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. 

[Henry Clark]

Quote from @Matthew Irish-Jones:

Quote from @Henry Clark:

Cash is king- means I have to provide all of the cash.

Cash is King- I make offers not subject to financing.   I’m pre approved or have a line of credit in place.  The buyer doesn’t care as long as they get paid.       

I think it’s a question of what was said and what was heard.  

In the end result OPM other peoples money or leverage is the best way to go.  

I believe in @Scott Mac posts when he tells people they are either losing money or losing equity when they say they have say 70% equity in an investment.  They should have use that equity to buy another property.

We have moved to a lower LTV or higher equity position relative to our concern in the economy and backing off scaling as we go into retirement. There are three things wrong with that from an REI standpoint. Not using enough OPM. We sold some locations, thus not holding into assets going into inflation. Not holding onto debt so inflation allows us to pay with cheaper dollars.

Point- each REI deal has to be from the investors standpoint. More cash to avoid PMI. More cash down if your job is insecure so payments are lower. More cash if you're in the military doing BAH payments.

Class C properties. We don't do housing. Self storage and country subdivisions. I love nasty properties. In commercial we can always make more money in nasty properties. Nasty doesn't mean dirty. Greater value add. On self storage development we expect 400% COC in 2 years, country subdivisions we expect 150% COC in 5 years.

 I agree to an extent that equity sitting in a property is lost equity.  However, when the equity sitting in the property is at a lower interest rate, there is a cost to refinance, and the property is producing cash due to the lower mortgage amount, there is also a time to let it sit there.  

Being highly leveraged on commercial debt that is on a adjustable rate mortgage increase risk.  

 We cross collateralize with the same bank and don’t chase rates.  This no refinancing.  They use that equity to finance the next deal.  Although Commercial debt has a balloon period of 3/5/7 years it’s not adjustable.  Anyone using adjustable needs to go bankrupt.  They are taking the risk versus other potential investors, thus they should take the failure when things go sideways.  Our bank took us to a 7 year balloon when we refinanced at the end of the balloon period.  Plus we have rate caps built into our loan agreements.  

I think even the REITS and syndications should only use Fixed to cover their investment harvest window.  If they went with variable they should go bankrupt.  

[Travis Biziorek]

Quote from @Joe S.:

Quote from @Travis Biziorek:

I agree with a lot of this but recognize there are exceptions.

Equity is absolutely where it's at. But there are markets where you can get both. They are rare, and hard to spot/access for most people.

I got lucky and fell into one in 2019 (Detroit) and bought C-class stuff hand-over-fist for 2 years. Prices on everything I own have gone up 2-3x and my cash flow went from ~$150/door to $500-$600.

I still believe Detroit offers that opportunity today and is why I continue to pound the table on it. But it is by no means without risk.

Most folks are better off doing exactly what you say... buying properties near them in B Class areas and waiting.

One thing I've considered, and curious your take, is if you truly believe appreciation is everything then why not have interest only loans?

You could argue that the money you spend toward principal is being wasted. Why not leverage that again on another property and ride the appreciation to build even more wealth?

I see you still promote Detroit. Are you still investing there personally? 

Hey Joe, I haven't personally bought anything there in the last couple years. My Detroit investing has been on pause because we purchased our primary residence here in CA and have been doing an extensive ADU build (~2,100 square feet).

That's been sucking up most of my capital, and we're likely going to be moving into it here in the coming months to redo the main house as well. 

So, sadly, I haven't been able to invest in anything other than that. But I'm hoping that changes here shortly. I should have a huge HELOC to play with here once we're on the other end of our primary residence stuff.

[Don Konipol]

Quote from @Matthew Irish-Jones:

Quote from @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. 

These are all great examples of, like you said, creating cash flow.  Creating cash flow comes from years of experience and know how.  Its also an active investors game.  Most investors I am talking to are passive and want the same returns as active investors.  You cannot have your cake and eat it too.

My suggestion for passive investors is to play it safe, get low risk B investments, take good care of your properties and play the long game.

If you are an active investor who can buy or rehab residential, or you are comfortable going into industrial or retail space, those can be great investments.  IN my opinion they also increase risk if you are a passive investor and want to jump into that game. 

Your five investments listed sound like fantastic returns, that is not the norm for a W-2 working passive investor.  They would be taking a huge leap of faith to try and pull off what you did.  

Either way, great point and great returns, congrats!

Your points about passive investors, risk and ability to "create" value are right on point. So is your comment about passive investors wanting ROI that are only achievable (on a SUSTAINABLE basis, and without undo risk) by knowledgable, experienced active investors "in the game".

There seems to be three lines of thinking (they are not mutually exclusive) about how to make better than risk adjusted returns in real estate investing.

1. buy and hold while price appreciation, FUTURE cash flow, and loan amortization increase the investors wealth

2. market timing - load up during market recessions, liquidate during market booms

3. Active investing - CREATE wealth through forced value increases, financial engineering, better operational efficiency. 

[Matthew Irish-Jones]

Quote from @Don Konipol:

Quote from @Matthew Irish-Jones:

Quote from @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. 

These are all great examples of, like you said, creating cash flow.  Creating cash flow comes from years of experience and know how.  Its also an active investors game.  Most investors I am talking to are passive and want the same returns as active investors.  You cannot have your cake and eat it too.

My suggestion for passive investors is to play it safe, get low risk B investments, take good care of your properties and play the long game.

If you are an active investor who can buy or rehab residential, or you are comfortable going into industrial or retail space, those can be great investments.  IN my opinion they also increase risk if you are a passive investor and want to jump into that game. 

Your five investments listed sound like fantastic returns, that is not the norm for a W-2 working passive investor.  They would be taking a huge leap of faith to try and pull off what you did.  

Either way, great point and great returns, congrats!

Your points about passive investors, risk and ability to "create" value are right on point. So is your comment about passive investors wanting ROI that are only achievable (on a SUSTAINABLE basis, and without undo risk) by knowledgable, experienced active investors "in the game".

There seems to be three lines of thinking (they are not mutually exclusive) about how to make better than risk adjusted returns in real estate investing.

1. buy and hold while price appreciation, FUTURE cash flow, and loan amortization increase the investors wealth

2. market timing - load up during market recessions, liquidate during market booms

3. Active investing - CREATE wealth through forced value increases, financial engineering, better operational efficiency. 

 I think that sums it up perfectly.  To be a complete hypocrite I am a #3 active investor while preaching #1 for others LOL.

[Nicholas L.]

@Matthew Irish-Jones

...and the issue is folks want the returns of 3 with the effort of 1.

[Adam Michael Andrews]

(1) has the advantage of lower effort-in per year invested. (3) is really a job if you boil it down

[Marcus Auerbach]

#3 is often the only possible path to #1. 

The single biggest metric nobody talks about in real estate is portfolio value in dollars. For your long term success it does not matter as much if you have 10 doors or 100, as if your portfolio value is 500k or 5 million. 

Cash flow, principal pay off and of course appreciation are all a function (percentage) of your portfolio value. 

For example to illustarte: 

3 duplexes valued $1,000,000      (or 30 duplxes $10,000,000) 

7% CoC return: $17,500 - or if you have $10m ($175,000)
3% principal pay down: $30,000                          ($300,000)
5% appreciation: $50,000                                     ($500,000)

So the real question is, how do you get from $1 million to $10 million. More doors mean mostly more expenses and more headaches, but most people don't have $2,5 million sitting around, so starting small and with cheaper properties may be the only path to eventually get where you want.

[Matthew Irish-Jones]

Quote from @Nicholas L.:

@Matthew Irish-Jones

...and the issue is folks want the returns of 3 with the effort of 1.

 Exactly right.  

[Matthew Irish-Jones]

Quote from @Marcus Auerbach:

#3 is often the only possible path to #1. 

The single biggest metric nobody talks about in real estate is portfolio value in dollars. For your long term success it does not matter as much if you have 10 doors or 100, as if your portfolio value is 500k or 5 million. 

Cash flow, principal pay off and of course appreciation are all a function (percentage) of your portfolio value. 

For example to illustarte: 

3 duplexes valued $1,000,000      (or 30 duplxes $10,000,000) 

7% CoC return: $17,500 - or if you have $10m ($175,000)
3% principal pay down: $30,000                          ($300,000)
5% appreciation: $50,000                                     ($500,000)

So the real question is, how do you get from $1 million to $10 million. More doors mean mostly more expenses and more headaches, but most people don't have $2,5 million sitting around, so starting small and with cheaper properties may be the only path to eventually get where you want.

 I agree completely with a small clarifying point.  New investors have to start small with cheaper properties, but they should (in my opinion), take on less risk and play the long game.  

A B-Class property with 4%-6% cash on cash returns is normally a better investment than a C/D property with 10-12% cash on cash returns.  The unpredictability of the C and D class returns is too risky when you have very little Capital.  

If you get a B class low risk investment that is predictable, you should be able to refinance is 7-10 years and start your snowball.  If you are also living below your means, saving, and reinvesting after tax dollars you can get the ball rolling faster.

Nothing ruins an investing career faster than a surprise $20,000 CapEx bill to a new investor who has $2,000 in the bank and just spent every penny they have on a high risk property.

[Peter W.]

Really there are two types of investing: 

1.  Ones who make money elsewhere and are really looking for a place to park their money until retirement or to pass to kids or some other event in the future and make a good return.  This is all about quality--best locations in the best cities.  Cash flow is secondary.

2.  The ones who are trying to build a real estate business to make money.  This is all about figuring out how to add lots of value through work--renovations, additions, creative financing etc.     Here it's less about the class of the property, and more about where you can add and capture value.

These things exist on continuum and not discretely, but it's important to not think you are a two when you are really a one.  Many techniques we discuss here (like brrrr) are ways to combine 1 and 2 to get higher returns--but we should not deceive ourselves brrrr is a combination of a construction business with real estate investing.

[Marcus Auerbach]

Quote from @Matthew Irish-Jones:

Quote from @Marcus Auerbach:

#3 is often the only possible path to #1. 

The single biggest metric nobody talks about in real estate is portfolio value in dollars. For your long term success it does not matter as much if you have 10 doors or 100, as if your portfolio value is 500k or 5 million. 

Cash flow, principal pay off and of course appreciation are all a function (percentage) of your portfolio value. 

For example to illustarte: 

3 duplexes valued $1,000,000      (or 30 duplxes $10,000,000) 

7% CoC return: $17,500 - or if you have $10m ($175,000)
3% principal pay down: $30,000                          ($300,000)
5% appreciation: $50,000                                     ($500,000)

So the real question is, how do you get from $1 million to $10 million. More doors mean mostly more expenses and more headaches, but most people don't have $2,5 million sitting around, so starting small and with cheaper properties may be the only path to eventually get where you want.

 I agree completely with a small clarifying point.  New investors have to start small with cheaper properties, but they should (in my opinion), take on less risk and play the long game.  

A B-Class property with 4%-6% cash on cash returns is normally a better investment than a C/D property with 10-12% cash on cash returns.  The unpredictability of the C and D class returns is too risky when you have very little Capital.  

If you get a B class low risk investment that is predictable, you should be able to refinance is 7-10 years and start your snowball.  If you are also living below your means, saving, and reinvesting after tax dollars you can get the ball rolling faster.

Nothing ruins an investing career faster than a surprise $20,000 CapEx bill to a new investor who has $2,000 in the bank and just spent every penny they have on a high risk property.

Yup, exactly. Otherwise your first investment is your last investment! Cash flow is not the primary strength of real estate. If cash flow is what you want to quit your W2, start (or buy) a business!

[Frank Chin]

A relative of ours, and his wife had successful careers, invested over the years in real estate, accumulated plenty of properties which became mortgage free. I was in the same boat for a while. I was shocked when they told me they took out mortgages on the paid off properties, to invest in more properties. 

Turned out their earnings are so large that they hit limits on what they can deduct on their tax returns. I don't know all the particulars, someone more well versed can comment on it, when your income exceeds a certain level, there are limits on your deductions you can take. He tells me his cash flow is more than what he needs. So, he instead is reducing his cash flow, mortgaging his paid off properties, acquiring more properties, and get more appreciation instead. He invested in high appreciation areas in New York and San Francisco and the additional properties which he got ten years ago so far more than doubled in value, where capital gains are not taxed, I agree that in his situation "cash in not king".

I always thought acquiring properties, over time being mortgage free, cash flowing is the end game. After hearing what my relative did, there's another chapter to the story, trading cash flow for appreciation, acquire more properties, due to limitations of the recent tax laws.

[Becca F.]

Quote from @Matthew Irish-Jones:

 I agree to an extent that equity sitting in a property is lost equity.  However, when the equity sitting in the property is at a lower interest rate, there is a cost to refinance, and the property is producing cash due to the lower mortgage amount, there is also a time to let it sit there.  

Being highly leveraged on commercial debt that is on a adjustable rate mortgage increase risk.  

I've heard that statement many times. There are thousands if not millions of people in California sitting on a lot of equity. Many people who bought 30 to 40+ years ago have paid off mortgages. For some the psychology of having no loan works - they still have the property tax (which is artificially low from Proposition 13) and insurance payments (which is increasing from wildfire risks and some major companies not taking on any new clients). 

Right now I'm comfortably leveraged - between your non-RE investors (the mortgage free people) and heavily leveraged RE investors. I'm struggling with that, if I should cash out refi (or rate and term refi) when the rates drop more and use that equity to buy another property, do more renovation (ADU) or another investment strategy. 

I've considered starting a business for cash flow but that's like taking on another job on top of my W2 job. 

[Matthew Irish-Jones]

Quote from @Becca F.:

Quote from @Matthew Irish-Jones:

 I agree to an extent that equity sitting in a property is lost equity.  However, when the equity sitting in the property is at a lower interest rate, there is a cost to refinance, and the property is producing cash due to the lower mortgage amount, there is also a time to let it sit there.  

Being highly leveraged on commercial debt that is on a adjustable rate mortgage increase risk.  

I've heard that statement many times. There are thousands if not millions of people in California sitting on a lot of equity. Many people who bought 30 to 40+ years ago have paid off mortgages. For some the psychology of having no loan works - they still have the property tax (which is artificially low from Proposition 13) and insurance payments (which is increasing from wildfire risks and some major companies not taking on any new clients). 

Right now I'm comfortably leveraged - between your non-RE investors (the mortgage free people) and heavily leveraged RE investors. I'm struggling with that, if I should cash out refi (or rate and term refi) when the rates drop more and use that equity to buy another property, do more renovation (ADU) or another investment strategy. 

I've considered starting a business for cash flow but that's like taking on another job on top of my W2 job. 

 Somewhere in the middle is probably the answer.  I use leverage and think there is a difference between good debt and bad debt.  Anyone saying being highly leveraged is not taking on more risk is wrong in my opinion. 

[Amit M.]

@Frank Chin this only works if the market continues to appreciate. If your relatives leveraged 10 years ago then they did so in a great market. I did the same thing and made a lot of money strictly by smart leverage. BUT when the market in high appreciation areas like San Francisco and NYC tanked, mainly due to work from home and high interest rate, I sold my lesser locations in 2021/early 2022 (still a market high, even in my market San Francisco) and kept the best locations debt free.

I could easily leverage again now, but I don’t think we’re going to have the strong appreciation runs that we have had since the mid 1990s. For the past 30 years I rode that ride well (in spite of the dot com bust and mortgage crisis), and made a lot of money. But now I prefer to keep fewer debt free quality properties, which are easy to keep rented with great tenants, and check out of the leverage game. I just don’t see the crazy high appreciation coming back anytime soon. Stable appreciation yes, but what we had in the Bay Area and costal CA in general over the last 30 years was a one time, tectonic and largely tech based phenomenon that won’t be repeated imo. If you were fortunate to have made a lot of money during the run ups, it’s important to know when to hold ‘em and when to fold ‘em ;)

[Frank Chin]

@Amit M.

My relative did most of his investments in San Francisco, whereas I did most of mine in NY City. I can say that while prices went up tremendously over the years in both areas, in NYC, there were dips, as much as 30% at times. If you time it right, buy at the dips, you'll do fine. I also invest in the stock market and did very well with high tech stocks.

In NYC, where I started investing in 1980, the first downturn took place in 1986. Triplexes that I got rose from $150K to $350K between 1983 and 1986. In 1986, the owner of the triplex next to mine divorced, sold it for $350K. A flipper bought it, placed it on the market for $399K, gave up 3 years later and sold it at $300K, and negatively cash flowed more than $10K/year losing a total of $100K. Another investor who bought it for $300K sold it two years later for $250K, losing more money as his son lived rent free as PM. On the other hand, I bought mine in 1983 for $150K and sold it in 2003 for $450K after determining the property needed $100K in rehab. In addition, I cash flowed $10K/year while I had it. 

In 1993, there were pages and pages of auctions advertised in the papers each week. One I bought at auction for $208K, market price $325K, which I still have had an appraisal of $1,450,000 in June when I got a HELOC.

The markets here took another dive between 2006-2008 where I attended a few foreclosure auctions a month between NYC and in MA and picked up a few. I agree at current levels, prices would not rise as it once did. 

[Amit M.]

@Frank Chin thanks for those specifics. We had similar ups and downs, but overall the market went up a lot as long as you held. 2 questions for you:

1- what part of NYC did you invest in? (I’m guessing Queens or Brooklyn)?
2- do you think manhattan had smaller down markets (and more appreciation) than your location?