The Cash Flow Trap

[Matthew Irish-Jones]

If you are just starting out I suggest you don't fall into the cash flow trap. 

What is the cash flow trap?  It starts with a picture of a guy with abs on a beach sipping a light beer next to a beautiful woman.  Then a caption about how he is living off of "cash flow."  It ends with you borrowing money from your parents. 

How does this happen? You get sucked into a dream that you can take $100,000 and keep rolling it over until you have $200,000 of passive income per year and you are on the beach.  

How to avoid all of this? 

1. Remove the dream of retiring on cash flow from your mind -   Real Estate investing takes lots of hard work, if you don't do the work, you are paying contractors, property managers and handymen do do the work, and they are taking a piece of your cash flow for their time.  Its a long term wealth building strategy, not a short term job replacement strategy. 

2. Value Real Estate in the following order.  a) Location b) Asset Condition c) Returns.  Most new investors disregard the most important aspect of Real Estate... location and start walking through places that look like S*it, smell like SH*t, and will most likely have returns like Sh*t, but their spreadsheet says otherwise.   If the location is crap, and the asset condition is crap, your bill is coming due eventually.  When it does, you can burn your spreadsheet. 

3. Chase consistent and reliable returns, not HIGH returns.  High returns = high risk. Life is short and your life will be shorter chasing sky high returns.  They exist, but not for brand new investors.   You are going to start at the bottom.  When you start at the bottom a 6% return for a nice double with a new roof, and updated mechanics is a win.  As rents go up your nice, conservative double is going to be a 7,8,9 and eventually some day a 10% return.   

4. Seriously consider the risk  -  Risk can be geographic.  Risk can be based on the asset itself.  Does it have lead paint on the windows, asbestos wrapped radiator?  These things increase risk, and if you don't know how to quantify that, you will take on too much risk for too little of a reward.  There is also a lot of risk in rehabs, especially if it is your first one.  Do you understand permits, asbestos tests, lead tests, building inspections, sub contractor insurance, GC insurance, hold harmless agreements, and the rest?  If not, you are once again not properly accounting for the risk involved.  

If I could do it all over again, I would have bought much better properties in much better condition, in much better areas from the start.   

[Carlos M.]

OMG!!Finally some truth!! I am so over people telling me I'm doing it all wrong because I still work so hard on my rentals after 15 years. 

We purchased 200 year old value add 4-11 unit properties. ( Our more recent stuff is much larger) Not that that was our niche , but it was all we could afford. I refused to bring in partners or borrow from friends and family to buy nicer newer properties. That was the biggest blessing of all!! We accidentally stumbled into the BRRRR method because of all the sweat equity we did for pennies on the dollar.

Years 1-5 were very slow. Just purchased a few properties and invested ALL of the money back into the properties. My wifey and I did all the work. By all I mean every turn over, mowed every lawn, managed every property.  This stage was easy. 

Years 6-10 were a lot more difficult as the unit count increased. Our commitment to sweat equity caused us to  miss out on most weekends and even a few holidays. We still did not spend ANY of the profits. It was all about re-investing. 

Years 11-15 ( current). I quit my 6 figure w-2, my wifey will be done with hers by the end of this month. We live off of the rental income. ( NOTICE I DID NOT SAY PASSIVE) We finally pay someone to mow, we do hire help with renovations and we are training a girl to help manage as well. After 14 years of grinding and sacrifice, Our life finally  looks a lot like the picture you painted. Except my abs aren't as pronounced as "that guy", I don't drink light beers, we are at the bay not the beach,  and there is NOTHING passive about it. How ever, Life is amazing and I would do it all over again! It is so rewarding to to see what my wife and I have accomplished by simply living below our means, a **** ton of hard work and tenacity. 

Years 16-20 should be as passive as we want it to be. I plan on taking a few month long vacations a year but grinding on our portfolio otherwise. What can I say, I love hard work, and It's hard to turn your back on what got us here in the first place.