
1. In the world of commercial this whole conversation does not really apply because the world of commercial really forces one to understand the full-math of things. For example, NOI.
In commercial NOI is fundamental, and one understanding it, properly formulating NOI, it's expected.
Yet in residential rarely is NOI mentioned, and the formulations people use for coming up with what they call NOI is..... well it's interesting at times.
And truly, NOI is just another way of saying "spread before debt service". So we are talking the same fundamental.
And in commercial we have seen when cost of money is lower, buyers happy to buy lower NOI's, and when cost of money is higher, demand for a better higher NOI is commanded.
My whole approach of trying to get people to adjust there thinking to looking at and focusing on a "spread" is one of trying to get people to consider the full picture of the math, vs a pointless metric such as "cash-flow" because 98% of "cash-flow" numbers are COOKED BOOKS in residential as it's pre-capx or completely removed of any capx or deferred maintenance. So it's a liar cash-flow.
Could you imagine someone in commercial trying to sell a deal with a NOI that has capx and maintenance removed, lol, they'd get laughed at by everyone.
2. Dang good question Henry. I would STRONGLY urge everyone to take another page from commercial where we never look at just yr1 as a picture or statement of forever performance, we look at rent/tenant stabilized numbers. In commercial we look at the full picture of what is time requirement to get rent stabilized, and what is performance yr1, 2, 3 and beyond. And we equate an investment value to the time cost in getting rent stabilized.
For example, as you are well aware and a master of Henry, in mini storage if you look at a deal that was rent stabilized in 9 mnths and another in 24+, that's 2 very different deals and market indicators that require one to dig deeper into the why. The why may be no big deal, but it may be a canary in a coal mine of a serious issue.
For generalization I'd reinforce it's INVESTING and not buying paychecks, so view an aggregate median of the first 36 months NOT yr1 as a standalone.
Or better yet, an aggregate median of yr 1-3, 1-5, and 1-7. Review those 3 numbers to direct your actions. And NEVER use projections beyond yr7 because it's too far out and cap-x grows significantly past yr7. This is all for residential.
This above is exactly what I personally do. I wrote a program and have refined it over the years that gives me a spreadsheet of everything, all the data and numbers, and gives me a read for these 3 key time windows of yr 3, 5 and 7. And has all the growth factors to it including inflation, appreciation, including inflation to expenses.
This is how I have identified deals in past that to some seemed a "bad deal" because yr1 was in the red, but I found by yr 5/7 exit it was 300%+ ROI.
Residential Investing is a black-hole of math prowess. People could learn a lot from study of commercial. Namely how one values and decides if a Mini-storage venture is viable or not.
The standard means of mini-storage analysis is in my opinion the "gold standard" of investment analysis.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes1y
Quote from @Henry Clark:
@James Hamling. How do the following play into your approach above?
1. Commercial value is based on NOI, to a large degree cash flow. The more NOI the higher the appreciation in value.
2. Housing. Say negative $50 per month cash flow. But say 5% appreciation per year. With 7.5% interest rate. Change parameters to help understandThanks. As OP mentioned he is approaching this from a retirement standpoint.
From a retirement standpoint in emphasis the paramount importance of focus to Equity and Appreciation all the more.
Because of the paradigm that equity = cash-flow.
Cash-flow is a realized profit in the now, from the equity aka "spread" between market value and expense.
Also, equity is protection and insulation for declines in revenues, increases in expenses.
Appreciation is equity addition. If equity is cash-flow and cash-flow insulation, than appreciation is the rate at which defense and protection increases.
These are all simple generalized terms anyone can understand CORRECT analysis to a real estate investment. If they realign mindset to view it as a "Spread", between aggregate expenses and revenues, that rate at which each grows, and that cash-flow is a RESULT of the spread and not a thing of itself.
That the laser focus is on growing Equity, if you need just 1 generalized metric to follow than it would be Equity.
Just as bad things compound in there potential from over-leveraging, good things compound in there potential from EQUITY.
So when we boil it all down to it's most basic root "game", investing is about getting and growing the maximum Equity, with the least amount of capital and risk.
This is why infinite return models are so powerful.
BUT, but, but, but..... There is liar infinite return models that we can readily identify because they violate the foundational principle of EQUITY.
When an infinite return model has limited or no equity, it's sky high risk. It's over leveraging.
Equity is the center of the investing universe.
Equity is cash-flow and protection. The lack of equity is risk exposure.
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes1y
Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Valid points.
My plan is different, though.
I don't invest for cash flow at all. I buy for equity, refinance and buy more. I have done this for years now and my ultimate plan is sell everything and invest in paper assets.
My paper assets have not done anywhere near as well as my RE returns, but when I am ready to be done with the "trouble" that comes with real estate I'll be happy to take a lower return for less headache.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Luka Milicevic:
Quote from @Marcus Auerbach:
If you are investing primarily for cash flow you are barking up the wrong tree. Once you have aggregated a small cash flow portfolio, you'll be so busy landlording that you wish you kept your W2.
Instead, build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation. It's 100% tax-free income forever and you never have to increase leverage or even touch your cash flow.
People who primarily "invest for cash flow" don't have a very deep understanding of REI principles. Tell me I'm wrong!
Valid points.
My plan is different, though.
I don't invest for cash flow at all. I buy for equity, refinance and buy more. I have done this for years now and my ultimate plan is sell everything and invest in paper assets.
My paper assets have not done anywhere near as well as my RE returns, but when I am ready to be done with the "trouble" that comes with real estate I'll be happy to take a lower return for less headache.
You are in the growth phase, which makes sense. While I am personally not a big fan of re-leveraging to buy more, because it keeps your LTV high and close to 75%, in the end growth matters.
And pace. When you look back at your first ten years it makes a difference if you acquired every year 10% of your assets evenly spread out or if you were able to "frontload" and buy more early on - you have more horses in the race for longer, which is key. When you move from RE to paper assets, you have a lot of taxes to catch up. Except if you 1031 into something like a DST.
We invest in single-family homes, which is probably the most passive form of active REI. The resident takes care of everything, including garbage, snow and lawn, there are no common areas to clean and they usually stay for many years.
What we have done systematically over the last years is 1031 exchanged properties in lower-quality neighborhoods into higher-priced suburbs. And systematically taken on capex items like driveways - we have a ranked list and replace a few every summer. So, obviously we are committed for the long term. And tax optimized.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes1y
@Marcus Auerbach how long have you been investing using this strategy?
While I can understand your theory, it just doesn't work long term without solid cash flow or exiting properties. Buying properties that you can add value to and cash flow in good neighborhoods with a high DSCR is the most tried and true investment strategy.
Why does it not work to "build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation?"
1. This is expensive. Each year, you'll spend thousands on refi fees.
2. Interest rates can go up, which makes doing this annually impossible
3. Values can go down
4. No or little cash flow will cause issues with paying the bills. Eventually, the chickens will come home to roost!
If you want to directly own rental real estate, then buy in solid locations and purchase something you can add value to. Then put on debt that is fixed and provides you with a high DSCR (1.5+). This allows you to own a cash-flowing property that you have equity in. Over the course of 2-10+ years, strategically refinance it or sell and exchange into something bigger.
- Rental Property Investor · Medford, OR · Member since 2017 · 94 posts · 115 votes1y
@Todd Dexheimer very well said!
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Todd Dexheimer:
@Marcus Auerbach how long have you been investing using this strategy?
While I can understand your theory, it just doesn't work long term without solid cash flow or exiting properties. Buying properties that you can add value to and cash flow in good neighborhoods with a high DSCR is the most tried and true investment strategy.
Why does it not work to "build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation?"
1. This is expensive. Each year, you'll spend thousands on refi fees.
2. Interest rates can go up, which makes doing this annually impossible
3. Values can go down
4. No or little cash flow will cause issues with paying the bills. Eventually, the chickens will come home to roost!
If you want to directly own rental real estate, then buy in solid locations and purchase something you can add value to. Then put on debt that is fixed and provides you with a high DSCR (1.5+). This allows you to own a cash-flowing property that you have equity in. Over the course of 2-10+ years, strategically refinance it or sell and exchange into something bigger.
Todd, not what I am saying: you do need cash flow and you can't avoid it, it's a byproduct of the equity. If you have a mature portfolio in quality locations and your leverage should be under 50%, maybe even under 30%, your DSCR is probably well over 2.
We are talking about phase 3 of your portfolio, when you're drawing from it, after you've been growing it (phase 1) and then coasting (phase 2), at some point you should enjoy the fruits of your labor - and a lot of that is equity.
To answer your question, I've been buying for 15 years now and it looks like we are more coasting now. Here and there we buy another property and do a cost seg.
Maybe my 1 unit example to Henry was confusing. Let's say someone has 20 fourplexes after a career of investing, 500k each. That is $10 million portfolio value, $7 million equity, 100k rent roll, 30k debt coverage. Annual rent increase 3%, annual appreciation 3%.
1.) Yes it does cost money; a 300,000 refi will cost you probably 1% of that
2.) If rates go up, the amount you can support with 3% rent increase goes down a little
3.) Yes values can go down, but if you start with a 30% leverage, it only affects your LTV temporarily. But also, you are right, nothing in life is guaranteed
4.) Agreed, but lack of cash flow is not an issue on a mature, quality portfolio.
I totally agree with your summary at the end. My message to a noobie is, equity will dwarf cash flow over time, so it is a critical mistake to only invest forcash flow.
And to the seasoned landlord: stop pinching pennies to pay down your last 30% LTV. Start living, do something now, buy a house for your kids - stop delaying everything into the future. You can either maintain your leverage and cash flow (as long as you match your annual rent increases) or you can even start to re-leverage your portfolio and go back up to 50-60% LTV. - Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes1y
Quote from @Marcus Auerbach:
Quote from @Todd Dexheimer:
@Marcus Auerbach how long have you been investing using this strategy?
While I can understand your theory, it just doesn't work long term without solid cash flow or exiting properties. Buying properties that you can add value to and cash flow in good neighborhoods with a high DSCR is the most tried and true investment strategy.
Why does it not work to "build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation?"
1. This is expensive. Each year, you'll spend thousands on refi fees.
2. Interest rates can go up, which makes doing this annually impossible
3. Values can go down
4. No or little cash flow will cause issues with paying the bills. Eventually, the chickens will come home to roost!
If you want to directly own rental real estate, then buy in solid locations and purchase something you can add value to. Then put on debt that is fixed and provides you with a high DSCR (1.5+). This allows you to own a cash-flowing property that you have equity in. Over the course of 2-10+ years, strategically refinance it or sell and exchange into something bigger.
Todd, not what I am saying: you do need cash flow and you can't avoid it, it's a byproduct of the equity. If you have a mature portfolio in quality locations and your leverage should be under 50%, maybe even under 30%, your DSCR is probably well over 2.
We are talking about phase 3 of your portfolio, when you're drawing from it, after you've been growing it (phase 1) and then coasting (phase 2), at some point you should enjoy the fruits of your labor - and a lot of that is equity.
To answer your question, I've been buying for 15 years now and it looks like we are more coasting now. Here and there we buy another property and do a cost seg.
Maybe my 1 unit example to Henry was confusing. Let's say someone has 20 fourplexes after a career of investing, 500k each. That is $10 million portfolio value, $7 million equity, 100k rent roll, 30k debt coverage. Annual rent increase 3%, annual appreciation 3%.
1.) Yes it does cost money; a 300,000 refi will cost you probably 1% of that
2.) If rates go up, the amount you can support with 3% rent increase goes down a little
3.) Yes values can go down, but if you start with a 30% leverage, it only affects your LTV temporarily. But also, you are right, nothing in life is guaranteed
4.) Agreed, but lack of cash flow is not an issue on a mature, quality portfolio.
I totally agree with your summary at the end. My message to a noobie is, equity will dwarf cash flow over time, so it is a critical mistake to only invest forcash flow.
And to the seasoned landlord: stop pinching pennies to pay down your last 30% LTV. Start living, do something now, buy a house for your kids - stop delaying everything into the future. You can either maintain your leverage and cash flow (as long as you match your annual rent increases) or you can even start to re-leverage your portfolio and go back up to 50-60% LTV.This advice is much better than your original post and I can get on board with what you're saying here.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Todd Dexheimer:
Quote from @Marcus Auerbach:
Quote from @Todd Dexheimer:
@Marcus Auerbach how long have you been investing using this strategy?
While I can understand your theory, it just doesn't work long term without solid cash flow or exiting properties. Buying properties that you can add value to and cash flow in good neighborhoods with a high DSCR is the most tried and true investment strategy.
Why does it not work to "build an equity portfolio, stabilize it and then start doing annual cash-out-refis in an amount that matches your annual equity appreciation?"
1. This is expensive. Each year, you'll spend thousands on refi fees.
2. Interest rates can go up, which makes doing this annually impossible
3. Values can go down
4. No or little cash flow will cause issues with paying the bills. Eventually, the chickens will come home to roost!
If you want to directly own rental real estate, then buy in solid locations and purchase something you can add value to. Then put on debt that is fixed and provides you with a high DSCR (1.5+). This allows you to own a cash-flowing property that you have equity in. Over the course of 2-10+ years, strategically refinance it or sell and exchange into something bigger.
Todd, not what I am saying: you do need cash flow and you can't avoid it, it's a byproduct of the equity. If you have a mature portfolio in quality locations and your leverage should be under 50%, maybe even under 30%, your DSCR is probably well over 2.
We are talking about phase 3 of your portfolio, when you're drawing from it, after you've been growing it (phase 1) and then coasting (phase 2), at some point you should enjoy the fruits of your labor - and a lot of that is equity.
To answer your question, I've been buying for 15 years now and it looks like we are more coasting now. Here and there we buy another property and do a cost seg.
Maybe my 1 unit example to Henry was confusing. Let's say someone has 20 fourplexes after a career of investing, 500k each. That is $10 million portfolio value, $7 million equity, 100k rent roll, 30k debt coverage. Annual rent increase 3%, annual appreciation 3%.
1.) Yes it does cost money; a 300,000 refi will cost you probably 1% of that
2.) If rates go up, the amount you can support with 3% rent increase goes down a little
3.) Yes values can go down, but if you start with a 30% leverage, it only affects your LTV temporarily. But also, you are right, nothing in life is guaranteed
4.) Agreed, but lack of cash flow is not an issue on a mature, quality portfolio.
I totally agree with your summary at the end. My message to a noobie is, equity will dwarf cash flow over time, so it is a critical mistake to only invest forcash flow.
And to the seasoned landlord: stop pinching pennies to pay down your last 30% LTV. Start living, do something now, buy a house for your kids - stop delaying everything into the future. You can either maintain your leverage and cash flow (as long as you match your annual rent increases) or you can even start to re-leverage your portfolio and go back up to 50-60% LTV.This advice is much better than your original post and I can get on board with what you're saying here.
Yeah reading my OP, it was not very detailed ;-)
- Member since 2024 · 222 posts · 161 votes1y
@Marcus Auerbach I have also been at this for 30 plus years and have seen large appreciation and built cash flow. I'm at the stage I no longer look for additional properties because what we have is more than enough to fund our lifestyle through retirement. We currently live on the cash flow because of the appreciation and spread.
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
I think we should all be required to write posts while we are drinking. Helps to clarify things. Switched for this meal to Sangria. Goes with the Paella and Caprese salad.
Another item to factor in is inflation.
OP is approaching this from a retirement mode.
Let's say 3% inflation, 65% LTV on equity, interest rate of 7%, 5% growth but 3% points of that is inflation. Cashflow of $150 per month after taxes or $1,800 per year on a $200,000 investment. Or $1,800/$200,000= 0.9% return.
So the net growth is 2% and the return is 0.8% on the total $200,000. Or $5,600 per year.Let's say you had 45% LTV versus loan required 65%. Then you took a loan of 20% of $40,000. PI using 7% interest, 20 year term, is $3,720 per year.
So I’m showing a return of $5,600 versus a PI of $3,720. At $1,900 per unit I would need 50 equivalent units to achieve an after tax life style of $100,000? Assumed no refi costs.
Someone check my logic and math. I think the spread is greater favorably since the PI would not adjust with inflation. Whereas the property value would both adjust with the inflation and compounding. So instead of 50 equivalent units maybe 30? For now don’t drink while you’re checking the above.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes1y
Quote from @Henry Clark:
I think we should all be required to write posts while we are drinking. Helps to clarify things. Switched for this meal to Sangria. Goes with the Paella and Caprese salad.
Another item to factor in is inflation.
OP is approaching this from a retirement mode.
Let's say 3% inflation, 65% LTV on equity, interest rate of 7%, 5% growth but 3% points of that is inflation. Cashflow of $150 per month after taxes or $1,800 per year on a $200,000 investment. Or $1,800/$200,000= 0.9% return.
So the net growth is 2% and the return is 0.8% on the total $200,000. Or $5,600 per year.Let's say you had 45% LTV versus loan required 65%. Then you took a loan of 20% of $40,000. PI using 7% interest, 20 year term, is $3,720 per year.
So I’m showing a return of $5,600 versus a PI of $3,720. At $1,900 per unit I would need 50 equivalent units to achieve an after tax life style of $100,000? Assumed no refi costs.
Someone check my logic and math. I think the spread is greater favorably since the PI would not adjust with inflation. Whereas the property value would both adjust with the inflation and compounding. So instead of 50 equivalent units maybe 30? For now don’t drink while you’re checking the above.
Uh-oh Henry, now your going to that place of present $ vs future $ that it seems all of about 7 of us on BP get.
Gotta simplify the heck out of it, because look at all the people who think a 7% or even 8% interest rate is "too high" and it's better to sit the sidelines and watch there liquid capital instead slow-burn.
Here is my attempt:
Let's say inflation rate is 3% and stays that forever.
And say you borrow $10k today.
That $10k today, has $10k worth of purchase power.
Inflation is the rate at which purchase power goes DOWN. I think it best if people picture inflation in that way, the rate at which purchase power declines.
That means, in 10 years, at 3% annual inflation rate, that $10k today will have a purchase power of just $7,374.24.
Or to say that $10k has lost about 26% of it's purchase power over 10 years.
Meaning, to get the same purchase power in 10 years, it would need to be $12,600 dollars. Because in 10 years $12,600 will buy what $10k will buy today.
Make sense everyone?
The BEAUTY of investments with real estate, is that:
- Real Estate adjusts WITH inflation. Rents go up, cost of real estate goes up, it moves WITH inflation which is why real estate for generations has been coined "the best hedge against inflation".
- And Real Estate can be bought with FIXED debt.
* Why FIXED debt matters so much*
Remember that inflation makes the purchase power of the money LESS over time.
So if we borrow $10k TODAY, and we buy an asset that adjusts WITH inflation such as real estate, it's a time capsule, we will KEEP that $10k of purchase power year after year after year as inflation does it's thing. So in 10 years, it looks like a "gain" because it's now $12,600 BUT, it's just that $10k in purchase power brought into the future.
And we borrowed at say 5% interest rate. Fixed.
Some THINK we are paying 5% but NO, we are not, because we borrowed at FIXED rate, we are paying back a set amount and inflation is eroding the purchase power of what we pay back.
So sure, yr1 that call it $125 monthly payment, it was $125 worth of stuff we couldn't otherwise buy. But by year 10, were laughing at $125 monthly payment because it's nothing, it's "cheap".
And the whole time the real estate, which adjusts WITH inflation, has produced more and more and more revenue.
This speaks back to the "Law of Buffet"; Time IN the market beat's TIMING the market!
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votesAs I noted above I don’t watch podcasts. This would be a great topic. Make money on inflation on the asset side plus appreciation; Make money on the debt side with inflation paying with cheaper dollars since most debt is fixed except balloon payments.
Quote from @James Hamling:
Quote from @Henry Clark:
I think we should all be required to write posts while we are drinking. Helps to clarify things. Switched for this meal to Sangria. Goes with the Paella and Caprese salad.
Another item to factor in is inflation.
OP is approaching this from a retirement mode.
Let's say 3% inflation, 65% LTV on equity, interest rate of 7%, 5% growth but 3% points of that is inflation. Cashflow of $150 per month after taxes or $1,800 per year on a $200,000 investment. Or $1,800/$200,000= 0.9% return.
So the net growth is 2% and the return is 0.8% on the total $200,000. Or $5,600 per year.Let's say you had 45% LTV versus loan required 65%. Then you took a loan of 20% of $40,000. PI using 7% interest, 20 year term, is $3,720 per year.
So I’m showing a return of $5,600 versus a PI of $3,720. At $1,900 per unit I would need 50 equivalent units to achieve an after tax life style of $100,000? Assumed no refi costs.
Someone check my logic and math. I think the spread is greater favorably since the PI would not adjust with inflation. Whereas the property value would both adjust with the inflation and compounding. So instead of 50 equivalent units maybe 30? For now don’t drink while you’re checking the above.
Uh-oh Henry, now your going to that place of present $ vs future $ that it seems all of about 7 of us on BP get.
Gotta simplify the heck out of it, because look at all the people who think a 7% or even 8% interest rate is "too high" and it's better to sit the sidelines and watch there liquid capital instead slow-burn.
Here is my attempt:
Let's say inflation rate is 3% and stays that forever.
And say you borrow $10k today.
That $10k today, has $10k worth of purchase power.
Inflation is the rate at which purchase power goes DOWN. I think it best if people picture inflation in that way, the rate at which purchase power declines.
That means, in 10 years, at 3% annual inflation rate, that $10k today will have a purchase power of just $7,374.24.
Or to say that $10k has lost about 26% of it's purchase power over 10 years.
Meaning, to get the same purchase power in 10 years, it would need to be $12,600 dollars. Because in 10 years $12,600 will buy what $10k will buy today.
Make sense everyone?
The BEAUTY of investments with real estate, is that:
- Real Estate adjusts WITH inflation. Rents go up, cost of real estate goes up, it moves WITH inflation which is why real estate for generations has been coined "the best hedge against inflation".
- And Real Estate can be bought with FIXED debt.
* Why FIXED debt matters so much*
Remember that inflation makes the purchase power of the money LESS over time.
So if we borrow $10k TODAY, and we buy an asset that adjusts WITH inflation such as real estate, it's a time capsule, we will KEEP that $10k of purchase power year after year after year as inflation does it's thing. So in 10 years, it looks like a "gain" because it's now $12,600 BUT, it's just that $10k in purchase power brought into the future.
And we borrowed at say 5% interest rate. Fixed.
Some THINK we are paying 5% but NO, we are not, because we borrowed at FIXED rate, we are paying back a set amount and inflation is eroding the purchase power of what we pay back.
So sure, yr1 that call it $125 monthly payment, it was $125 worth of stuff we couldn't otherwise buy. But by year 10, were laughing at $125 monthly payment because it's nothing, it's "cheap".
And the whole time the real estate, which adjusts WITH inflation, has produced more and more and more revenue.
This speaks back to the "Law of Buffet"; Time IN the market beat's TIMING the market!
- 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
I don't watch podcasts but should. Do they have these types of discussions? Would love to see people at different REI stages discussing retirement, financial freedom, and their approaches. - 1yCharles ClarkBusiness MemberReal Estate Broker · Milwaukee, WI · Member since 2020 · 306 posts · 209 votes
@Marcus Auerbach
You make a solid point—there’s real power in building equity and using strategic refis to unlock tax-free capital. That said, I think it depends on the investor’s goals and stage. Some may prioritize cash flow for lifestyle or financial independence, while others lean into long-term equity plays. There's room for both approaches with the right strategy and balance.
Raise the Standard RE LLC55 Reviews - 1yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
@Marcus Auerbach. All of our time and money should be going to scaling. Not retirement. Don't use your REI cash to enjoy life. Especially at a Michelin restaurant in Italy.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes1y
Quote from @Henry Clark:
@Marcus Auerbach. All of our time and money should be going to scaling. Not retirement. Don't use your REI cash to enjoy life. Especially at a Michelin restaurant in Italy.
Si!! Il dolce far niente. Especially in the context of REI!
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