Cash is NOT King... in Real Estate Investing

[Matthew Irish-Jones]

I have two major issues with Bigger Pockets.  Before I get to the issues I want to point out Bigger Pockets is a great website for networking, free information, investing strategies and many other things.  Overall I think BP is a very well run company and one of my favorite platforms.

#1 - Cash Flow Investing - is for novice investors.  Sorry I know this one is going to be painful for many rookie investors just getting started who want to live on the beach with their mail order cash, but this is not they way investing works.  The real wealth is in equity.  Equity and debt paydown are king.  I have been investing for 15 years, own over 60 units, manage 700, and have data and analytics on everything.  The data is clear:  Stable, B class investing of quality assets, professionally managed makes investors rich through equity. 

High risk, C class or lower investments that chase cash flow makes people poor.  Even if everything goes great on your C class investment, the cash flow generated is normally not enough to make you rich.   Most people making good money on cash flow are self managing and are not really cash flowing, they are just saving on maintenance cost due to not having to pay a market rate.  

I have made FAR more money in equity over time, with great properties, than I ever have from cash flow on my entire portfolio.  Play the long game, buy good properties with low cash returns and stable tenancy.

#2 - BRRRR is a Good Strategy -  The BRRR is a great strategy, but not for you. The BRRR is one of the most complex investing strategies that exist. It takes market knowledge, construction knowledge, proper analysis, financial relationships, rent projections, property management knowledge, and a whole list of other things that are only gained through experience. You can try to outsource that experience to general contractors, property managers, agents, and others (I highly suggest you do), but all of those services will eat into the last "R" of repeat. You will not get to the repeat part, because you have to pay and pay well to get highly trained professionals on your side.

If you are a first time BRRR investor I suggest you outsource to trusted professionals and temper your expectations of infinite returns. If you get a property that has all new mechanicals, fully updated units, get it all done in a timely fashion, and still leave 25% in the deal you are WAY ahead of the game, due to the fact that you have front loaded risk and updated your mechanicals. That will save you big dollars in the future.

When I tell new investors that they should plan to leave 15-25% in the deal they look at me like I have a third eye and normally find another agent. However, the joke is on them, I am a BRRRR investor, have over 30 employees and do all of the work in house on my investments. We use my construction team and my property management team, and I DO NOT charge myself agency fee's. I still normally leave 15-25% in the deal. I am happy to do so because I have fully updated units and have beat the market by a few % points if I leave less than 25% in.

The path to wealth is not Cash... in this business cash is not King... Equity is.  

As a new investor focus on Equity growth over time and you will be rich.  Chase cash flow so that you can get infinite returns and you will be poor. 

[Don Konipol]

All posts have a common theme - they’re based on the posters PERSONAL experience, beliefs, and real estate education/knowledge.  Nothing wrong with that - it kinda “plays it safe”.  BUT, to accelerate wealth building the investor needs to be open to strategies, tactics, investment types OUTSIDE their “comfort zone”.  For example, there’s a lot of “you can’t get cash flow, you can get equity buildup” in this thread.  And, if you are buying a property that is already in good condition, or is fairly easily to rehab, you’re probably right.  However, there are numerous ways to CREATE investments that have 15% or more cash flow AFTER repairs and allowance for cap ex.  The key is CREATE.  If you’re relatively passive, then you won’t be able to take advantage of these situations/opportunities. 

Here’s a short and incomplete list of ways I’ve either utilized myself or financed investors who utilized to create a high cash flow investment. 

1. Bought an auto repair shop for 30% of value because of environmental problem.  Solved the problem for $2,300 and had an annual 22% cash return on my investment (purchased for cash).

2. Bought the first lien note on a auto service repair facility for 30% discount, did a deed in lieu with the tenant/owner/borrower, and a long term lease back providing a 20% annual return 3N

3. Financed the purchase of a 12 unit motel in an area with an oil refinery; the buyer/investor rehabbed and turned it into furnished month to month rentals.  His financial statements showed a 40% annual cash on cash return.

4. Purchased a 2 building warehouse/service center utilizing a 11% hard money loan to gap over the down payment.  Sold the back building which was NOT part of the security for the loan, paid off the 11% mortgage and refinanced with a 20 year fixed 4% mortgage, paying down about $400k.  Used the rest of the funds to turn part of the front building into retail store fronts which leased for 150% more on a per square foot basis. Again 20% annual return.

5. Financed an investor who purchased an old, but rehabbed 148 unit holiday Inn which consisted of 2 separate buildings.  He turned one into month to month furnished housing, and the other building into low end motel.  He sold the motel building and was left with a property yielding him a 18% annual return over the next 8 years.