What is your cutoff for cash flow/door?

[Nathan Hui]

Hello BP Folks,

What is your cutoff for cash flow per door? This is more of a poll. No need for explanation or rationalization but feel free to elaborate if you like.

[Ben Zimmerman]

Personally I don't care about cashflow.  I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth).  Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth.  I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.

For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:

If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.

Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home.  While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases.  At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.  

Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years.  Expand this horizon to 20, 30 or 50 years and the numbers become insane.  

People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.

Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything.  But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.  

Cashflow allows you to retire, but growth rate lets you build an empire.