Is Relying on Cash Flow Feasible?

[Christopher Morris]

Listening to all of the podcasts and reading the BP books / Rich Dad Poor Dad types makes it seem like building a portfolio and scaling smart could lead to early retirement and living on cash flow that ultimately replaces your income. 

But, talking to real life investors at RE meetups seems to come with a different answer. Many investors told me cash flow is a myth that all of it just goes right back into the property for repairs, vacancies, etc. 

I’m sure it’s a combination of both - but what should we believe as newer investors? Many investors seem to flip houses or have another form of income coming in (not a W2). I’ve been much more interested in flipping but I’m curious if that’s the common way to retire with RE on top of long-term holds with cash flow. 

Thoughts?

[Arn Cenedella]

@Christopher Morris

You hit the nail on the head.

The “retire on real estate cash flow” gurus sell the dream of quick retirement from cash flow.

Buy two houses a year that each cash flow $1000 a month and retire in 5 years, they preach.

Or invest passively in real estate syndications and financial freedom will soon be yours, they promise.

What they don’t tell you is:

In order to owner enough real estate to generate say $10,000 a month income let’s say, you need at least $2M of capital invested in YES cash flowing real estate.

Let’s say one could buy rental real estate that provides a 6% annual cash on cash return. It could be either single family or multifamily. And truth be told, a 6% ConC return year one is hard to find but let’s stipulate to that return.

To get $10,000 a month, $120,000 a year off 6% annual cash on cash, how much capital does one need invested?

$120,000/0.06 equals $2,000,000.

So in my mind the target should NOT be cash flow but rather building net worth.

Despite what the gurus say, sufficient cash flow to be financially free can only come once one has sufficient capital to invest.

Let’s be clear I only buy apartment propeties that cash flow but immediate cash flow to put spendable dollars in my pocket is NOT the primary goal. The primary goal is appreciation adding value building equity and therefore net worth.

I’ve been at this “game” 46 years  and there is no magic bullet.

It takes time, discipline and consistent effort.

But it can be done in 10 years.

Of course this means living below one’s means - ie spend less than they make - to develop and build cash and capital that can be invested and then watch ot grow over time.

Hope this helps.

Arn