Should I Invest for Cash Flow or Growth? An Investor’s Analysis

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The new year is upon us, so if you havenโ€™t taken the first steps to start investing, you should — and now is the time. I do understand that for a new investor, so many questions come to mind and getting answers that make sense can be a struggle. Here on BiggerPockets, the Forums, blogs and podcasts are all available to satisfy the never ending thirst for knowledge and feedback.

With this blog, I thought Iโ€™d answer a question I get asked repeatedly from people all over the world, it also just happens to be my favorite.

Q. Should I invest for cash flow or growth — and why?

While this is as simple and straightforward as a question can get, it has quite a complex answer. I will try to keep my opinion clear and concise.

A. Cash flow! Always cash flow.

Always, always, always base your investment decisions on the numbers in the deal. The real numbers, the numbers as they stand TODAY. Never base your return on a prediction and hope that a property will rise in value. Hoping is not a strategy. Many other investments work completely off of predictions of growth, and that is fine. There is nothing wrong with that, but in real estate you have the option to look at only the true, in-your-face return. That is what I go with every time.

When I purchase a property, I only have two major concerns: what is my return based on the cap rate (click here for simple rule I use to crunch numbers) and is it in a solid B class area should I need to exit the investment quickly? (Meaning, can I sell it to another investor or owner occupier?) If you get growth or see a realization of appreciation, then that is just a bonus and the cherry on top. ๐Ÿ™‚

Related: 5 Reasons Your Rental Property Is Not Cash Flowing

When I say base your decision on the numbers in the deal, this is what I mean…

Basing Your Investment Decisions on the Numbers

Property A

You purchase a property in Toledo, Ohio for $50,000 cash, no financing, completely renovated. Itโ€™s a nice 3 bed, 1.5 bath, 1,400 sqft 2-story single family home built in 1935. It is currently renting for $1,000 per month and is in a solid B class area. Total gross annual return is $12,000 — deduct 40% for taxes, insurance and property management, leaving you with $7,200 in net annual return (feel free to discount further for maintenance/vacancy).

This is what youโ€™re actually cash flowing. A rate of return at 14.4%! Those are real numbers, not predictions.

Property B

You purchase a property in Mesa, Arizona for $200,000 with financing involved at a low rate of 4%, hoping the value would increase to $300,000 in the next 5 years. Itโ€™s a nice 3 bed, 1.5 bath, 1,400 sqft 2-story single family home built in 1992. So far the property has not been completely renovated, but itโ€™s all up to date. It is currently renting for $1,500 per month and is in a solid B class area. Total gross annual return is $18,000 — deduct 40% for taxes, insurance and property management, leaving you with $10,800 in net annual return. A cap rate of 5.4%.

Now, you still have to service your debt at 4% so your true return is only 1.4%, and you haven’t even added any calculations for maintenance/vacancy. (Note: I am not bagging Arizona as only a “growth” market; it was just a recent deal that came across my desk so I decided to mention its numbers in this blog.)

In my experience, predicting that a property will appreciate a thirdย of its value in the next 5 years is unrealistic. Even a prediction of $50,000 cannot be justified.

I do understand the disbelief if youโ€™re looking at a 14% return and thinking I must be crazy, but here in Ohio, Michigan and other parts of the Midwest, this can be a real expectation for that type of cash flow. I would much rather collect a 14% return year after year with no debt service because of a low entry price than wait and hope for appreciation to make up my return when I sell. Most of the folks renting these cash cows were once homeowners in the same area so it’s also only a matter of time before they jump back into the market looking to buy again.

Related: How to Really Calculate Cash Flow on Your Next Rental Property

Just think about this for a moment: the average turnkey B class property in Toledo generates a 12-14% return. So just taking those numbers, you could purchase 10 properties for $500,000 through a self-directed IRA or tap into existing equity, for example, and generate a gross annual return of $70,000 and have the ability to think about more important ventures like where to take your next vacation or how much sooner could your retire. These amazing numbers are one of the main reasons why I am not on the beach in Sydney, Australia right now, but rather freezing my, well, you-know-what here in Ohio. ๐Ÿ™‚

Conclusion

I have always been a numbers person. I love working out the details of a property in my head. It is always necessary to have competent, trustworthy people on the ground to provide input, though. So if youโ€™re a new investor or maybe just want to change course and rethink your methods, broaden your dreams and goals, and find good people AND good numbers.

Iโ€™d love to hear your plans for 2015 and your experiences in the different markets.

Please leave your comments below.

About Author

Engelo Rumora

Engelo Rumora โ€œThe Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is Listโ€™n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

47 Comments

  1. Where can I get those free $50K packets of cash? The first example is only accurate if you stole the money or had previously been storing it in a cigar box. Every time I invest cash it has to come from somewhere where it has been already producing an income. Maybe you should re-run your first-example numbers using an 8% lost time-value-of-money as your debt-service and see how the property cash flows then.

    stephen
    ————-

    • Engelo Rumora

      Hi Stephen,

      Thanks for your comment.

      As expected we knew this blog post would most likely stir the pot as we have seen happen many times on the Bigger Pockets forum when touching on the Cashflow vs Growth topic. We still decided to submit it as I personally believe based on my experiences thus far that cashflow is the best way to go.

      Many investors in Australia for example and the East and West Coasts of the US make very decent incomes where cash savings of $50,000 – $100,000 per year are quite achievable. One of my best friends is a Neurologist and earns in excess of $400,000 per year.

      I for instance on the other hand slaved away on dirty construction sites for 4 years before I saved $40,000 cash to buy my first property. I quickly had to adjust my strategy and now flip houses for lump sum profits and when a surplus is available I buy these cash-cows all day everyday.

      Even with your scenario of a further 8% deduction, the numbers still go in favor of the higher net cap property.

      Thanks and have a great day.

      • Just to be clear: when you pay cash you are not buying “without financing”. What you are doing is buying by means of financing the purchase yourself. And because you cannot have the same cash invested passively if you also want to invest it in RE – even your own money costs you something.

        And also: I agree with your methods and an not trying to argue or “be right” as I write these discussions.

        Let’s do a re-do:

        You purchase a property in Toledo, Ohio for $50,000 cash, no external financing – rather you remove the money from your stock market portfolio – and so give up the 8% return on it from that source. The property is completely renovated. Itโ€™s a nice 3 bed, 1.5 bath, 1,400 sqft 2-story single family home built in 1935. It is currently renting for $1,000 per month and is in a solid B class area. Total gross annual return is $12,000. – deduct 40% for taxes, insurance and property management, leaving you with $7,200 in net annual return. The 30 year loan you have made to yourself costs you about $4400. per year in lost income on the previously-invested-elsewhere money for an actual net return of $2800. (feel free to discount further for maintenance / vacancy).

        This is what youโ€™re actually cash flowing. A rate of return at 5.6%

        • Engelo Rumora

          Hi Stephen,

          Thanks for your comment.

          I very much appreciate your statement here
          “And also: I agree with your methods and an not trying to argue or โ€œbe rightโ€ as I write these discussions.”

          I never get into keyboard banter and prefer showing my intensity in person haha.

          I get what your saying and agree. But this would be the case with any investment. The investor would have to vary his options and see where he gets the best return.

          The 8% opportunity cost could also be attached to the down payment needed for the Arizona property also for example. Except this deal is much riskier IMO due to the leverage and lower return.

          At the end of the day something, somewhere has to give.

          I did stocks also and decided that I prefer being the “CEO and “Board of Directors” for every property I buy. So if I loose, I have only myself to blame hehe

          Thanks

        • Phil Fourie

          Stephen, I enjoyed your comments and thought I will jump in and ask a quick question. Where are you getting the 8% return from – the stock/share market? How did you determine the 8% growth on your investment …?

          Also, how reliable is the projected 8% return you referenced over a 12-month period?

  2. Logan A.

    Hi Engelo,

    Let’s say someone has $100k saved up, has decent income, and is currently renting. He lives in a good market for appreciation, say Southern California, and is not sure what his first move into real estate should be. He is seriously considering house hacking in a fourplex in his market since 1) it’s better than paying someone else rent every month and 2) although not as much as single-family homes, multifamilies in his area still do appreciate, and he can certainly leverage a lot of appreciation with a 3.5% down payment on say a $1,000,000 property. Would you urge this individual to rather than house hack, continue to pay rent and invest in out-of-state turnkey properties?

    • Engelo Rumora

      Hi Logan,

      Thanks for your comment.

      Yes is my answer.

      I went down the path of leverage when I first started. I had $1.4 million in debt and almost lost my a.. lol

      Other investors bought in better areas than myself in Sydney and have now doubled there money as the market has boomed.

      While man investors here in the US have lost everything due to leverage. I am firm believer in starting of slower and using cash. If you don’t have cash. Find a way to earn it.

      Build a strong portfolio of cashflowing properties that you can milk every month. IMO opinion $5,000 – $6,000 in passive per month is when the party starts and also when taking on some debt should be considered.

      I was a tenant myself until 3 months ago but owned quite a few SFH cash cows. So I wouldn’t be too worried about paying rent. I will most likely be selling the house i am in now for a $50,000 profit and go back to renting again hehe

      With most banks doing recourse loans now, the last thing you want is a sour investment and the bank knocking on your door for years to come.

      I hope my opinion has helped.

      Thanks and have a great day.

    • Engelo Rumora

      Hi Michael,

      Thanks for your comment.

      There are many different strategies that offer different figures.

      I personally don’t want to get out of bed if I can’t make at least 15%-20% in cashflow on my money.

      What Real Estate path are you looking at going down?

      Thanks

  3. brandon l.

    The message of buying based on the numbers in front of you at the time of purchase is a common message from very successful investors. The growth should be the icing on the cake if/when it happens.

    This is a valuable lesson that every beginner should write down.

    Thanks for sharing Engelo.

    • Engelo Rumora

      Hi Brandon,

      Thanks for your comment.

      Predictions and hoping a rise in price almost cost me at least 20 years of my life (How long it would have taken me to pay it all back haha)

      These days I like using cash and just focusing on the numbers in the deal.

      One of my mentors/business partners has built a multimillion business over the past 10 years with cash only and focusing solely on the numbers in each deal. I might get him to chime with some words of wisdom ๐Ÿ˜‰

      Thanks again and have a great day.

    • Engelo Rumora

      Hi Don,

      Thanks for your comment.

      Having a sound exit strategy is vital. I always think about the exit before purchasing even tho I want to hold forever. Life’s circumstances sometimes don’t allow this.

      Have a great weekend ๐Ÿ˜‰

  4. Amy A.

    In regards to the comments above, predicting growth in the stock market is the same as predicting appreciation in a real estate market. You simply can not know the future, so your opportunity cost is undetermined. For example, A year ago experts thought that oil would be at $95 per barrel today. Only God knows the future.
    With a cash flowing, leveraged rental property, your tenants are buying the building for you. If the value decreases it does not effect you unless you are forced to sell.
    Yes, there is the risk that rents could go down or expenses go up, but every investment has risk.

    • Engelo Rumora

      Hi Amy,

      Thanks for your comment.

      I believe Stephen was more referring to always adding opportunity costs when calculating ROI.

      I do this but always stick withing the asset class as its my area of expertise. For example should I buy 2 properties for $100,000 showing 20% net or 1 property for $100,000 showing 18% cap.

      The risk investors run of declining rents is very minimum IMO.

      I have never seen declining rents in any market in my 4 years of Real Estate investing.

      Thanks and have a great day.

  5. Ben Leybovich

    Engelo – nicely written, but a couple of points:

    Property, in my experience, just doesn’t operate on a 40% margin. Some of the expenses (not all, just some) that you did not include would be:

    Vacancy, turn-over, maintenance, CapEx escrow, loss to lease, administrative (evictions, etc.), credit loss, concessions, lease-up bonuses to the managers, etc.

    In the end, you are looking at 55%-60% expense ratio. Averaged over 5-7 years, don’t you think that 14% in Toledo Ohio on SFR is a bit aggressive?

    Ben

    • Engelo Rumora

      Hi Ben,

      Thanks for reading and commenting.

      With the deal in the blog being more of a turnkey example I would have to answer with not really.

      We tend to put our hand in our own pocket to cover quite a few of the expenses you mentioned.

      In houses PM only started for the sole benefit of our investors. No nickle and dime BS stuff. Soon to be full time maintenance guy to unclog toilets for example at no charge.

      B class properties with good tenants and great exit strategies is our brand so if we need to do an eviction, that would be our fault for not doing our job properly. We would cover all associated costs. I think you get my drift here ๐Ÿ™‚

      Its quite a different model to many out there mate.

      We don’t pump the numbers. To be honest, probably turned down working with 10+ investors over the last 3-4 months.

      We want to be known as the Ferrari, Rolex and Louis Vuitton of Real Estate hehe

      Thanks ๐Ÿ™‚

      ps. Still waiting to catch up for coffee?

      • Ben Leybovich

        Ok, I’ll bite ๐Ÿ™‚

        Sustainability is key – you are talking about a model. And it sounds fine and dandy. But can you sustain it for a decade…? CAP rate means nothing, Engelo – IRR is the game…

        Perhaps you can, in which case I’ll give you some money. But, I have my doubts in many ways, not the least of which is that I know Toledo and I know property. I’ll be watching, Engelo.

        In any case, I commend you on thinking big!

        PS: Any time on the coffee. Want neutral dirt, or you wanna come down to Lima?

        • Engelo Rumora

          Thanks Benny ๐Ÿ™‚

          I believe we can mate.

          The key is quality over quantity and not to get greedy. As mentioned we don’t pump the numbers just to make a profit. Yes, OCF is profitable but it could be much more profitable if we wanted it to be.

          It takes a lifetime to build a reputation and 5 min to loose one as the saying goes. I still Google my name everyday to see if any green eyed monsters are talking smack. Its tough for us Ben. You know what its like being tall, dark, European and successful haha, many haters looking to bring you down for no reason ๐Ÿ™‚

          I believe in keeping the biz small, boutique and exclusive. The trust and relationship that we have established with some investors is so big that I can access their accounts to wire funds for a purchase if need be.

          I guarantee them success and financial freedom mate, and you know what. If they loose, Ill cover all losses personally. More than happy to tie myself to the ship and go down with it. (God forbid that happening off course).

          Plus doing a ton of other personal deals. Just started a VC firm with one of my partners from Dayton. Rumora Construction is doing a JV also for much work. Bust, busy 2015.

          Dude,

          It would be a pleasure to meet you in Lima, a photo is a must tho, ok?

          What’s your email address?

          Grazie Mile

        • Ben Leybovich

          Engelo – there are no haters here. There’s no one trying to bring you down. My concern is that your model will collapse on you under its’ own weight. From everything I know, this is not a sustainable model; you don’t know it yet cause you haven’t been around long enough. That’s not a fault, but it is a reality. And when it hits you, by the time you realize what’s happened, it’s usually too late…

          Being a battering ram is not enough in this business – sometimes when the market says so, you have to be a butterfly…In fact, being a battering ram, with a tunnel vision on that which you know is often detrimental – it precludes us from seeing that which you don’t want to see.

          Listen to Serge. Listen to me. We are saying the same thing. IRR is key – underwrite to an honest projection of IRR going out 5-7 years! It’s people’s money…You are in the first inning and you can make crucial changes to your model.

          Email for coffee. I’d like to sit down with you. You got potential ๐Ÿ™‚
          [email protected]

        • Engelo Rumora

          Hey Benny,

          Your opinion and Serge’s are much appreciated and taken on board.

          I”ll shoot you an email a few days before I travel to Dayton and maybe we can catch up.

          Grazie Mile

        • Hi Engelo,

          You should really listen to Ben. IRR is key. IRR is the internal rate of return. It’s the only method that factors time into the equation. Cap rates, Gross rent multipliers, and cash-on-cash are all snapshots for a single year’s performance. If that’s all you consider going in, the model will fail.

          I would encourage you to take some of the CCIM courses, so you can get a better grasp on valuations. Even the intro course will give you a new perspective and ultimately much better investments.

          Best of luck to you.

  6. Sam D.

    Inspiring article, Engelo. Based on your example of a rental mentioned in the article, I tried to look up rental comps. in Toledo, OH and found the following:
    1) There are too many vacancies with rental units lying vacant in the market for considerable amount of time.
    2) The rent amount varies between $500 – 700 for a property with an average price of about $100K.
    3) The public schools are rated very poorly in Toledo area.

    With the above research that I have done, from my perspective, it looks very unrealistic to earn the kind of cash flow that you have mentioned in the example. Maybe I am wrong in my analysis and perhaps you can shed some light on the above 3 points. Also, where and how do we go about finding such properties (with +ve cash flow) ? Any tips will be very helpful. Thanks a lot.

    • Engelo Rumora

      Hi Sam,

      Thanks for your comment.

      I wouldn’t rely too much on the stats and demographics that you pick up online.

      Focus more on establishing trust and relationships with key people that live and breathe the market you’re looking at investing in. These folks will either make or break the investment.

      Feel free to check out this link to many blogs I have written about some of the questions you asked – https://www.biggerpockets.com/renewsblog/author/engelorumora/

      There are many turnkey companies in Ohio that can offer those figures on paper, The question is if they can hit and sustain them in real life ๐Ÿ™‚

      Thanks and I hope my comment helped.

  7. serge s.

    Good work Engelo. Sounds like your doing good stuff in Ohio. I understand your model very well and used to think the same way. Nearly 10 years in the business has taught me some lessons though:

    1. Your comparison of Mesa, AZ to Toledo, OH is not too accurate. I have many units in Mesa and have never and would never purchase a $200k property that rents for $1500. Now if that $200k property were worth $300k at time of purchase, I would much rather prefer that property.

    2. Generally, wealth in Real Estate is built through appreciation and rent increases over the long run. If you look at the people with large balance sheets in this game, its usually because they purchased quality long term property in growth markets. Its typically not the guy with the most Class C rentals.

    3. Cash flow by definition is unstable over the long run. I have properties that I purchased for $70k that rent for $1500. Fabulous 15%-20% return right? Nope – one year I may come close to that but in the next I’ll have a turnover and an HVAC repair and I’m breaking even or losing money. Having many units helps alleviate some of the fluctuations but even after all these years I cannot predict what my cash flow will be this year. In my class C rentals its much more unstable and in older homes I rarely turn a profit. So to assume a consistent 15% yearly return is not plausible in my experience no matter the upfront remodel. One bad tenant can undo the best remodel in months.

    4. Last point I will make – a true comparison of investments are made using IRR (Internal Rate of Return) and not a highly variable yearly estimated cap rate. If you apply IRR to a early 1900s Ohio home I think you will quickly see what I am talking about. Take into account the higher turnover, the $20k remodel that will need to be done before final resale and low to no appreciation and I will be very surprised if the IRR is anywhere close to double digits. IRR looks at the entire hold period and resale. Now compare that to a home purchased with leverage in a high growth market with equity at time of purchase. Cash flow should be more stable as the home is newer and tenant more qualified. Add just historical appreciation in that growth market, higher depreciation due to higher purchase price and principle pay down and it becomes quite obvious that there just is no comparison.

    Everyone wants that yearly “cap rate.” Unfortunately they go to Ohio to get it and significantly retard their future. The name of the game is sustainable balance sheet growth. That’s the only real way to build wealth in RE. Unfortunately I don’t think that is attainable with 1930s homes in population declining Ohio. Maybe for the guy like you on the ground cherry picking the best deals but I don’t see it for the out of state investor. I would bet the turnkey out of state investor is adding very little to nothing to his balance sheet yearly and depending on unsustainable cash flow. Not the recipe to wealth.

  8. Jeff S.

    Hi Engelo, I appreciate your style and work ethic. There is nothing that will replace it. Hate to see people steal your thunder.

    However, saying you haven’t seen something in the 4 years you have been investing sounds funny to someone like me who has lived and died in some serious recessions since 1979 or so. We currently have the tightest rental market around but it wasn’t that long ago that I had vacancies and had to reduce rents. Were talking places vacant with rents that are competitive sitting vacant for months. Rent reduction happens just as dropping prices do.

    I do think your idea of paying cash is great though. You are young and can take your time. Stay on top of your business and keep your pants on when the tide goes out.

    Best wishes this new year.

    • Engelo Rumora

      Hi Jeff,

      Thanks for your comment and kind words.

      I see myself as a battering ram, head first into any wall until I get through haha

      My approach is raw but always honest and genuine.

      I am obviously green a growing and have not yet seen rents dropping as fast as you mention. I also believe in having great PM that can make it happen no matter what the market is doing.

      Thanks for the advice on keeping my pants on. I just recently took them off in a video when dared by one of my Aussie mates ๐Ÿ˜‰

      Check it out – https://www.youtube.com/watch?v=J_LYRiie3MA&list=UUyFPrO74SdaNnhFHXlvzl6g

      haha

      Thanks again and have a great day ๐Ÿ™‚

  9. Bryan Blankenship

    Hello all,

    Lots of good opinions in this thread!

    I am Engelo Rumora’s JV partner on several different businesses that he refers to above.

    While I certainly respect everyone’s opinions, I’m glad I didn’t heed any of this advice early in my career. Otherwise I would be broke instead of retired. If my only option was to play the RE lottery in California or Florida and pray the market goes up, I’d have been destitute by now. “Oh I hope it goes up so we can cash out some day!!” NO THANKS. That’s what homeowners say, not professional investors. Some folks can time hot markets like CA well and do extremely well and that’s awesome. MOST cannot.

    Not a single decision I have ever made has been based on hoping a market appreciates, and yet, my portfolio can weather any storm in a recession as it did just fine. This is why we focus on REO and retail.

    When you have 4 Janitors making $14/hr buying a $2.2MM home in CA during the bubble that then sells for $780K 4 years later, you have a problem. We don’t have those imaginary numbers in Ohio. Our buildings are valued correctly due to being priced near replacement value. In a SHTF scenario, that’s all ANY building is ever worth no matter the location. I could provide thousands of these doomsday scenarios as we have performed thousands of REO rehabs for 22 different clients in 5 states. We work in FL in 5 counties on homes every day that last sold for $475K and are now still only $225K. How long are you willing to wait for that $475K to come back around if you bought the top? How does your cashflow work out for you if you paid $475K and you are renting it for $2200/mo now? Not so hot. I know folks in this exact scenario.

    If I wanted some excitement like that in my life then I would short CL oil futures months ago, or go heavy long YM futures during the Santa Claus rally…oh wait, I did that too ๐Ÿ™‚

    Boom/Bust cycles are a fact of life, and we will see them again. Other than speculation, your tiny 1200sqft junk box in CA isn’t worth $1.3MM no matter where it’s located. So when the market crashes again, good luck with that. Please save the supply vs demand discussions of OH vs CA as I’m well aware of them too.

    Ohio has never seen the boom, thus we’ve never seen the bust. Steady, boring, stable, mundane…Ohio! Kentucky! Indiana! Boring returns, I know.

    I’ve sold retail flip houses all through the boom and bust and my pricing hasn’t changed by more than 5-7% ever even in the worst of times. There were certainly fewer buyers, but our housing prices were still reasonable and thus folks could still buy if they were well qualified. All that changed was the janitor scenario above. You could no longer do a no doc loan and buy a $300K house with your $15/hr income.

    In Ohio we actually have to know how to flip and invest. We don’t get to make bad decisions and be saved by the magical capital appreciation rates some states experience. We don’t predict rehabs at $50K, screw up like an amateur and turn them into $120K, and still somehow get our butts saved because the comps went up $100K during our 2 month rehab. We actually have to work with solid, realistic numbers from day one and know what we are doing.

    So instead of relying on the magical RE lottery, I have been able to retire since age 26. I choose to continue working in RE (among 10 other ventures) on a part time basis as RE is just too much fun for me. Making $52K on Christmas day by sending 2 emails isn’t a bad life, so I choose to still keep active for now.

    I’ll be the first to admit; Ohio won’t EVER achieve 20% capital appreciation in a year. But achieving and exceeding the CAP rates Engelo posts above? Easy. I can EASILY exceed those in the real world all day every day of the week. Engelo does so daily as well. I know his experience is less than mine in longevity, but he’s been doing it for many investors on dozens and dozens of properties and could have already taken on 5X what he has.

    I know of one group who owns nearly 40 Ohio Cashflow properties and is very happy with their purchase. He only chooses to work as a small boutique firm and keep a small client list, and pick the RIGHT clients. I have seen him personally turn down cash buyers on 3 homes he has in inventory now just because they were risking family savings and had no business investing at this point.

    As for us, we can also force appreciation via increasing rents in our commercial and multi-family holdings, and as a licensed GC on top of a dozen other things, we can keep our costs lower than anyone else as we buy all materials and labor wholesale.

    I see some mention of rents going down. Where? Never has happened to me in over 10 years. Only up, up, up. Even some of my oldest Section 8 rentals from long ago do nothing but go up. Actually, despite popular belief, some of my best long term tenants have been Sec8. I have several in place from 8-10 years ago that will not move, their $880 gets paid monthly on a house that costs $25K back then, and they call once a year max for a $100-250 repair. Hard to argue that the building has now been paid off 3X over in rents alone. I can still go in today, do a $15-20K retail rehab and list for $89.9K and sell easily. So we buy under market and thus our profits are built in day one whether we rent or sell for the next 1 or 20 years.

    So as Engelo originally said – if you can invest in cashflow with sound, solid numbers, then do so. If you happen to get free capital appreciation along the way, consider it an awesome bonus!

    I think it’s awesome you can hit a home run and make $3MM in one deal! No envy there at all, nothing but huge respect! But I don’t know the CA market like I know the OH markets, so I can only dominate in what I know. And I know of many many local investors with hundreds of rentals, commercial, multis, etc that cash flow numbers that are obscene. 150 units, 250, 600 for a guy in Cleveland, 2600 for a guy that invests in 6 local states, and on and on.

    You have to keep in mind, our local pricing is cheaper as the cost of living is cheaper. So I can roof most rental homes for under $4K with tearoff. I can replace the HWH for $325. I can replace a furnace for $480 plus labor, or AC for the same cost. These costs certainly occur, but they all get factored in and planned for. Once they are done, they don’t have to be revisited for 20 years or more typically (roof, hvac, windows, etc).

    As a quick example to wrap this up, here are a few of my very recent deals I’ve been involved in or know of partners/friends doing:

    21,000sqft warehouse with 6,000sqft office space. B+ grade. Prime I-75 Interstate access. $309K PP, Small rehab, rented NNN for $6800/mo. Value now, over $700K

    167 unit apartment complex. B area. Last loan? $5.6MM. PP $1.8MM, $700K rehab, now at 97% occupancy and average rents are $640/mo between the 1/2/3 bedroom units and townhomes. A gross income of over $1.2MM per year. And expenses are NOT half of that figure, so a net of over $50K/mo for one easy deal. Sadly I lost this bid by 6 hours but the buyer did exactly what I would have done and it’s now an amazing property. I would have actually saved at least $200K on rehab and the numbers would be even better. Whatta ya know, millions in free capital appreciation again as the building is worth $5MM again after being fully stabilized.

    4 unit doctors office. 6000sqft total. $95K PP, $35K rehab, gross rents $4300/mo.

    4200sqft golf course home that would easily rent for $3200/mo so the CAP would be great. Instead PP $150K, full remodel for $52K, going on the market this week for $319K and will sell within 10 days max. Very high end area with schools all rated 10/10.

    A barely touched flip, PP $90K, minor $10K cleanup, sold $155K cash (no fees).

    A 12 unit PP $50K, $90K in work, Rents for $575 per unit/mo.

    A nice rehabbed C+ duplex for $42K, rents for $650 per half or $1300/mo with everything new and thus no major costs anytime soon.

    Suffice to say, I am always learning and always open to new things. So when I find a better market or a better method/opportunity, I’ll jump on it! If you have that opportunity for me at lower entry costs than I post above, I’m an 8 figure investor ready to jump today.

    Til then, Engelo and I will be doing our thing in Ohio and already have been for many years ๐Ÿ™‚

    As much as I’d like to reply and debate 20X, my time is best spent focusing on my business and doing what I already do so no disrespect to anyone for not engaging in year long debates. It’s simply not worth my time to try to convince folks who are of a different mindset, nor would anyone change my mind on my investing principles.

    But I do respect every single opinion, every single investor, and I hope you all do extremely well in the future!

    Best of luck to everyone in their cashflow vs capital appreciation decisions!

      • Engelo Rumora

        Hi Don,

        Thanks for your comment.

        It sure has been a pleasure working with Bryan. My biggest efforts are talking him out of leaving for the Bahamas one day, Spain the next and than Ireland the 3rd haha

        Also, its always worth listening to everyone’s opinion. At the end of the day, they all mold your decision for the better.

        Thanks and have a great day.

  10. Ben Leybovich

    Check out what happened to our friend Brandon Turner, Engelo:

    https://www.biggerpockets.com/forums/84/topics/165938-one-of-my-units-got-destroyed-it-last-night-in-a-flood-what-do-i-do-now

    Has this happened to you yet? What do you think it did to Waldo’s cash flow this year, or for the next 2 years…!?

    This is exactly what Serge and I are talking about – cash flow does mean something, but only in context. Cap Rate means nothing – IRR is the game…

    When are you buying me that coffee?

    • Engelo Rumora

      Hi Julia,

      Thanks for your comment.

      Bryan is my butterfly as Benny puts it ๐Ÿ˜‰

      Its a blessing being surrounded by smarter and more successful people than myself. For some reason these folks tend to like me haha

      Have a great day.

  11. One thing you guys always forget to include is the debt pay down aspect of the deal.

    You can collect $1500, spend $1500, and still build wealth. The last payment you make at the end of your mortgage life will be almost all principal and little interest.

    That then leaves you with a free and clear 200k asset as opposed to a 50k asset.

    I’m not saying you should invest to break even in cash flow. I’m simply saying that people always forget about this gain. I had a couple that was underwater want to sell their rental because they were making about $25-50 per month cash flow. However they never realized until I pointed it out that their unpaid principal balance was dropping by $250 per month at that point.

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