Why is cash flow important to many here?

[Stuart M.]

I was thinking in a long term view.  Take two examples, tell me which you'd buy.

House 1:

100k house, 5k down, 20k in repairs

Rents for 2k

Cash flow is 500/mo

House 2:

500k house, 25k down, no repairs

Rents for 4k

Cash flow is 0 after PITI, Insurance, etc.

House 1, in 30 years you own a house free and clear that is worth 217k, and if you saved the 500/mo at 7% return, 640k in the investment acct, 857k total.

House 2, in 30 years you own a house free and clear that is worth 905k, even ignoring cash flow from rent raises for year 2-30.

A few notes.

In both cases, I assume house appreciation tracks inflation (2%) as it has on average for a long time.  If you assume greater appreciation, House 2 does even better.

I included no "cash flow" for house 2 but I assumed 2% increase in cash flow for House 1 yearly.  However, House 2 would probably begin to cash flow in year 2 at first rental raise, and I didn't include any of that in the long term projections.

Also, why do people consider House 1 to "cash flow" if the mortgage is paid down $137 in month one and you get $500 cash ($637 total), but House 2 doesn't "cash flow" even though the mortgage is paid down $684 in month one?  Both are off an initial 25k outlay.  Both seem like money in the bank to me.

It seems to me that we're investing in land here (there is not much of a price difference between a water heater for a 500k house and a 120k house or a call to unclog a toilet - in fact, those numbers work against House 1 - and usually a majority of the difference between a 500k house and a 120k house is the dirt it sits on) and if that's the case, aren't we aiming to leverage as much money as possible to buy as much land as is possible, in the long run at least, and have some tenants make the payment for us in the meantime?  Seems like appreciation is the key.

What's your take on this.  What am I leaving out, missing, etc, I'd like to hear other opinions.

[Llewelyn A.]

@Stuart M.

Hi Stuart. I'll probably be one of the only few that will lean towards House 2 approach.

I've been buying houses in Brooklyn, NY for the last 20 years. It's your House 2 on steroids.

Results are incredible. Real Example:

Year 2000:

Purchase Price: $140k, $21k down and $7k Closing, $119k Mortgage

Rent: 2 Units at $500 each per month

Cash Flow: ZERO

Repairs: $40k

------------------------

Year 2017

Current Value: $1 Million

Profit if Sold: $1 Million minus $40k Repairs minus $21k down minus $7k Closing minus $80k Mortgage Balance minus $50k in Commissions minus $35k Seller's Closing Costs = $767k profit on $21k down plus $7k Closing plus $40k in repairs = $767k / $68k = 1,128% ROI just on Appreciation and Mortgage Reduction.

Current Rents are $1,850 for Unit 1, $1,900 for Unit 2. Cash Flow is approximately $2.5k per month

-----------------------

I started getting Cash Flow in Year 3 with the above property.

I used the Equity to Buy other properties. In fact, all other properties came from the Equity of the previous properties.

Some call it luck. I did this 8 times in 20 years. Virtually all properties are similar to this one.

I will say that I was also a highly paid Programmer when I graduated College in 1997 and didn't need the Cash Flow to put food on the table.

BUT, I will also say that if you don't need the cash flow, you can get into these kinds of lucrative properties.

You can't just do the numbers. You need to assess the long term effects of economics as well as other external scenarios like Climate Change.

I'm not sure about Boca Raton or where you are planning on investing finally.

Florida will deal with Rising Sea Levels, but 2017 was devastating in terms of Hurricanes. Prices will be in the next 30 years will depend on what Florida does to counteract Climate Change, if anything can be done. If anything, you will have to take into account higher increasing Hurricane Insurance over the future years.

That's also the beauty with doing a long term analysis. It makes you think of the future. I normally put together a 10 year projection and take into account all the effects of future Economics and other things like Climate.

Just like a Squirrel who has to put away nuts for the winter, if that little animal didn't think of the future, he'd starve to death before the Spring!