Originally posted by "Vincent":
The one thing that I believe is missing in this thread is the fact that any and every property can cash flow despite what the price of real estate is and despite what the current rental rates are. I have seen Investors make this mistake time and time again because of the necessity and mental fixation on cash flow. How does this work? Simple, you put more money (cash) down. With enough cash down, the property will always cash flow. Does that make it a solid investment because it cash flows? Absolutely not! What isn't being accounted for is the opportunity cost on the money being invested to put a property in a cash flowing position. This requires a simple Internal Rate of Return calculation based on each investment opportunity. Example, I have a friend who put down $1.5 million in cash with a leveraged balance of another $2.2 million on a "cash flowing" property. True, with that amount down, it cash flowed $30k per month. The challenge came when necessary repairs drained his remaining liquidity and he was forced to survive on the $30k per month. He is now wishing that he didn't have his nest egg buried in this "cash flowing" opportunity and is looking to cash out. Anyone who has been in business for a day knows that illiquidity can kill you and a few mishaps can easily drain the $30k or kill it permanently.
While I certainly agree for the average and professional Investor that cash flow is king, it is the cost of the cash flow that must be calculated to ensure that the investment opportunity is truly an opportunity to profit and not an opportunity to lose everything.
Vincent,
Your friend is making 24% on his $1.5M. He's beating inflation. Add depreciation, appreciation, tax strategies, etc. into the mix and I'm not sure what he's complaining about.
He could have put less money down to have more in reserve. Since there's still room for the property to pay for itself.
If I understand your post correctly your friend's reserves are being eaten up by the cost of repairs, correct? If so then this has nothing to do with cash flow, but more to do with not buying right. Lack of due diligence perhaps?
In fact I would like to thank you for posting this example as this perfectly shows CASHFLOW IS KING. I'm sure a lot of newbies and experienced investors would be happy earning $30K a month in passive income. Your example also highlights that equity/appreciation does not pay the bills since that is exactly your friend's dilemma right now.
I'm not sure what the details are regarding the repairs as it is hard to imagine $30K a month in cash flow is still taking money away from your friend's pocket.
Cash(flow) IS KING!
