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!

[Michael Byers]

Have the tenant pay for repairs and maintenance with future rent increases by using a line of credit. If a HVAC  or roof need to be replaced for and your bill is 15k, use the line of credit on the property to pay for it and increase the rent to help cover the payment. 

[Shiloh Lundahl]

@Kyle Kline your post exposes your problem. You have a concept (investing in real estate), but you don’t have a specific plan. 

In other words. Like Covey wrote, begin with the end in mind. What do you want real estate to do for you? Once you are certain about that, then you can create the plan to get there.

Let me give you an example. My goal is to get to 50k per month in net income from our businesses. We had a large portfolio and have sold a lot of it. Currently we have about 50 single family homes with about 35% equity. We also have some mobile home parks that we are selling and we have some luxury short term rentals. We don’t get cash flow from our real estate right now. But for the most part it sustains itself. Over the next 3 - 5 years I plan to 1031 exchange all of our single family homes and purchase another 40 that won’t have mortgages (we use the lease option model to sell our properties to maximize profits so we cycle through properties every 3-5 years). I will be also partnering with other investors to purchase another 40 properties where we will split the profits. So with 40 paid off properties and another 40 properties with partners and the other businesses that we own we I should meet that cash flow goal. 

So Kyle, I would encourage you to figure out what you want your real estate to do for you and then work backwards. 

[Paul Cijunelis]

Quote from @Kyle Kline:

On a recent Bigger Pockets Podcast episode (link above) the guest discussed the idea of investing for equity and not cash flow. [...] 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.

Kyle some investors are in a different place than others. If you are starting this is an approach that assumes more risk tolerance. If you want less risk it's not for you. the cost of capital right now is forcing some to get deals at par and hope for appreciation (due to inflation). this works if you have other income to offset.

[Andy Lanyi]

@Arn Cenedella

Here is something that is not brought up very often when you purchase properties. Where do you want to spend your cash, give it to UNCLE SAM or put it into rehabbing property. if you want to off set your W2, purchase a STR. If you want to off set business income anything is available. Always try to purchase with value add in mind, it is tax deductible and brings up your value. You can never bank on sale price in five years, and then you take a six percent hit from the agents when you sale. That is three of the five years of appreciation. Then on top of that I have four multifamily in Southern California, and they really have not appreciated that much except for the value add that I have forced.

[Arn Cenedella]

@Andy Lanyi

Good comments on how to reduce tax bill. 

I would make one distinction and that’s between an expense and a capital improvement. 

An expense is relax deductible. A capital improvement is not - it gets added to the basis which ultimately reduces the tax due on sale but it’s not tax deductible in the sense in reduces current income. 

There is of course a grey area between what’s a repair expense and what is a capital improvement. 

I’m curious about your comment no appreciation in your SoCal properties. 

When did you purchase them?

If 2022 or later the values have dropped due to higher cap and interest rates so if you have gotten any appreciation at least you haven’t lost money. 

If you owned them for 10 years, I’d be very surprised if they are not worth more today than when you bought. 

Just curious. 

Arn

[Kyle Kline]

Quote from @Shiloh Lundahl:

@Kyle Kline your post exposes your problem. You have a concept (investing in real estate), but you don’t have a specific plan. 

In other words. Like Covey wrote, begin with the end in mind. What do you want real estate to do for you? Once you are certain about that, then you can create the plan to get there.

Let me give you an example. My goal is to get to 50k per month in net income from our businesses. We had a large portfolio and have sold a lot of it. Currently we have about 50 single family homes with about 35% equity. We also have some mobile home parks that we are selling and we have some luxury short term rentals. We don’t get cash flow from our real estate right now. But for the most part it sustains itself. Over the next 3 - 5 years I plan to 1031 exchange all of our single family homes and purchase another 40 that won’t have mortgages (we use the lease option model to sell our properties to maximize profits so we cycle through properties every 3-5 years). I will be also partnering with other investors to purchase another 40 properties where we will split the profits. So with 40 paid off properties and another 40 properties with partners and the other businesses that we own we I should meet that cash flow goal. 

So Kyle, I would encourage you to figure out what you want your real estate to do for you and then work backwards. 

Thank you for your input! I certainly am still trying to figure out my path and am attempting to get as much information as I can before doing so. This is helpful advice and I appreciate your time. 

[Kyle Kline]

Quote from @Paul Cijunelis:

Quote from @Kyle Kline:

On a recent Bigger Pockets Podcast episode (link above) the guest discussed the idea of investing for equity and not cash flow. [...] 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.

Kyle some investors are in a different place than others. If you are starting this is an approach that assumes more risk tolerance. If you want less risk it's not for you. the cost of capital right now is forcing some to get deals at par and hope for appreciation (due to inflation). this works if you have other income to offset.

That makes a lot of sense. I appreciate your input!

[Kyle Kline]

Quote from @Jake Baker:

@Kyle Kline

My Take on Cash Flow: 
- Cash Flow is a hedge against corrections. Cash flow (in my portfolio as a whole) covers my expenses. 
- Forced Apperception (BRRRR or buying at a discount) is also a hedge against corrections. Forced appreciation allows me to build equity from the beginning of the investment, so if I need to firesale for an unforeseeable reason, I will not be underwater.
- Debt-Paydown is a result of time. This is the easiest to predict. Tax Benefits are also a result of time, good bookkeeping, and tax advisory.
- Market Appreciation is the least predictable, but historically, where you will make the most money. Real Estate values, nationally, have never decreased over any 10 years.

Thank you! This makes sense and I appreciate your input. 

[Paul Cijunelis]

Quote from @Kyle Kline:

Quote from @Paul Cijunelis:

Quote from @Kyle Kline:

On a recent Bigger Pockets Podcast episode  [...] 

Kyle some investors are in a different place than others. If you are starting this is an approach that assumes more risk tolerance. If you want less risk it's not for you. the cost of capital right now is forcing some to get deals at par and hope for appreciation (due to inflation). this works if you have other income to offset.

That makes a lot of sense. I appreciate your input!

Kyle, you can fund an entire acquisition with OPM (other people's money). It's your risk tolerance. I rarely use OPM to fund a rehab but I sometimes use OPM to fund an acquisition. For example, I used a HML (hard money lender) to fund the acquisition of a property in Indiana I purchased off-market from someone in foreclosure, but paid for the rehab with my own cash. It's being listed/rented right now. This was an Oct 15th acquisition and took about 2 months to clean out and repair/rehab. So the timeline is dependent on experience, amount of work, contractor trustworthiness and promptness, etc. A typical rehab is going to be 3-4 months, with a month to list/rent. I would figure 6 months carry cost (cost to carry the property while it is vacant). So there's acquisition, rehab/repair, carry, insurance (vacant/contractor insurance, yes there's two types), and any other expenses (closing, etc). If you had eyes on the property and have a good idea on all this you can hit the HML for all the costs and take draws after the initial acquisition to do the rehab for the rest of the amount. Good luck.

[Trevor Finn]

Quote from @Kyle Kline:

Quote from @Trevor Finn:

@Kyle Kline you bring up a great point, and it's important to clarify the idea of investing for equity versus cash flow. The concept discussed likely assumes that you're building equity through appreciation or loan pay-down, while any cash flow is minimal or neutral. However, this strategy doesn't eliminate the need to budget for repairs and capital expenditures (CapEx).

You’re right that without cash flow, unexpected expenses like emergencies or major repairs can be risky. To mitigate this, investors focused on equity typically maintain a CapEx reserve fund or factor in their personal finances to cover these costs, ensuring they don’t face financial strain. It’s not that these expenses aren’t important—they should absolutely be planned for even if the property isn’t producing extra cash monthly.

So no, you’re not misunderstanding—it’s just that the guest may have assumed investors in this strategy are prepared for such expenses through other means, like savings or planned reserves.

Thanks for your input! This specific guest was a physician and sounded as though he had a fair amount of personal income that could be used to support his property. My concern is that without that amount of personal income available I would have difficulty establishing a sufficient amount of reserves for emergencies. Thanks, again!

 You're welcome, Kyle - all the best on your RE journey!