Would you invest strictly for cash flow?

Question

I recently found a property that will cash flow at close to 10% Cap but I think the prospect of the property appreciating in value isn't great.  The only potential upside is by increasing the rent a little bit at a time.  The more I think about it, the more it feels like a bank account with a 9% interest rate.  So, I think about this deal as a pure cash flow play.  The good thing about it is that it isn't very expensive.  Would you do this deal?

Cal C. · Answer

Unless you are investing in a Brandon Turner type area aka the sticks, then I'd stay away from properties that you don't think are going to ever appreciate.  To me that denotes problems such as crime, urban blight etc ...

However, if you are a local hands on investor I think it could be a good thing.

Bottomline these type of properties usually require an exceptional amount of care and a long distance investor is just not going to be there to give it that care and in most cases a management company will not have the time to devote to it.

Eddie Werner · Answer

It you analyzed the property correctly and it makes money in a good area why wouldn't you buy it?  I am focusing on cash flow early to build up reserves and buy more properties.  Once I build a good base I will up the price range I buy in which will probably lead to appreciation.  Don't bank on appreciation (it's not guaranteed).....cash flow is king.....to me at least at this moment in my company with my current growth goals.

Bill Gulley · Answer

No, always consider the economic impact of a property. You're not getting 9% after maintenance, insurance, legal, taxes and effort in management. Your Cap Rate is a guess if you are speaking on a net basis, the seller's actual is irrelevant as they aren't you and they have a different basis. A property that has flat appreciation will be going down most likely in the future, it's a normal cycle, excluding external factors, the building will need updating and perhaps a change in external factors (revitalization of an area) to bring it back to market. Such properties often turn investors with good intentions into slumlords, cutting costs increases profits but later on it can cost you in various ways, city officials, legal issues, insurance can go up, quality of tenants goes down, a property can become a liability. I'd suggest you stay in decent areas that have potential, have decent appreciation and can command market rents, it may cost more but you'll be better of in the end. :)

J Scott · Answer

if you look at the data, most areas appreciate about in line with inflation.  In other words, in most areas, appreciation isn't a viable way to earn positive yields (in terms of real dollars).

In my opinion, the idea of real estate appreciating (again, in most areas and in real dollars) is a common misconception.

Bryan L. · Answer

@Roger Lin To answer your question in the title - no I wouldn't.  I suggest that you should also consider getting cash-flow properties at a discount.  That way, if you make a mistake in your analysis or the market changes, you can sell them without losing your shirt.

Account Closed · Answer

If you think you have a 10% cap read all this thread..

http://www.biggerpockets.com/forums/311/topics/137702-if-im-cash-flowing-why-does-bigger-pockets-make-me-feel-like-i-failed

And NO.  I would never invest for only cash flow.  I invest for appreciation and total cash flow.

Robert Leonard · Answer

@Roger Lin this would only make sense to me if you have no better options.  I think there's always a better option.  The strictly cash flow investors I know of are slumlords who do nothing to add value to their property(ies), as long as it cash flows.  I didn't say that to be accusatory of you, just of the strictly cash flow strategy.

The lower the price, the more it becomes a cash flow intensive property and appreciation usually is out of the equation.  While the cash flow is good, the management is usually more intensive/costly.  The properties also usually come with significant deferred maintenance.  Your resale options are usually limited on such a property also.

I'm speaking in general terms.  If what you found is an exception to all of what I said usually comes with this type of property, a consistent 9% ROI is better than you can do in a lot of other investments.

Joel Owens · Answer

Roger I can't really answer your question.

You have given no specifics about this property with rent per door levels, number of units, risk exposure for you on the loan, etc.

One strategy is to buy a nicer property in a better area for an 8 cap. Rather than putting 25% down you have the seller hold a second and put 15% down. Even though your spread is less between going in cap and debt the cash on cash is still good with more leverage.

I have clients that buy just for cash flow on larger commercial properties. They understand it is cash flow only and the focus is not equity growth with cap rate compression. The poorer areas you do not get as strong rent growth on the fixed low incomes and more turnover happens due to life volatility issues. If you price all that in on the buy side it can still be a winner.

What you don't want to do is get 5 year term finance banks are selling and then be looking at having to sell and that okay market went to a war zone and you are having to sell 150 basis points lower than you bought.

Justin Knapp · Answer

I don't see anything wrong for investing for cash flow, especially if your focus is investor dividends. Two positive aspects of cash flow - you can use it as proof of stability as you're trying to increase investor confidence, and you can use it to give you a base to increase future activity. Relying on appreciation is just speculation to a degree (unless you're factoring in cash flow improvement due to property upgrading and improved management, which I wouldn't consider appreciation; that's a skilled turnaround). Cash flow opens up so many opportunities as it gives you the ability to take a longer range view of your operations/direction.

Sam Craven · Answer

We sell low end properties to investors that only care about cash flow, but if i sent them a low end property that only worked as a 10 cap i would never sell it.  The cash flow has to "make up" for appreciation, and at a 9 or 10% rate that's not going to cut it.

Would you invest strictly for cash flow?

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