How do you fund property repairs/expenses if you are “investing for equity”?

[Kyle Kline]

On a recent Bigger Pockets Podcast episode (link above) the guest discussed the idea of investing for equity and not cash flow. Unless I missed it throughout the episode, I do not recall them ever discussing how you cover the cost of property repairs and capital expenditures if you are not concerned about the property making extra money each month. I am assuming that these expenses should be factored into your budget prior to calculating your cash flow. However, it seems risky to own a property that you would barely break even on each month in the case of an unexpected emergency. Am I missing something or misunderstanding what they are saying? Any thoughts are greatly appreciated!

[Arn Cenedella]

@Kyle Kline

“Investing for equity and not cash flow” doesn’t mean “buy properties that don’t cash flow.”

To me, invest for equity not cash flow means that the PRIMARY reason to invest is for equity growth and an increase in net worth and NOT cash flow.

I’ve been investing for over 40 years and while cash flow is important, it’s not why invest.

A property must be self supporting ie produce enough cash flow to cover debt service, operational expenses including repairs and replacements. So even if the cash flow is only 3% or 4% cash on cash, that’s enough to provide a protective layer to cover unexpected items.

To me, the cash flow is NOT to put spendable cash in my pocket NOW but rather keep the property self supporting while it increases in value over the long term.

In addition, every property a purchase has a cash reserve fund - call it my rainy day fund or my Sominex account (ie I can sleep at night knowing if the furnace goes out I have $8,000 in my reserve fund to replace it.)

One final note, I have found once one reaches a certain net worth, cash flow no longer is a concern, there is always as much cash flow as anyone wants.

Final note, who will have more cash flow someone with $1M investible cash or $3M investible cash? The answer is obvious.

I invest to create equity growth.

Hope this helps,

Arn