No cash flow. Does it make sense ?

Question

Hello All!

I would like to know your thoughts/opinion.

My wife and I are salaried employees. Our goal is to have a stable income stream 15 years down the line (we are in mid 40s) when we stop working. BRRR is not our cup of tea. We want to play safe, buy relatively new houses and in good area. It won’t make sense if we go by biggerpockets calculator/by pure numbers and there are no such properties available in our area that meet 1% criteria. With 20% down, new or almost new properties will not cash flow but will even out.  I have acquired one but would like to buy 1-2 more. What do you think?

Appreciate your response. Thanks !

Scott E. · Answer

If you don't care about cash flow today or for the next few years, you actually will probably end up in a better position 15 years down the road.

A lot of people want cash flow today so they chase B and C properties in sketchy areas. These properties provide cash flow but are higher maintenance and won't appreciate as much.

You instead could go after newer homes in 'A' locations that won't cash flow today. But throw a 15 year mortgage on each one, and in 15 years when you are ready to retire these homes will cash flow like crazy, and will have likely appreciated a ton as well.

Leo R. · Answer

@Amar Amar you mentioned you "want to play safe, buy relatively new houses".  The age of the house alone really has little to do with how "safe" it is to invest in the property, and looking only for newer houses might end up working against you--and could even prevent you from cashflowing.

One of the biggest misconceptions by inexperienced investors is that new houses are inherently less costly, and less headache to maintain than older houses.  This is true some times, but in some scenarios, brand new properties end up producing significantly MORE maintenance/repair headaches than older properties.

The reasons are:

1) Some building techniques/materials are far superior to those used in the past, but some are not, and some are unproven. For instance, I'm very doubtful that pex will have a longer service life than copper plumbing. The trend toward flat roofs is just silly in most areas (bc it causes water diversion problems, which then cause a myriad of other problems). Etc.

2) A new house hasn't gone through its "growing pains" phase. All sorts of problems can emerge in the first few years. For instance, inadequate/improperly designed water diversion systems can cause major problems (e.g.; rot, masonry degradation, foundation settling) that won't emerge for several years. I personally know people who bought brand new, multi-million dollar, beautiful luxury homes, only to have serious foundation settling over the first 5-10 years of ownership (and the repair bill was in the hundreds of thousands!).

On the other hand, an older house has been around so long that these types of problems have either been addressed by previous owners, or they're often plainly visible. For instance, if there's an unresolved settling issue, you can probably see cracks in the foundation, buckling, un-level floors, un-plumb doors, etc. ...but, if everything is solid now on an old house, it'll probably remain pretty solid for the foreseeable future.  As my GC says: "if it's stood straight and true for the last 100 years, it'll probably make it at least another 25".

I own properties from the 1910s, 1940s, 1960s, and early 2000s –and frankly, the older properties are some of my best performing, and least headache-causing properties of the portfolio!

Don't get me wrong; there are plenty of issues/problems/quirks that old houses have that new houses don't, and an old house can obviously have hidden problems and big repair/maintenance bills too (which is why you need a strong due diligence process)...but, the point is: a new house is not a foolproof solution to repairs/maintenance (and in some cases, a brand new house can be a much bigger gamble than an older house!).

This is a particularly important lesson for inexperienced investors, who tend to be the most prone to "shiny object syndrome" (the tendency to let nice aesthetics distract from real, underlying issues). There are no shortage of lipsticked pig properties out there, and learning to spot them is essential for successful RE investing...we're all susceptible to "shiny object syndrome", but being aware of it is the first step to avoiding it!

Lastly: cashflow v. appreciation. If you are buying a property that doesn't cashflow, and you're just *hoping* it will appreciate and cashflow in the future, you're not investing--you are speculating. ...it's one thing for Warren Buffet to put a small fraction of his net worth toward speculative purchases, but for those of us not named Warren Buffet, speculation is basically gambling. Anyone making speculative purchases on cashflow negative properties had better have the net worth to absorb the loss if their speculation doesn't pan out.

Good luck out there!

Bruce Woodruff · Answer

Cash flow is less important IF you foresee great appreciation in the near future (not 30 years from now, but 2-5 years).

Also, forget any and all rules and do what works for you.

Finally.....'comfort zones' are killers of everything they touch.....

Eliott Elias · Answer

Losing money every month will not give you a stable income stream. Buy property that cash flows or has good equity.

Henry Lazerow · Answer

Buy a property that cashflows or may as well just buy an index fund that compounds at 8% which has less risk and will also help you retire in 15 years.

Jack Mawer · Answer

It depends on the area you are in but I would definitely look into short term rental or midterm rentals for traveling nurses in order to maximize profit - use tools such as AirDNA to see if your property has more potential for a greater return as an STR

Benjamin Aaker · Answer

Cash flow is certainly important, especially if you are starting out and trying to scale. What's often forgotten about is the equity build you can have. Those that have a high income stream may want to minimize their cash flow and opt for equity build for the tax benefit. A property that doesn't have a lot of cash flow but builds equity can be a great investment, but be careful that you did your diligence well and have cash reserves - an unanticipated repair can tank your investment pretty fast if the cash flow is low. Don't go for anything with a negative cash flow, however.

Paul De Luca · Answer

@Amar Amar

The property does NOT need to meet the 1% rule to be a good investment.

If properties aren't making sense in your local area you're going to have to look elsewhere if you want cash flow.

Nate Sanow · Answer

If you can afford to not have cash flow, okay fine. Just track the previous rate of appreciation and go somewhere timeless … and near Starbucks, Wholefoods, etc if you want something that won’t get worse with time.

Theresa Harris · Answer

It really depends on prices in your area along with taxes and rent.  Look for a place with a legal suite or a duplex.  Do the mortgage for a longer term to lower payments.  Avoid places with an HOA.

No cash flow. Does it make sense ?

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