NET WORTH/EQUITY or CASH FLOW?

Question

NET WORTH/EQUITY pros: 1) Ability to leverage assets with current low interest. 2) tax free money which could become very valuable with the new administration.

CASH FLOW pros: 1) money without debt for real operations. 2) the beauty with real estate cashflow is that you can depreciate to show less cashflow on assets that are almost always appreciating.

Which do you strive for? Where is the balance?

Joe Villeneuve · Answer

As far as I'm concerned, you have to have both from the start. Having one without the other, is like having steak using just a fork...or just a knife.  Hard to use your fork if you can't cut it as easily as you can if you had a knife, and after the knife cuts the steak, although the knife works as a fork, it's not nearly as easy and efficient.

In the end, you lose a lot of good steak using only one, and it takes much longer to get to the chocolate cake (retirement).

Joe Villeneuve · Answer

I've always wondered, why is the question always, "one or the other"?

What do I strive for?  Both.

Account Closed · Answer

Cash flow is a useless metric because it can be manipulated by a dozen factors. A cashflow of 1K/door sounds great. But what if it takes $1M in value to generate it? Not so good anymore right? Or its manipulated by leverage. Or length of mortgage. Or by deferring maintenance. What matters in investing is IRR (or ROI as a simple substitute). Actually its risk adjusted return that is the most important. For example you buy a 1% rule property with expenses of 50%. That nets you about 6% per year. Sounds good. Sure when banks pay 0.1% it sounds awesome. But lets say we go back to the 90s where a money market pays 5%. Now what do you think? So you always compare projected return with the risk free rate. This is also why the stock market can trade at a PE of 33 and still make sense. Why? Because a 33 PE is 3% earnings yield when the 10 year treasury pays under 1%. So still better than risk free return (about 3X better).

Cash flow matters in the end of the game when you decide to live off the income from your investments. But even then you could just sell a property with high equity and spend it down over time.

Justin Thorpe · Answer

@Sean Wilkinson

Equity is a wealthy mans play. The best and the only way to get rich is to take a lot of equity in an asset or enterprise.

Think about it if guys like Jeff Bezos or Elon Musk had given up equity and settled on a “high” salary instead, they would have “cash flow” but not have a fraction of the wealth they have today. But they were smart guys and kept a lot of equity. So equity is the ticket to riches.

Cash flow on the other hand is a ticket to comfort. It’s a middle class play where paying bills and maintaining a life style is important vs building an empire unless of course you use cash flow to reinvest in other assets.

In an RE situation I would not want to burn cash but I would be happy with a small cash flow as long as I can see or create appreciation. Wealth creation is the goal.

Nicole W. · Answer

I go for an area that sees both...good rents with low enough purchase for a good property. When I started I just got a lot of houses & an apt with loans. Over time I built equity up and did an exchange to some properties for cash. I am now retired and live off that cash flow. Some advise against doing this cash buying and not using the equity but I am happy where I am at and it is what I dreamed of. When I started though, I had a regular job that I could help pay expenses and mortgages should something happen to that property. It was tight at times but I kept it all going. I had to sell a handful that were in areas with hurricanes (and resultant mold from floods). The insur just skyrocketed destroying my cash flow. The equity was increasing at one point but it pushed the taxes way up so that destroyed my cash flow and then the crash occured in 2008 . There were so many properties on the market that the rent rates went down. I couldn't hold onto all of them due to the amount of debt I was in with having 9 SFR that I only put 5% down on and an apt, I could've held on better. But I did keep some (+ the apt) and their loans have been getting paid down by the tenants. Even with no equity left in the ones remaining back in 2008, I held onto them and now the have great equity and the cash flow over time has been better and better. So, you have to weigh all these things.

Joe Villeneuve · Answer

Actually, the way I look at it, if you only have one or the other, the basket does have a hole.  LOL

Steve Vaughan · Answer

Yup. Both.

Cash-flow for lunch money, balance sheet and NW for 'college.'

As you grow in your journey, hopefully you'll shift towards and better see the advantages of equity capture and balance sheet wealth.  Early it's tough to see past a cf analysis only.

Sean Wilkinson · Answer

Account Closed

I really like your response here. Really resinates with my thoughts on the topic.

To expand, with real estate investing, we are talking about income producing properties that hopefully cashflow and cover all expenses. So I completely agree that we want both, but I would argue that you can systematically build your equity much faster than your cashflow. Cashflow in my mind is the actual operating cash that is in my account at the end of the day (this is not entirely correct, but just the way I think of it). NOI is different and has a direct correlation to equity, so NOI shown on your P&L is very important in building equity. Cashflow can be very unpredictable. With IRR (as Account Closed mentioned) being the important metric, equity seems to be the most controllable of the two and a great way to systematically build wealth, but I'd argue that Cashflow is more valuable because at the end of the day you want money you can put to use.

Thank you all for your thought out responses!

Sean Wilkinson · Answer

@Anish Tolia

I really like your response here. Really resinates with my thoughts on the topic.

To expand, with real estate investing, we are talking about income producing properties that hopefully cashflow and cover all expenses. So of course we want both, but I would argue that you can systematically build your equity much faster than your cashflow. Cashflow in my mind and is the actual operating cash that is  in my account at the end of the day (this is not entirely correct, but just the way I think of it). NOI is different and has a direct correlation to equity, so NOI shown on your P&L is very important in building equity.

Daniel Machado · Answer

To the folks saying aim for both - do you think that’s possible in most cities, or are there particular markets you find that have both cash flow and appreciation plays?

NET WORTH/EQUITY or CASH FLOW?

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