All Forum Posts by: Kyle Kline

The majority of my rentals I have acquired were for equity not cash flow. I have a few for cash flow but I prefer equity - which I live in the Washington DC area so you are not going to be getting cash flowing rentals off the bat but if you hold them for 20 years you will not be complaining. 

Yes you will need to make sure you have the cash to take care of any repairs that are needed out of pocket. We keep "kiddie" as we say backhome which is a pot of money set aside for rainy day fund in case we need to replace appliances, perform repairs or other capital improvements. 

As someone who focuses more on equity than cashflow, I do include capital expenses in my initial analysis. So the property may break even or even "lose" $100-200 each month for the first year or so but that number includes the capital I'm putting aside each month for the eventual water heater, roof, or vacancy. 

That being said there are those that are willing to accept buying in an appreciating area where the rent only covers the mortgage (PITI). In these cases, maintenance and capex come out of the investor's pocket funded by their day jobs. If your a high income earner living below your means then this isn't a horrible strategy.

@Kyle Kline

“Investing for equity and not cash flow” doesn’t mean “buy properties that don’t cash flow.”

To me, invest for equity not cash flow means that the PRIMARY reason to invest is for equity growth and an increase in net worth and NOT cash flow.

I’ve been investing for over 40 years and while cash flow is important, it’s not why invest.

A property must be self supporting ie produce enough cash flow to cover debt service, operational expenses including repairs and replacements. So even if the cash flow is only 3% or 4% cash on cash, that’s enough to provide a protective layer to cover unexpected items.

To me, the cash flow is NOT to put spendable cash in my pocket NOW but rather keep the property self supporting while it increases in value over the long term.

In addition, every property a purchase has a cash reserve fund - call it my rainy day fund or my Sominex account (ie I can sleep at night knowing if the furnace goes out I have $8,000 in my reserve fund to replace it.)

One final note, I have found once one reaches a certain net worth, cash flow no longer is a concern, there is always as much cash flow as anyone wants.

Final note, who will have more cash flow someone with $1M investible cash or $3M investible cash? The answer is obvious.

I invest to create equity growth.

Hope this helps,

Arn

Hey @Kyle Kline! While I haven't listened to that episode, I generally advise similar clients to have a certain # of months of operating expenses in reserve to cover repairs/capex. The bigger the reserve the better, obviously, but generally most recommend a 3–6-month reserve.

If that's the case, it makes sense. Just be certain you have the cash flow to cover the HELOC payment as well.

Agree here. Use the cash first so you aren't paying interest. Use the HELOC as the emergency fund. However, make sure you are building the cash reserve part back up as well.

@Kyle Kline
Why not use the 15-20k in savings and lose out on the 5% interest instead of incurring 8%-13% on the HELOC?

In an emergency situation you could always access the HELOC at 8%-13%.

This emergency situation should be considered before the funds are accessed with either method, can you afford to have no savings AND be paying 8%-13%. Is the return on the use of the funds worth that risk? 

Questions to consider. But my rule of thumb is always use my cash before I pay interest knowing I can always draw later if I need to.

I think a key part of building wealth is being paranoid and optimistic at the same time. Using my own cash makes me paranoid and a much better investor. I'm a cautious spender vs. borrowed funds that I throw around like free money.

Figure out what your reserves need to be and keep it there, but don't hoard cash. You'll get scrappy, learn how to do things on your own, and figure out ways to earn extra money if/when you need it. I'd rather you do that than go borrow $40k. If you do pull out money from the HELOC, have a plan to pay it back within 18 months. It's a short term debt instrument and needs to be treated that way.