Cash flow vs equity discussion in recent Podcast

[Kyle Luman]

I just listened to the recent BP podcast with Dr Benjamin Aaker and Dave Meyer from a couple of weeks ago.

https://www.biggerpockets.com/blog/real-estate-1045

There was a section where Dr Aaker talks about focusing on equity and trying to avoid cash flow since he didn't want more income presently while earning money as a physician.  They didn't dig into specifics on how to do that.  I've been analyzing deals looking more at cash flow, but like Dr Aaker, I don't need cash now and I can't become a real estate professional for a while since I'm working more than 40 hours weekly in my W2 job.

I had hoped Dave Meyer might have asked more specifics on how you design for equity instead of cash flow.

I can think of these ways, but I feel that I am probably missing some of the best ideas:

1. Buy in appreciating areas. Obvious, but maybe the least reliable as it is somewhat by chance. Past performance doesn't guarantee the same future performance.  For instance, a starter home on the wrong side of town in central California is ~$400k now.  Is it really going to be $500k in 10 years?

2. If it looks like it will cash flow too much, take a larger loan (put less down) and use the remaining capital for other properties.  Not sure I want to end up paying higher interest rates due to smaller down payments.

3. Get a 15 or 20 year loan (higher monthly). The cash that would flow in a 30 yr loan underwriting scenario is sent back to the bank so that builds equity faster.

Forced appreciation, while excellent overall, I am not sure it helps in this situation to avoid income from cash flow as that will probably both provide equity, but also increase cash flow right away.  Are there other ways to focus on equity and minimize cash flow?

[V.G Jason]

Quote from @Kyle Luman:

I just listened to the recent BP podcast with Dr Benjamin Aaker and Dave Meyer from a couple of weeks ago.

https://www.biggerpockets.com/blog/real-estate-1045

There was a section where Dr Aaker talks about focusing on equity and trying to avoid cash flow since he didn't want more income presently while earning money as a physician.  They didn't dig into specifics on how to do that.  I've been analyzing deals looking more at cash flow, but like Dr Aaker, I don't need cash now and I can't become a real estate professional for a while since I'm working more than 40 hours weekly in my W2 job.

I had hoped Dave Meyer might have asked more specifics on how you design for equity instead of cash flow.

I can think of these ways, but I feel that I am probably missing some of the best ideas:

1. Buy in appreciating areas. Obvious, but maybe the least reliable as it is somewhat by chance. Past performance doesn't guarantee the same future performance.  For instance, a starter home on the wrong side of town in central California is ~$400k now.  Is it really going to be $500k in 10 years?

2. If it looks like it will cash flow too much, take a larger loan (put less down) and use the remaining capital for other properties.  Not sure I want to end up paying higher interest rates due to smaller down payments.

3. Get a 15 or 20 year loan (higher monthly). The cash that would flow in a 30 yr loan underwriting scenario is sent back to the bank so that builds equity faster.

Forced appreciation, while excellent overall, I am not sure it helps in this situation to avoid income from cash flow as that will probably both provide equity, but also increase cash flow right away.  Are there other ways to focus on equity and minimize cash flow?

Who is looking to avoid cash flow? I think you're thinking not prioritizing cash flow is synonymous with avoiding it-- it's not.

A high earner is not prioritizing cash flow, that's fine. To dismiss it is every bit is as bad. You want to mitigate cash flow loss while prioritizing quality land for appreciation, tenant quality, and to lower your risk profile. 

Risk in real estate is not beta like an equity, it's going to mitigated by the quality, location, and leverage in the property among other facets. 

The advice is to not dismiss an attractive location just because it doesn't cash flow $x dollars or CoC isn't X%. That's missing the forest for the trees, but you do need to manage cash flow because if you're buying conventional you'll come across DTI issues soon and if you're buying nonQM it needs to be 1:1 ratio at minimum to be qualified without unfavorable terms. 

There's a ton of different strategies to do this.

My recommendation is still going to be the same as I've put in other threads; buy 1.25x DSCR in a very good area or up & coming area of a very good city ideally through BRRR(you'll keep 10-30% of the capital in the deal likely), invest ideally 60-80% of your downpayment(no less than 33%) in a debt note fund that matures in 2-4 years.

Both are in held in the same LLC or your name, you'll be net cash flow positive and be owning the debt, equity, and hard asset at different ratios that's relatively strong for performance growth in the portfolio. This will allow you to continue to borrow more, give you cash flow and appreciation.