Would You Buy for Cashflow Only?

[Terry Dunlap]

The area: Sandusky, OH 44870.

The local economy: tied to the seasonal fluctuations of Cedar Point, an amusement park. Most major blue-collar jobs have left leaving a primarily services-based economy around Cedar Point tourists.

Background: I grew up there (live in Maryland now) and have seen my childhood neighborhood get taken over by the Firelands Regional Medical Center and have seen the surrounding area properties fall into disrepair. I have a team in place: agent, prop mgmt company, handyman, lawyer, et al. 

When I buy, I pay cash. I'm fortunate enough to own a couple tech companies that permit me that option. My goal is to find income producing assets for retirement. My two options today are between triple tax-free bond funds from T Rowe Price or incoming producing properties.

I have found a number of cash flowing properties that beat the tax-free return from the bond funds. My CPA created a spreadsheet for me that will calculate the return on these properties by taking into account my current tax rate (the highest) and the tax savings from the depreciation on these properties. When comparing the two returns, I want as close to apples vs apples as possible.

In light of all that, would anyone invest in cash flowing rentals when the potential appreciation is little to non-existent given the goal is cashflow only?

[Joe Villeneuve]

Yes, but you still have to analyze that deal.  It's all about the deal you make, and how much you are actually paying for the property.

If you're paying all cash, you won't start making a profit until you recover all of it...in your case, from the cash flow.  If you buy a property all cash for $150k, and the cash flow (no loan) is $10k/year, it will take you 15 years (all going perfect) to recover your money spent...and then you start profiting.  Until then, all you're doing is getting your own money back in small (very small) pieces.

If you put 20% down instead, subtracting the mortgage payments, you could be getting $7k/year in cash flow.  That means you would recover all your cash, and start profiting, in year 5.  By the time you start profiting the all cash deal 10 years after), you would have profited $35k already...on just the one house.

Now the fun begins.  Take that same $150k, and put a down payment on 5 houses.  You end up cash flowing $35k/yr, instead of only $10k...spending the same money...and, all 5 houses recover their DP in 4 years.  So, by the time your all cash deal starts making a profit (11 years worth), you would have already profited around $385k.

Can that other investment do that?