You Expect Cash Flow?

Denver, CO · Member since 2021 · 61 posts · 100 votes

Investing in real estate is categorically different than investing in stocks/bonds and other customary financial planning tools.

It is buying a small business. This fundamentally changes how you should think about the debt.

A mortgage on a rental property is not an operating expense. It is an acquisition expense.

It is not the market's responsibility to cash flow your acquisition costs. We were lucky enough to experience this over the past several years when interest rates were ridiculously low. However, the product/service you sell your tenants (shelter) is marked up, like any other business, based on your operating expenses plus a profit margin.

The fact that the bank will lend you 75-80% of the acquisition cost of your small business is AMAZING. Covering that expense with the markup on the shelter you provide your tenants is not required to make that a viable business purchase.

If you expect to invest in properties that cash flow with 20% down, you're going to be looking at rentals in more challenging areas.

More importantly, if you're waiting until the market hands you low priced businesses (rentals) and low interest rates to purchase them, then I suspect you will wait for a very long time, if it even happens in our lifetimes.

Interest rates don't play a factor in determining whether small business is covering its operating expenses plus an acceptable profit margin with the revenue. Interest rates just determine the cost of borrowing the money to purchase that business.

Negative cash flow because you borrowed money to purchase a business is an acceptable way to purchase a business. You're buying a business! Why wouldn't it cost you something? However, if you require cash flow out of the gate, you will simply have to put more money down (borrow less) so your profits cover the acquisition expense of the loan.

The golden age of low interest rates and low asset costs is over. There's no sense in pining for it. It's gone. That doesn't make real estate a bad investment. It's just not falling into your lap anymore.

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

If positive cash flow is your do or die metric to evaluate a property acquisition, then you've probably only invested from 08-22 ish. If you look at physical real estate it's rarely ever intrinsic, only in super low rate territory which made it historically intrinsic. Physical assets require upkeep, etc., make it a long game really. If you're going to evaluate a long term investment based on a cash flow metric from year 1, it's why you are probably a penny chaser and miss the big dollars.

You can bring a million BPers that sit on the cash flow and do or die mantra, but all the major players know where the real underlying value is. It's also why they invest differently than the nonsense posted on here a lot of times. I'd take the top 40-50 investors over the million investors that just following the junk.

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Jon K.
Rental Property Investor · Perry Hall, MD · Member since 2016 · 588 posts · 600 votes
3y
Quote from @Brady Mullen:

Investing in real estate is categorically different than investing in stocks/bonds and other customary financial planning tools.

It is buying a small business. This fundamentally changes how you should think about the debt.

A mortgage on a rental property is not an operating expense. It is an acquisition expense.

It is not the market's responsibility to cash flow your acquisition costs. We were lucky enough to experience this over the past several years when interest rates were ridiculously low. However, the product/service you sell your tenants (shelter) is marked up, like any other business, based on your operating expenses plus a profit margin.

The fact that the bank will lend you 75-80% of the acquisition cost of your small business is AMAZING. Covering that expense with the markup on the shelter you provide your tenants is not required to make that a viable business purchase.

If you expect to invest in properties that cash flow with 20% down, you're going to be looking at rentals in more challenging areas.

More importantly, if you're waiting until the market hands you low priced businesses (rentals) and low interest rates to purchase them, then I suspect you will wait for a very long time, if it even happens in our lifetimes.

Interest rates don't play a factor in determining whether small business is covering its operating expenses plus an acceptable profit margin with the revenue. Interest rates just determine the cost of borrowing the money to purchase that business.

Negative cash flow because you borrowed money to purchase a business is an acceptable way to purchase a business. You're buying a business! Why wouldn't it cost you something? However, if you require cash flow out of the gate, you will simply have to put more money down (borrow less) so your profits cover the acquisition expense of the loan.

The golden age of low interest rates and low asset costs is over. There's no sense in pining for it. It's gone. That doesn't make real estate a bad investment. It's just not falling into your lap anymore.

Why would you invest money in a business and expect negative cash flow? That doesn't make sense. Also, you can still find properties that cash flow well in good neighborhoods. I respectfully disagree with pretty much every point you made here.
1 Reply
Brady MullenPro Member
OP
Denver, CO · Member since 2021 · 61 posts · 100 votes
3y
Quote from @Jon K.:

Quote from @Brady Mullen:

Investing in real estate is categorically different than investing in stocks/bonds and other customary financial planning tools.

It is buying a small business. This fundamentally changes how you should think about the debt.

A mortgage on a rental property is not an operating expense. It is an acquisition expense.

It is not the market's responsibility to cash flow your acquisition costs. We were lucky enough to experience this over the past several years when interest rates were ridiculously low. However, the product/service you sell your tenants (shelter) is marked up, like any other business, based on your operating expenses plus a profit margin.

The fact that the bank will lend you 75-80% of the acquisition cost of your small business is AMAZING. Covering that expense with the markup on the shelter you provide your tenants is not required to make that a viable business purchase.

If you expect to invest in properties that cash flow with 20% down, you're going to be looking at rentals in more challenging areas.

More importantly, if you're waiting until the market hands you low priced businesses (rentals) and low interest rates to purchase them, then I suspect you will wait for a very long time, if it even happens in our lifetimes.

Interest rates don't play a factor in determining whether small business is covering its operating expenses plus an acceptable profit margin with the revenue. Interest rates just determine the cost of borrowing the money to purchase that business.

Negative cash flow because you borrowed money to purchase a business is an acceptable way to purchase a business. You're buying a business! Why wouldn't it cost you something? However, if you require cash flow out of the gate, you will simply have to put more money down (borrow less) so your profits cover the acquisition expense of the loan.

The golden age of low interest rates and low asset costs is over. There's no sense in pining for it. It's gone. That doesn't make real estate a bad investment. It's just not falling into your lap anymore.

Why would you invest money in a business and expect negative cash flow? That doesn't make sense. Also, you can still find properties that cash flow well in good neighborhoods. I respectfully disagree with pretty much every point you made here.
Thanks, Jon. What exactly did I say that you disagree with? I’m open to digging into it - I am just not clear on what I said that you’re disagreeing with.

Cheers!
0 Reply
Jon K.
Rental Property Investor · Perry Hall, MD · Member since 2016 · 588 posts · 600 votes
3y
Quote from @Brady Mullen:

Quote from @Jon K.:

Quote from @Brady Mullen:

Investing in real estate is categorically different than investing in stocks/bonds and other customary financial planning tools.

It is buying a small business. This fundamentally changes how you should think about the debt.

A mortgage on a rental property is not an operating expense. It is an acquisition expense.

It is not the market's responsibility to cash flow your acquisition costs. We were lucky enough to experience this over the past several years when interest rates were ridiculously low. However, the product/service you sell your tenants (shelter) is marked up, like any other business, based on your operating expenses plus a profit margin.

The fact that the bank will lend you 75-80% of the acquisition cost of your small business is AMAZING. Covering that expense with the markup on the shelter you provide your tenants is not required to make that a viable business purchase.

If you expect to invest in properties that cash flow with 20% down, you're going to be looking at rentals in more challenging areas.

More importantly, if you're waiting until the market hands you low priced businesses (rentals) and low interest rates to purchase them, then I suspect you will wait for a very long time, if it even happens in our lifetimes.

Interest rates don't play a factor in determining whether small business is covering its operating expenses plus an acceptable profit margin with the revenue. Interest rates just determine the cost of borrowing the money to purchase that business.

Negative cash flow because you borrowed money to purchase a business is an acceptable way to purchase a business. You're buying a business! Why wouldn't it cost you something? However, if you require cash flow out of the gate, you will simply have to put more money down (borrow less) so your profits cover the acquisition expense of the loan.

The golden age of low interest rates and low asset costs is over. There's no sense in pining for it. It's gone. That doesn't make real estate a bad investment. It's just not falling into your lap anymore.

Why would you invest money in a business and expect negative cash flow? That doesn't make sense. Also, you can still find properties that cash flow well in good neighborhoods. I respectfully disagree with pretty much every point you made here.
Thanks, Jon. What exactly did I say that you disagree with? I’m open to digging into it - I am just not clear on what I said that you’re disagreeing with.

Cheers!

Apologies if I was a little curt in that message. You can definitely find properties that cash flow with 20% down that are not in challenging areas. You may have to do some digging to identify those markets, but they're out there.

I can't speak intelligently about most businesses, but I disagree that negative cash flow is an acceptable way to buy a rental property. I think it's a recipe for disaster.

I agree however that there's no sense in pining for the past. All you can do is your best with the information that you have today.
2 Reply
Michael DiossaPro Member
Investor · RI · Member since 2023 · 192 posts · 163 votes
3y
Quote from @Jon K.:

Quote from @Brady Mullen:

Quote from @Jon K.:

Quote from @Brady Mullen:

Investing in real estate is categorically different than investing in stocks/bonds and other customary financial planning tools.

It is buying a small business. This fundamentally changes how you should think about the debt.

A mortgage on a rental property is not an operating expense. It is an acquisition expense.

It is not the market's responsibility to cash flow your acquisition costs. We were lucky enough to experience this over the past several years when interest rates were ridiculously low. However, the product/service you sell your tenants (shelter) is marked up, like any other business, based on your operating expenses plus a profit margin.

The fact that the bank will lend you 75-80% of the acquisition cost of your small business is AMAZING. Covering that expense with the markup on the shelter you provide your tenants is not required to make that a viable business purchase.

If you expect to invest in properties that cash flow with 20% down, you're going to be looking at rentals in more challenging areas.

More importantly, if you're waiting until the market hands you low priced businesses (rentals) and low interest rates to purchase them, then I suspect you will wait for a very long time, if it even happens in our lifetimes.

Interest rates don't play a factor in determining whether small business is covering its operating expenses plus an acceptable profit margin with the revenue. Interest rates just determine the cost of borrowing the money to purchase that business.

Negative cash flow because you borrowed money to purchase a business is an acceptable way to purchase a business. You're buying a business! Why wouldn't it cost you something? However, if you require cash flow out of the gate, you will simply have to put more money down (borrow less) so your profits cover the acquisition expense of the loan.

The golden age of low interest rates and low asset costs is over. There's no sense in pining for it. It's gone. That doesn't make real estate a bad investment. It's just not falling into your lap anymore.

Why would you invest money in a business and expect negative cash flow? That doesn't make sense. Also, you can still find properties that cash flow well in good neighborhoods. I respectfully disagree with pretty much every point you made here.
Thanks, Jon. What exactly did I say that you disagree with? I’m open to digging into it - I am just not clear on what I said that you’re disagreeing with.

Cheers!

Apologies if I was a little curt in that message. You can definitely find properties that cash flow with 20% down that are not in challenging areas. You may have to do some digging to identify those markets, but they're out there.

I can't speak intelligently about most businesses, but I disagree that negative cash flow is an acceptable way to buy a rental property. I think it's a recipe for disaster.

I agree however that there's no sense in pining for the past. All you can do is your best with the information that you have today.

Great insight here
1 Reply
Devin Dougherty
Real Estate Agent · Omaha, NE · Member since 2023 · 47 posts · 23 votes
3y
I think it depends on your personal goals. If you're wanting to rent out, and cash flow is negative for more than that first year, it may not be worth it as a preferred business. In the market we are in now, profitable cash flow is definitely possible, just harder to find.
1 Reply
Brady MullenPro Member
OP
Denver, CO · Member since 2021 · 61 posts · 100 votes
3y
Quote from @Jon K.:

Quote from @Brady Mullen:

Quote from @Jon K.:

Quote from @Brady Mullen:

Investing in real estate is categorically different than investing in stocks/bonds and other customary financial planning tools.

It is buying a small business. This fundamentally changes how you should think about the debt.

A mortgage on a rental property is not an operating expense. It is an acquisition expense.

It is not the market's responsibility to cash flow your acquisition costs. We were lucky enough to experience this over the past several years when interest rates were ridiculously low. However, the product/service you sell your tenants (shelter) is marked up, like any other business, based on your operating expenses plus a profit margin.

The fact that the bank will lend you 75-80% of the acquisition cost of your small business is AMAZING. Covering that expense with the markup on the shelter you provide your tenants is not required to make that a viable business purchase.

If you expect to invest in properties that cash flow with 20% down, you're going to be looking at rentals in more challenging areas.

More importantly, if you're waiting until the market hands you low priced businesses (rentals) and low interest rates to purchase them, then I suspect you will wait for a very long time, if it even happens in our lifetimes.

Interest rates don't play a factor in determining whether small business is covering its operating expenses plus an acceptable profit margin with the revenue. Interest rates just determine the cost of borrowing the money to purchase that business.

Negative cash flow because you borrowed money to purchase a business is an acceptable way to purchase a business. You're buying a business! Why wouldn't it cost you something? However, if you require cash flow out of the gate, you will simply have to put more money down (borrow less) so your profits cover the acquisition expense of the loan.

The golden age of low interest rates and low asset costs is over. There's no sense in pining for it. It's gone. That doesn't make real estate a bad investment. It's just not falling into your lap anymore.

Why would you invest money in a business and expect negative cash flow? That doesn't make sense. Also, you can still find properties that cash flow well in good neighborhoods. I respectfully disagree with pretty much every point you made here.
Thanks, Jon. What exactly did I say that you disagree with? I’m open to digging into it - I am just not clear on what I said that you’re disagreeing with.

Cheers!

Apologies if I was a little curt in that message. You can definitely find properties that cash flow with 20% down that are not in challenging areas. You may have to do some digging to identify those markets, but they're out there.

I can't speak intelligently about most businesses, but I disagree that negative cash flow is an acceptable way to buy a rental property. I think it's a recipe for disaster.

I agree however that there's no sense in pining for the past. All you can do is your best with the information that you have today.

It didn't feel curt. :) I love this platform for sharing ideas and challenging them.
My point is not that you should be okay with negative cash flow - that is a personal decision. My point is that it is an incorrect business principal to call an "acquisition expense", like a mortgage on an investment property, an "operating expense". It is categorically different.
The economic forces that determine the cost of any business's product (or service) are determined by the cost of providing that product plus some acceptable profit. The cost of debt for acquiring that business, is not one of those costs. That is why it is not considered in the Net Operating Income (NOI) calculation, which is Revenue, minus operating expenses.
This is also why it is not considered in Cap rate, which is NOI/Asset Value.
In short, we all know the cost of borrowing money is higher than it has been for quite a while. However, that doesn't really affect the viability of the underlying business you'd be purchasing. It definitely affects your ability (and everyone else's) to purchase that business.
If Net Operating Income that covers even your acquisition costs right out of the gate is important to you (as it is for most real estate investors), you have to look a little harder, put a little more money down, or get creative in other ways. Or some combination of those things.
Another larger point I am making is that real estate investors' expectations have been a little skewed by ridiculously low acquisition costs (due to values and interest rates) in the past decade. The getting was good.
Real estate is still a great business. We just need to get accustomed to the fact that it was an unusually good market before, and if we insist on those exact conditions returning before we purchase our next investment property, we will pass up on getting good assets because our expectations are unrealistically high.
2 Reply
Dean ValadezPro Member
Investor · Member since 2023 · 64 posts · 11 votes
3y
I'd like to flip this topic to the other end of the spectrum and ask about paying for a property all cash to avoid the high interest and to get better cash flow. It's not through a 1031, but if I would have the financial means to buy with all cash, is that a wise strategy in this higher interest rate environment? The property, with an all-cash offer, could get a Cap Rate of 8.3%, a COC ROI of about 5.99%, and would cash flow well enough with about $415 per unit. I am new to this field and am looking for insight from experienced investors. I would prefer a higher COCR and a higher cash flow per unit, but the rents are under market and I can slowly raise them to get to market value. By year 2 or the start of year 3, I would imagine the rents would get to market value and then my COCR would be at 7% and cash flow would be $490 per unit.
Are these numbers appropriate for having no mortgage? Also, would it be better to take that cash and purchase 2 or 3 smaller properties, forcing me to take out loans for those 2 or 3, paying for the high interest and having low cash flow? Advice is welcome!
0 Reply
Zach Scherschel
Member since 2022 · 33 posts · 44 votes
3y
I agree that purchasing a business with negative cash flow is certainly an acceptable risk and that's ultimately what business is, its risk/reward.
Now, operating the business to profitability is a very different thing. Once a property or any business is purchased, the goal should always be to bring it to profitability. That's where in RE like other business types, operations upon acquisition become critical. I'll never look at a piece of property where there isn't an outlook to cash flow and profitability within a defined timeframe and I'll always have a plan in place to get it there.
Just like an operation making widgets, you should have a plan to cut costs, improve revenue streams (productivity) and control for defects (quality) in your RE. Also, creativity goes a long way, by looking at lease terms and when they're coming due, looking at the area for turning a long-term lease into a mid-term rental and doubling your gross.
Cash flow isn't the only indicator to success with a property for sure, but have a plan to get there, IMO :).
0 Reply
Joe Garretson
Investor · Castle Rock, CO · Member since 2021 · 79 posts · 104 votes
3y
Quote from @Dean Valadez:

I'd like to flip this topic to the other end of the spectrum and ask about paying for a property all cash to avoid the high interest and to get better cash flow. It's not through a 1031, but if I would have the financial means to buy with all cash, is that a wise strategy in this higher interest rate environment? The property, with an all-cash offer, could get a Cap Rate of 8.3%, a COC ROI of about 5.99%, and would cash flow well enough with about $415 per unit. I am new to this field and am looking for insight from experienced investors. I would prefer a higher COCR and a higher cash flow per unit, but the rents are under market and I can slowly raise them to get to market value. By year 2 or the start of year 3, I would imagine the rents would get to market value and then my COCR would be at 7% and cash flow would be $490 per unit.
Are these numbers appropriate for having no mortgage? Also, would it be better to take that cash and purchase 2 or 3 smaller properties, forcing me to take out loans for those 2 or 3, paying for the high interest and having low cash flow? Advice is welcome!

This is a math problem for me. A 6% return is where you start. Let's assume for numbers sake you've got that $100k sitting in the bank. Are you earning 6% on it? Probably not. You could invest in stocks and potentially earn more than 6%. This comes with zero control other than what you buy so the risk is growing. You could buy the property you mentioned and earn 6%. You have greater control, the ability to increase rents, the tax benefits, the appreciation potential. So some risk but much greater upside in terms of control. You can always go get a mortgage when rates come down so you're playing arbitrage with the interest. If you're earning 7-8% but your mortgage is less than that, what could you do with the cash you received from the mortgage? Spin it into more properties?
The tl:dr is buy those properties with the cash and it opens up a ton of options. It's absolutely better than what you have it invested in now. In my opinion anyway.
1 Reply
Tommy Nguyen
Member since 2023 · 40 posts · 34 votes
3y
Hi @Brady Mullen,

I agree with your premise that the mortgage essentially functions as an acquisition cost. However, it's still possible to achieve positive cash flow in this market, and negative cash flow isn't the optimal model for building a long-term portfolio.

Let's consider a scenario where you purchase five rental properties, all of which have a negative cash flow. This would result in two key issues:

1. You'd have less cash on hand to invest in the next property and to save for unexpected events.
2. More of your personal funds would need to be injected into the 'business.'

Indeed, low interest rates and affordable property costs are not on the horizon. An investor typically doesn't acquire a business or asset with the intention of consistently losing money each month. Moreover, investors will eventually hit their maximum threshold for obtaining residential loans.

Consequently, they may shift towards commercial loans, and most underwriters will scrutinize the property's Debt Service Coverage Ratio (DSCR) and performance alone, without relying on external sources. If a property consistently generates negative cash flow, lenders are likely to view it as high-risk and may be reluctant to approve the loan.

0 Reply
Dean ValadezPro Member
Investor · Member since 2023 · 64 posts · 11 votes
3y
Quote from @Joe Garretson:

Quote from @Dean Valadez:

I'd like to flip this topic to the other end of the spectrum and ask about paying for a property all cash to avoid the high interest and to get better cash flow. It's not through a 1031, but if I would have the financial means to buy with all cash, is that a wise strategy in this higher interest rate environment? The property, with an all-cash offer, could get a Cap Rate of 8.3%, a COC ROI of about 5.99%, and would cash flow well enough with about $415 per unit. I am new to this field and am looking for insight from experienced investors. I would prefer a higher COCR and a higher cash flow per unit, but the rents are under market and I can slowly raise them to get to market value. By year 2 or the start of year 3, I would imagine the rents would get to market value and then my COCR would be at 7% and cash flow would be $490 per unit.
Are these numbers appropriate for having no mortgage? Also, would it be better to take that cash and purchase 2 or 3 smaller properties, forcing me to take out loans for those 2 or 3, paying for the high interest and having low cash flow? Advice is welcome!

This is a math problem for me. A 6% return is where you start. Let's assume for numbers sake you've got that $100k sitting in the bank. Are you earning 6% on it? Probably not. You could invest in stocks and potentially earn more than 6%. This comes with zero control other than what you buy so the risk is growing. You could buy the property you mentioned and earn 6%. You have greater control, the ability to increase rents, the tax benefits, the appreciation potential. So some risk but much greater upside in terms of control. You can always go get a mortgage when rates come down so you're playing arbitrage with the interest. If you're earning 7-8% but your mortgage is less than that, what could you do with the cash you received from the mortgage? Spin it into more properties?
The tl:dr is buy those properties with the cash and it opens up a ton of options. It's absolutely better than what you have it invested in now. In my opinion anyway.

You confirmed what I was thinking. Yes, I can put more money into stocks and get at or slightly above that 6%, and in the long term, possibly get even more when the market gets better. But my money in the stock market stays in the stock market and would not be used for re-investing into real estate (unless I pulled it out of course). Having said that, I know my COCR will grow into 7%, then 7.5, then 8, etc in an all-cash property purchase, with more controllables, and allow me to do a cash-out refi later when the rates come back to 6%, 5.5%, or maybe lower. Thus, ultimately, I would have mortgage on the property, but mainly when the rates drop so that I could enjoy the higher cash flow now.
Any other thoughts out there on this? Where are my flaws in my thinking, or possible scenarios I am overlooking?
0 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y
Quote from @Dean Valadez:

I'd like to ask about paying for a property all cash
The property, with an all-cash offer, could get a Cap Rate of 8.3%, a COC ROI of about 5.99%, and would cash flow well enough with about $415 per unit.
By year 2 or3 the rents should get to market value and my COCR would be at 7% and cash flow would be $490 per unit.

I bought for cash when I got at least a 12% discount / equity capture at the buy. This is easiest when buying off-market and no 6% agents need to be fed.

My ROE numbers dropped to be similar to yours, 6% with a PM, 7% self-managed. These were my reluctant mimums to hold at the end for my LL career last year. This was also when savings rates were only 2.5%-3% but climbing.

Now that risk-free, effort-free savings rates are 5%, I'd need an ROE minimum of 7% with a PM, 8% self-managed. That and 12% equity capture at the buy. Is your 5.99% ROE with a PM or self-managed?

Otherwise I'm keeping my cash in money markets and t-bills. RE is too much work and transaction costs too high to bother. I sold when my ROE dropped to still above where you are considering buying at.

What is your PP vs FMV? That's the key question.
1 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
If positive cash flow is your do or die metric to evaluate a property acquisition, then you've probably only invested from 08-22 ish. If you look at physical real estate it's rarely ever intrinsic, only in super low rate territory which made it historically intrinsic. Physical assets require upkeep, etc., make it a long game really. If you're going to evaluate a long term investment based on a cash flow metric from year 1, it's why you are probably a penny chaser and miss the big dollars.
You can bring a million BPers that sit on the cash flow and do or die mantra, but all the major players know where the real underlying value is. It's also why they invest differently than the nonsense posted on here a lot of times. I'd take the top 40-50 investors over the million investors that just following the junk.
3 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Steve Vaughan:

Quote from @Dean Valadez:

I'd like to ask about paying for a property all cash
The property, with an all-cash offer, could get a Cap Rate of 8.3%, a COC ROI of about 5.99%, and would cash flow well enough with about $415 per unit.
By year 2 or3 the rents should get to market value and my COCR would be at 7% and cash flow would be $490 per unit.

I bought for cash when I got at least a 12% discount / equity capture at the buy. This is easiest when buying off-market and no 6% agents need to be fed.

My ROE numbers dropped to be similar to yours, 6% with a PM, 7% self-managed. These were my reluctant mimums to hold at the end for my LL career last year. This was also when savings rates were only 2.5%-3% but climbing.

Now that risk-free, effort-free savings rates are 5%, I'd need an ROE minimum of 7% with a PM, 8% self-managed. That and 12% equity capture at the buy. Is your 5.99% ROE with a PM or self-managed?

Otherwise I'm keeping my cash in money markets and t-bills. RE is too much work and transaction costs too high to bother. I sold when my ROE dropped to still above where you are considering buying at.

What is your PP vs FMV? That's the key question.

Risk free tbills at 5% are what max 52-week term, right. I mean we all know this, that the investment in a house is not 1-year timeline. So as that that yield diminishes, the cash is going to get employed right?

You're going to go back in the market when the Tbill is paying you 2% ands rates are like 4-5%, right? Not worth holding the bill below inflation, and under what an investment yield can garner you.

So if you're going to follow the basic cash principle on how to invest based off when, you're going to follow the mass. And it's pretty safe to say that will not be the right event when supply & demand in the specific investment criteria you're looking at is so lopsided like it is now with real estate. I think following the math is everyone's hangup sometimes, much like it is with debt. Because it is so "logical". Understanding behavioral tendencies will take you further personally. I do believe supply will pick up when rates go down. But i don't think the we see a decline in YoY prices in good to great areas. That's ultimately going to be the biggest issue. It's more plausible we see a small increase, 2-4% in prices.

0 Reply
Sam YinPro Member
Los Angeles, CA · Member since 2021 · 584 posts · 738 votes
3y
There have been some pretty bold claims on this thread. Nice to see the BP banter about investing, risk, cash flow, and REI headaches continue in perpetuity.
I would like to add that there are those that view REI as a hobby, a side hustle, trophy collections, while others look to it for financial freedom, wealth building, and as a lifestyle. Some on this thread appear to more of the former than the latter.
It is my opinion that those who are looking for financial freedom or to use REI to sustain a lifestyle will tend to use cash flow as a primary metric. The other metrics are a bonus, but cash flow will allow them to get off the W2 treadmill. As they grow, they generally tend to either create better efficiencies through management refinements, or some transition to syndication.
At the other end, those that either have great jobs and want to dabble, or already have a steady cash flow and want just to collect more or pursue a dream of generational wealth building will chant the mantra of cash flow is not everything. They will tout that it's about appreciation, long term hold, buy in A areas with negative cash flow but greater potential, etc...
The point is that there is no one size fits all strategy. However, there are best practices and efficient strategies for each individuals situation and goals.
I think we, as a collective forum, should be cognizant and preempt our ideas with the background and basis of the claims. This will help members, that come from various stages, to better understand what investment philosophy might help them best.
I, personally, am not in the position to buy knowing a negative cashflow for a year or two is the outcome. I feel the opportunity lost is too great in that time frame. I have made deals with a negative cash flow projection, using bridge debt, but only because there is an untapped $2M - $3M equity that just needs a few months of shuffling paper and adding lipstick. Even in those situations, the cash flow is closer to zero versus negative. Outside of those opportunities, it must cash flow because it is a business that must sustain itself.
I chose to make REI my only source of income to sustain my lifestyle, my family, and to build wealth. For me, I do not see any good that will crome from the original OP. But I understand that it is an option and a play for those that do not need the cash flow. Or for those that just want to collect grade A properties for the future, as trophies, or for their heirs.
I say this because I question if anyone who banks on appreciation ever does a stress test on their portfolio. Will they be able to sustain a 15% to 30% reduction in gross, and still be able to maintain the properties, especially if refinancing/sales is not an option due to a credit crunch? If their other source of income is great enough to withstand that, then I think the original OP philosophy is golden. If not, you better re think investing for cash flow.
My strategy is to maintain 65% or less LTV position. I strive to keep my margins above 30%. The model also involves not more than 4 to 8 hours of actual required work from my part. Thus, cash flow was key. When I add depreciation, appreciation, passive income tax benefits, 1031 rules, write offs, and other tax strategies, it works best for me right now, later, and after I die.
Just my 0.02
3 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y
Quote from @V.G Jason:

Quote from @Steve Vaughan:

Quote from @Dean Valadez:

I'd like to ask about paying for a property all cash
The property, with an all-cash offer COC ROI of about 5.99%, and would cash flow well enough with about $415 per unit.
I bought for cash when I got at least a 12% discount / equity capture at the buy. This is easiest when buying off-market and no 6% agents need to be fed.
Now that risk-free, effort-free savings rates are 5%, I'd need an ROE minimum of 7% with a PM, 8% self-managed. That and 12% equity capture at the buy. Is your 5.99% ROE with a PM or self-managed?

Otherwise I'm keeping my cash in money markets and t-bills. RE is too much work and transaction costs too high to bother. I sold when my ROE dropped to still above where you are considering buying at.

What is your PP vs FMV? That's the key question.

Risk free tbills at 5% are what max 52-week term, right. I mean we all know this, that the investment in a house is not 1-year timeline. So as that that yield diminishes, the cash is going to get employed right?

You're going to go back in the market when the Tbill is paying you 2% ands rates are like 4-5%, right? Not worth holding the bill below inflation, and under what an investment yield can garner you.

So if you're going to follow the basic cash principle on how to invest based off when, you're going to follow the mass. And it's pretty safe to say that will not be the right event when supply & demand in the specific investment criteria you're looking at is so lopsided like it is now with real estate. I think following the math is everyone's hangup sometimes, much like it is with debt. Because it is so "logical". Understanding behavioral tendencies will take you further personally. I do believe supply will pick up when rates go down. But i don't think the we see a decline in YoY prices in good to great areas. That's ultimately going to be the biggest issue. It's more plausible we see a small increase, 2-4% in prices.

I was just saying I'm not doing all the work and risk RE is for the same yield or CAP I can get risk-free doing nothing without purchasing at a significant discount to FMV.
Paying retail and anticipating 2-4% appreciation isn't attractive to me either.
To each their own. I won't buy at retail, especially now.

2 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Sam Yin:

There have been some pretty bold claims on this thread. Nice to see the BP banter about investing, risk, cash flow, and REI headaches continue in perpetuity.
I would like to add that there are those that view REI as a hobby, a side hustle, trophy collections, while others look to it for financial freedom, wealth building, and as a lifestyle. Some on this thread appear to more of the former than the latter.
It is my opinion that those who are looking for financial freedom or to use REI to sustain a lifestyle will tend to use cash flow as a primary metric. The other metrics are a bonus, but cash flow will allow them to get off the W2 treadmill. As they grow, they generally tend to either create better efficiencies through management refinements, or some transition to syndication.
At the other end, those that either have great jobs and want to dabble, or already have a steady cash flow and want just to collect more or pursue a dream of generational wealth building will chant the mantra of cash flow is not everything. They will tout that it's about appreciation, long term hold, buy in A areas with negative cash flow but greater potential, etc...
The point is that there is no one size fits all strategy. However, there are best practices and efficient strategies for each individuals situation and goals.
I think we, as a collective forum, should be cognizant and preempt our ideas with the background and basis of the claims. This will help members, that come from various stages, to better understand what investment philosophy might help them best.
I, personally, am not in the position to buy knowing a negative cashflow for a year or two is the outcome. I feel the opportunity lost is too great in that time frame. I have made deals with a negative cash flow projection, using bridge debt, but only because there is an untapped $2M - $3M equity that just needs a few months of shuffling paper and adding lipstick. Even in those situations, the cash flow is closer to zero versus negative. Outside of those opportunities, it must cash flow because it is a business that must sustain itself.
I chose to make REI my only source of income to sustain my lifestyle, my family, and to build wealth. For me, I do not see any good that will crome from the original OP. But I understand that it is an option and a play for those that do not need the cash flow. Or for those that just want to collect grade A properties for the future, as trophies, or for their heirs.
I say this because I question if anyone who banks on appreciation ever does a stress test on their portfolio. Will they be able to sustain a 15% to 30% reduction in gross, and still be able to maintain the properties, especially if refinancing/sales is not an option due to a credit crunch? If their other source of income is great enough to withstand that, then I think the original OP philosophy is golden. If not, you better re think investing for cash flow.
My strategy is to maintain 65% or less LTV position. I strive to keep my margins above 30%. The model also involves not more than 4 to 8 hours of actual required work from my part. Thus, cash flow was key. When I add depreciation, appreciation, passive income tax benefits, 1031 rules, write offs, and other tax strategies, it works best for me right now, later, and after I die.
Just my 0.02

I assume you're talking about someone like me with the latter. But I'd argue that guy on a treadmill $60k/annual salary is better off going into the true wealth creation which is not looking at pennies, but chasing dollars. That's subsidizing a better property at the expense of something else(a car note, maybe some vacation, something else). You prioritize where you spend your money, but if you're trying to be truly wealthy person you start with zero debt(consumer) and start going for quality over quantity. Not how can i leverage my heloc for a 4th property that makes me $200/mo but if i have a $1000 expense, I am screwed.
I know the "diversification" crew will light me up for this, but the best swing in a narrow tunnel. And make it big. Buy 1 property every 3-5 years and prioritize a really good neighborhood if you're with limited means. But make sure you don't have any debt first.
0 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Steve Vaughan:

Quote from @V.G Jason:

Quote from @Steve Vaughan:

Quote from @Dean Valadez:

I'd like to ask about paying for a property all cash
The property, with an all-cash offer COC ROI of about 5.99%, and would cash flow well enough with about $415 per unit.
I bought for cash when I got at least a 12% discount / equity capture at the buy. This is easiest when buying off-market and no 6% agents need to be fed.
Now that risk-free, effort-free savings rates are 5%, I'd need an ROE minimum of 7% with a PM, 8% self-managed. That and 12% equity capture at the buy. Is your 5.99% ROE with a PM or self-managed?

Otherwise I'm keeping my cash in money markets and t-bills. RE is too much work and transaction costs too high to bother. I sold when my ROE dropped to still above where you are considering buying at.

What is your PP vs FMV? That's the key question.

Risk free tbills at 5% are what max 52-week term, right. I mean we all know this, that the investment in a house is not 1-year timeline. So as that that yield diminishes, the cash is going to get employed right?

You're going to go back in the market when the Tbill is paying you 2% ands rates are like 4-5%, right? Not worth holding the bill below inflation, and under what an investment yield can garner you.

So if you're going to follow the basic cash principle on how to invest based off when, you're going to follow the mass. And it's pretty safe to say that will not be the right event when supply & demand in the specific investment criteria you're looking at is so lopsided like it is now with real estate. I think following the math is everyone's hangup sometimes, much like it is with debt. Because it is so "logical". Understanding behavioral tendencies will take you further personally. I do believe supply will pick up when rates go down. But i don't think the we see a decline in YoY prices in good to great areas. That's ultimately going to be the biggest issue. It's more plausible we see a small increase, 2-4% in prices.

I was just saying I'm not doing all the work and risk RE is for the same yield or CAP I can get risk-free doing nothing without purchasing at a significant discount to FMV.
Paying retail and anticipating 2-4% appreciation isn't attractive to me either.
To each their own. I won't buy at retail, especially now.

I know what you're saying, but you're getting that for a max 52-week timeline. You're not getting that for the lifetime of an investment in real estate. We're comparing apples to oranges in that front.

Anytime someones says why buy a house @ 7% that can't make me much, I can get a 5% tbill. You're married to the house not the tbill. Depending on your risk and age, etc., that'll almost always be the better route. When the tbill yield declines, the underlying notes for mortgages will to and that asset you're already married to will likely increase. But now when you see that rates are down you go invest in real estate and wow that house you saw is already up significantly from when you wanted.

You could always buy a 10 year bill @4% but you're now your risking it against inflation not booming post rate drops. Not a bad hedge for 3-5% of your investment funds though. Everyone's evaluating things off today when really maturity is such a different timeline. I usually invest in a contrarian fashion, so obviously not everyone's cup of tea. It's not by design, but yeah this thread is a great one for a variety of views.
1 Reply
Sam YinPro Member
Los Angeles, CA · Member since 2021 · 584 posts · 738 votes
3y
Quote from @V.G Jason:

Quote from @Sam Yin:

There have been some pretty bold claims on this thread. Nice to see the BP banter about investing, risk, cash flow, and REI headaches continue in perpetuity.
I would like to add that there are those that view REI as a hobby, a side hustle, trophy collections, while others look to it for financial freedom, wealth building, and as a lifestyle. Some on this thread appear to more of the former than the latter.
It is my opinion that those who are looking for financial freedom or to use REI to sustain a lifestyle will tend to use cash flow as a primary metric. The other metrics are a bonus, but cash flow will allow them to get off the W2 treadmill. As they grow, they generally tend to either create better efficiencies through management refinements, or some transition to syndication.
At the other end, those that either have great jobs and want to dabble, or already have a steady cash flow and want just to collect more or pursue a dream of generational wealth building will chant the mantra of cash flow is not everything. They will tout that it's about appreciation, long term hold, buy in A areas with negative cash flow but greater potential, etc...
The point is that there is no one size fits all strategy. However, there are best practices and efficient strategies for each individuals situation and goals.
I think we, as a collective forum, should be cognizant and preempt our ideas with the background and basis of the claims. This will help members, that come from various stages, to better understand what investment philosophy might help them best.
I, personally, am not in the position to buy knowing a negative cashflow for a year or two is the outcome. I feel the opportunity lost is too great in that time frame. I have made deals with a negative cash flow projection, using bridge debt, but only because there is an untapped $2M - $3M equity that just needs a few months of shuffling paper and adding lipstick. Even in those situations, the cash flow is closer to zero versus negative. Outside of those opportunities, it must cash flow because it is a business that must sustain itself.
I chose to make REI my only source of income to sustain my lifestyle, my family, and to build wealth. For me, I do not see any good that will crome from the original OP. But I understand that it is an option and a play for those that do not need the cash flow. Or for those that just want to collect grade A properties for the future, as trophies, or for their heirs.
I say this because I question if anyone who banks on appreciation ever does a stress test on their portfolio. Will they be able to sustain a 15% to 30% reduction in gross, and still be able to maintain the properties, especially if refinancing/sales is not an option due to a credit crunch? If their other source of income is great enough to withstand that, then I think the original OP philosophy is golden. If not, you better re think investing for cash flow.
My strategy is to maintain 65% or less LTV position. I strive to keep my margins above 30%. The model also involves not more than 4 to 8 hours of actual required work from my part. Thus, cash flow was key. When I add depreciation, appreciation, passive income tax benefits, 1031 rules, write offs, and other tax strategies, it works best for me right now, later, and after I die.
Just my 0.02

I assume you're talking about someone like me with the latter. But I'd argue that guy on a treadmill $60k/annual salary is better off going into the true wealth creation which is not looking at pennies, but chasing dollars. That's subsidizing a better property at the expense of something else(a car note, maybe some vacation, something else). You prioritize where you spend your money, but if you're trying to be truly wealthy person you start with zero debt(consumer) and start going for quality over quantity. Not how can i leverage my heloc for a 4th property that makes me $200/mo but if i have a $1000 expense, I am screwed.
I know the "diversification" crew will light me up for this, but the best swing in a narrow tunnel. And make it big. Buy 1 property every 3-5 years and prioritize a really good neighborhood if you're with limited means. But make sure you don't have any debt first.

I post was not totally referring to you, but also others that appear to subscribe to similar views.
I agree with you partially, but not fully. From my point of view, the 3-5 year timeline to get quality of over quantity is a bit overrated. It is trending toward the Dave Ramsey methodology. That is great if you are well off already. But starting from zero, depending on age, timeline, and specific goal posts for wealth building, I feel that you are missing out on a ton of opportunity and growth. Understanding REI, the velocity of money, leverage, and frequency of trade in a given area is one of the best ways to scale, grow, build cash flow, and create the ability to enter in those quality markets at scale as well.
For example, if you had $30k and can only add another 20K to 30K at best per year for start-up capital, it would would take those 3 to 5 years to be able to possibly break into quality areas. This is also of course assuming you have paid down other debts. In a decade or two, or three, you would be able to pick up several more quality assets, with higher yields off the bat because you bought the equity and held longer for cash flow growth. The understanding is that there will be more stable tenancy, etc... May be, after a few decades this methods can accumulate $10M to $20M of quality assets and begin to consistently generate $500K to $1M in cash flow, with an average of about 50% LTV... may be... If you started young, great! If you did not, and started later, the likelihood of enjoying that $500K lifestyle in great health is less likely.
That same example, deploying immediately into an area with lesser quality (lesser capital required), and you can likely 3X to 20X the end result after a decade, or two, or three. That has to do with the ability to get in the market ASAP, maximize leverage, gain experience, create a network through frequency, and exchange equity into larger assets quicker. I would wager that after a few decades, there is a higher likelihood that the accumulated asset of the same quality would be closer to $50M to $150M. At about 50% LTV, that should generate plenty of cash flow to enjoy, along with much greater wealth.
But here is the kicker, between the two examples, the latter can slow down/quit sooner to enjoy a more leisurely lifestyle at an earlier age. That's the key! I am still very young and feel very healthy. However, I am well aware of the pace of health degradation as you age. I am also very keen on life experiences with your children when they are young. Because I know that it is often not what you hope it will be when they are older. They will have their own lives to live.
But I digress. I do understand that the right way is different for everyone because not everyone has the same commitments internally. I am committed to my children and my bloodline. Thus I tailored my strategy to that. In a few short years of intentional investing, I retired early from a great W2 and was willing to forego a 6-figure pension with only a couple of years left. That is because of the latter example I gave. By the way, I came from zero. A refugee who started with Zero English, zero money, zero family network, and zero REI background. And I would like to add that I am not an anomaly, I am just one that was willing to open up and share.

I am very well aware of other's perspectives on this. I just happen to feel strongly about opportunity loss if you wait for those home runs.
0 Reply
Brady MullenPro Member
OP
Denver, CO · Member since 2021 · 61 posts · 100 votes
3y
Quote from @Sam Yin:

There have been some pretty bold claims on this thread. Nice to see the BP banter about investing, risk, cash flow, and REI headaches continue in perpetuity.
I would like to add that there are those that view REI as a hobby, a side hustle, trophy collections, while others look to it for financial freedom, wealth building, and as a lifestyle. Some on this thread appear to more of the former than the latter.
It is my opinion that those who are looking for financial freedom or to use REI to sustain a lifestyle will tend to use cash flow as a primary metric. The other metrics are a bonus, but cash flow will allow them to get off the W2 treadmill. As they grow, they generally tend to either create better efficiencies through management refinements, or some transition to syndication.
At the other end, those that either have great jobs and want to dabble, or already have a steady cash flow and want just to collect more or pursue a dream of generational wealth building will chant the mantra of cash flow is not everything. They will tout that it's about appreciation, long term hold, buy in A areas with negative cash flow but greater potential, etc...
The point is that there is no one size fits all strategy. However, there are best practices and efficient strategies for each individuals situation and goals.
I think we, as a collective forum, should be cognizant and preempt our ideas with the background and basis of the claims. This will help members, that come from various stages, to better understand what investment philosophy might help them best.
I, personally, am not in the position to buy knowing a negative cashflow for a year or two is the outcome. I feel the opportunity lost is too great in that time frame. I have made deals with a negative cash flow projection, using bridge debt, but only because there is an untapped $2M - $3M equity that just needs a few months of shuffling paper and adding lipstick. Even in those situations, the cash flow is closer to zero versus negative. Outside of those opportunities, it must cash flow because it is a business that must sustain itself.
I chose to make REI my only source of income to sustain my lifestyle, my family, and to build wealth. For me, I do not see any good that will crome from the original OP. But I understand that it is an option and a play for those that do not need the cash flow. Or for those that just want to collect grade A properties for the future, as trophies, or for their heirs.
I say this because I question if anyone who banks on appreciation ever does a stress test on their portfolio. Will they be able to sustain a 15% to 30% reduction in gross, and still be able to maintain the properties, especially if refinancing/sales is not an option due to a credit crunch? If their other source of income is great enough to withstand that, then I think the original OP philosophy is golden. If not, you better re think investing for cash flow.
My strategy is to maintain 65% or less LTV position. I strive to keep my margins above 30%. The model also involves not more than 4 to 8 hours of actual required work from my part. Thus, cash flow was key. When I add depreciation, appreciation, passive income tax benefits, 1031 rules, write offs, and other tax strategies, it works best for me right now, later, and after I die.
Just my 0.02
Great post!

I want to be clear that I never recommended negative cash flow. That is only acceptable in the case you mentioned where you have enough reliably disposable to be comfortable with that.

I was just pointing out that real estate generally is still a good business to buy. But if you need to break even or cash flow positively right out of the gate, and you’re not willing to put more than 20-25% down, then your options are more limited than they were before.

And the “before” I’m referring to is not coming back anytime soon, so we need to stop waiting around for it.

Thanks for chiming in, Sam!
1 Reply

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