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. 

[Chris Seveney]

@Matthew Irish-Jones

As someone who has bought A class through C class rentals I would agree. The lower value / class rentals while are more challenging to manage also rarely bring out the cash flow you thought

In my B and A rentals I have had very little issues or challenges. Cash flow was not huge initially but I also did not need it to be. I was going to own them long term which has paid off greatly as I now sit on a ton of equity and they cash flow since rents have increased greater than taxes / insurance and costs

[Jay Hinrichs]

Quote from @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. 

when I first got on BP I would share the same opinion and then get shouted down by the "HEY i AM A CASH FLOW INVESTOR APPRECIATION IS JUST A BONUS CROWD"  OR THE " YOU CANNOT EAT EQUITY CROWD"

[Bruce Woodruff]

@Matthew Irish-Jones This is so true. Should be a sticky at the top of every page....

[Villy Ellinger]

@Matthew Irish-Jones I agree with you 100%. I mean I cash-flow on my investments, but I'm totally aware that's because I manage them and that is my job. I also BRRRR and that is also my job. I'm a real estate professional and sell real estate too. So when I get clients that tell me that they want to have passive income but also want to buy an STR that cash-flows right away or to BRRR while not doing anything themselves, I just pour myself a drink, lol. So, Amen, brother :-)!

[Stuart Udis]

@Matthew Irish-Jones I thought I had to reach precisely 30 sub $100K houses that meet the 1% rule which will equate to $250 in consistent cash flow each month per house. I figured I could squeeze out an addition $100 monthly per house by adding a bunch of junk fees into the fine print of my leases which my tenants wouldn't pick up on and could take  from their deposits. Perhaps even lease my tenants the scratch and dent washer and dryer I purchased because that would be even more cash flow.  As soon as I reach my goal of 30 doors I planned to live off my cash flow for the rest of my life. Are you telling me real estate investing is not that simple :) 

[JD Martin]

In general I agree with the premise of your post, and think that most new investors would be wise to follow your maxim. 

That said, the most money to be made in residential rental real estate is in C/D class housing in areas on the verge of becoming "discovered" and the influx of residents and investment money driving up prices (the equity that makes you rich). Real estate is pretty much like any other investment - the more risk, the greater the returns. The caveat to this of course is that A, you're going to work your *** off if you invest in C and below housing, and B, it is unlikely to be done successfully by a novice investor unless they just get lucky. 

Look at @James Wise. He's made a ton of money investing in some real bad neighborhoods, such as the neighborhood known as Cleveland 🤣. But he knows things, has teams of people to deal with all the craziness of that class of investing, and can withstand the inevitable financial disasters that come with running that type of housing. Locally, I know an investor that runs a crazy profitable trailer park where he is probably pulling in a 20%+ annual return on his investment - but he has to self-manage because no one will touch it, collects rent and deals with evictions armed, and has several "overseers" living for free on site to make sure no one burns the park down. You got to have a strong stomach to do that kind of investing. 

So yes, for the new investor, they should absolutely think about the long game - buy a decent quality house or duplex in a decent area, and just plan on holding on to it for as long as possible. No question RE is a long game and those who try BRRRRR (I add the last R because there should be one called "Reserves") with $200 cash flow in low cost areas are generally going to be blown out of the water in short order.

[Don Konipol]

The qualifier is that the OP is speaking of RESIDENTIAL real estate investments. I get REAL cash flow of 15 - 20% on commercial property. On the residential side my experience has been that any cash flow I accumulate gets eaten by major "replacement" items every three years. However, there doesn't seem to be (in general) a more consistent performer as to appreciation than the SFR.