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Updated over 17 years ago, 03/28/2007

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20
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Cash Flow Sucks!!

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Posted

Hey everyone!

I've been doing my due diligence before I start investing.

It seems as though most people want to find properties which main criteria being that the property has positive cash flow.

One book I've been reading makes the claim that "Cash Flow Sucks!" mainly the point being that positive cash flow is a very slow way to building wealth through REI.

Basically the concept is that if you have a property that is generating... lets say 500 dollars a month, after all expenses.

That’s 6,000 dollars a year of extra income for you. Now the problem is that, this money is considered taxable by the IRS. Also, in areas that have a high probability of positive cash flow, you often sacrifice being in a highly appreciating market.

So, if you are only focused on positive cash flow, you will be paying the IRS a good chunk of your money, and you will be short changing yourself on appreciation.

According to this book, appreciation is the best vehicle for wealth building in REI. This is mainly due to the use of leverage.

Let's say that you have a 500,000 dollar property and you put down 100,000 for a 5:1 LTV.

If that property appreciates 5% then you have 25,000 dollars of new equity, which is a 25% return on your investment of 100,000. And this money is not taxable, and you can also later do a 1031 tax deferred exchange and eliminate your capital gains on that specific property.

Also, this effect is compounded if you want to take you new equity and cash out refinance and use that as a down payment on a new property, and simply keep that cycle going.

So instead of getting a few hundred dollars a month, you can get a 25% or greater return by using leverage and then utilize your new equity to make down payments on new properties.

As long as you can make these properties break even, or even maybe a little negative in cash flow, as long as you can float it, you have a higher likelihood of making much more money over time than simply focusing on positive cash flow.

What's everyone's take on this perspective?

Thanks!
-Sean

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