If you’re relatively young or not yet 50, earning more than enough income at work, and living the lifestyle you more or less prefer, cash flow ain’t yer problem. Think about it from a practical viewpoint.
You’re paying taxes, saving money, going on vacations, and educating your kids. You have retirement plans at work, (please stop it) and have some other capital you’d like to invest in real estate. You’ve always been told cash flow is the way to go, so that’s what you set your sights on. That’s also why thousands of couples reach retirement with far less retirement income than was easily within their grasp when they started 15-30 years earlier. How much is far less you ask? If we’re talkin’ about 30 years of chasing cash flow over capital growth it could easily mean a 5-figure reduction in monthly income at retirement. Really.
Here’s the deal
All cash flow is, is a yield on a pile of cash or equity. The bigger the pile, the bigger the cash flow. The idea in the early years is to build the original pile into multiple BIG piles. The yield (interest rate as an example) is gonna be roughly the same for a million dollar pile as it is for the 5 million dollar pile. The difference is the amount of dollars the yield generates. It’s the same X% yield in both scenarios — only the size of the piles of cash are different. The central theme of retirement is for income, especially after tax income, to be as large as possible. To the extent you opt for cash flow over capital growth in the years preceding your actual, you know, need for cash flow, you are purposefully guaranteeing your retirement income will be far less than it easily could’ve been.
Debating this principle is akin to debating gravity.
Editor’s UPDATE 12/22/09: Jeff wanted to explore this topic deeper, and as such, has posted the following: Worshipping At the Altar of Cash Flow – II.
Next — how do you plan for sufficient tax shelter after you’ve successfully arrived at retirement with all that income?
Photo: Vinay Deep
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26 Comments
Could you possibly give a real world example to help explain what you’re saying here? I’m not 100% sure I follow.
You bet, Linda.
.-= BawldGuy Talking´s last blog ..Munchin’ The Numbers – Why Is the Holiday Trading More Intense This Year? =-.
Still no example concerning cash flow in the other post listed. Cash flow (on one property) over time will always beat any one time profit make from buying and selling of same property. So what are you really saying. Spell it out in the next blog please.
What do you mean by this: “You have retirement plans at work, (please stop it)”?
I would say your strategy is rock solid, if and only if, your employment is rock solid.
If not, it is going to be a rough road paying the bills on a profolio of negative or break-even properties, a few vacancies could wipe out all your assets very quickly.
How would you like to be holding 10 loser properties, in some area in equity free fall?
It would not be such a problem if they had cash-flow as you could hang on for the rebound.
I am just conservative, figuring if it doesn’t make money it is not an investment, but speculation.
I think you read my post incorrectly, all of my properties are cash cows returning more then $200 per unit after all expenses including the mortgage.
My employment is also assured as I am the boss, and a mechanical contractor for near 30 years.
I cannot believe I just replied to my own post, I am having a no brain day.
Hey Mark — I’ll post on that topic soon. Thanks for asking.
.-= BawldGuy Talking´s last blog ..Munchin’ The Numbers – Why Is the Holiday Trading More Intense This Year? =-.
Jim — Yes sir!
.-= BawldGuy Talking´s last blog ..Munchin’ The Numbers – Why Is the Holiday Trading More Intense This Year? =-.
Dennis — Your points are excellent. I don’t advocate having 10 break even props, and with incredibly rare exception, never to advise anyone to purposefully acquire negative cash flowing property.
We disagree apparently in degree.
.-= BawldGuy Talking´s last blog ..Munchin’ The Numbers – Why Is the Holiday Trading More Intense This Year? =-.
I thought I followed what was going on here but after reading the comments, I must say, I’m not sure I understand either.
Could you consider your next blog to be written in terms that a person with a brain of a 6 yr old(that would be) could follow a little easier.
Nick — I suggest it’s not your brain that’s the problem, but me having a poor writing day, and writing like a six year old. 🙂 The follow up post will make my points crystal clear.
.-= BawldGuy Talking´s last blog ..Munchin’ The Numbers – Why Is the Holiday Trading More Intense This Year? =-.
In today’s market; Cash Flow and preservation of capital(future loss appreciation), should be your major objective and concern. If it doesn’t cash flow-It isn’t worth buying!!!
.-= matt mathews´s last blog ..A LOOMING DOUBLE BUBBLE! =-.
Matt — I couldn’t agree more. You’re preachin’ to the choir.
.-= Jeff Brown´s last blog ..Munchin’ The Numbers – Why Is the Holiday Trading More Intense This Year? =-.
Another way of using positive cash flow is treating cash flow as an asset to yield or create bigger streams of cash. One effective way to do that is to use the power of compound interest .
Other ways are to invest in bonds and mutual funds that pay a higher yield than your regular savings account. However, one also has to realize the higher the yield, the riskier the investment.
I follow that a capital growth strategy will yield higher returns than a cash flow strategy because the capital growth returns are compounded and you’re not taking money out. But what if instead of spending the cash flow returns, you reinvested them into more properties? Would a capital growth strategy still get you higher returns then? Also, what would be the tax implications?
Thanks for your time.
Hey Matthew — You’ve put forth the most asked question on this subject. The short answer is, no, buying more solid cash flow props doesn’t work better.
First of all, the cheap, high cap rate/high cash flow props you’d be buying sport inferior locations. They wouldn’t have such high cap rates and cash flows if we’d put our mothers in them to live alone. The point being that the sellers were forced to make them that (faux) attractive to find a buyer.
Secondly, when executed correctly, the capital growth strategy annihilates the cash flow approach in the long run. It wins not only in end game cash flow, but in ultimate net worth too. I’d love to talk with you about this.
Hi Jeff,
Thanks for your insight. I would like to talk to you about this and other real estate related things some time. Is contacting you through your website the best way?
It is — you’ll find my phone number at the bottom all all posts on my own site authored by me. Look forward to talking with you.
Still no example concerning cash flow in the other post listed. … But interesting comments also!
Thx, will swing by again!
Lisa — I speak on concepts, principles, and strategies. I deal in examples in my practice. You and I both know examples are everywhere. You’ve apparently read the follow-up post, but if not, here’s the link.
Worshipping At the Altar of Cash Flow – II
Sorry Lisa — here’s the link for real.
https://www.biggerpockets.com/renewsblog/2009/12/22/worshipping-altar-cash-flow-ii/
Thanks for the additional comments Jeff, knowledge right here!
Dave
Thanks Jeff, saw the update now!
Sweet, Lisa.
Thanks for the help guys.
I’ll definitely be returning to review more comments on this site.
Some really useful information on here, especially for those of you interested in Finance and Investment.