But the cash flow isnt high enough!

[Adam Gollatz]

So I just finished up a light rehab on a single family home in Milwaukee and got it listed for rent. As I was going through the zillow listing admiring my efforts when I saw this neighborhood statistic and it really caught my eye. As an agent and an investor I get approached by a lot of people looking to get started in rentals and investing. The number one question I get asked is "what should I invest in?", and my answer is always the same. And their response is always the same, "but the cash flow isnt high enough". I get it, we read bigger pockets posts about people getting 250-300 a door and you do the math, if I have 10 rentals at 300 a door, I can basically quit my job or scale back at work. The reality of it though is that was the market 6-8 years ago and this is what the market looks like today:

I picked this specific property up for 90k, put about 7k in to it. It should appraise for ~125k, If I put another 7-10k in to it I could sell it for 130-135 fairly easily. The mortgage on a 100k at 5.5% is 568/mo. Throw in 300/mo for taxes and insurance and another 200/mo for capex and repairs Im at 1050/mo leaving me 200/mo. Sounds good right? Well lets be realistic, I didnt factor in PM or anything to make this a hands free investment; Im answering emails, showing the property, coordinating maintenance, etc. Lets say I turn it over to a good PM that charges a flat 99/mo now Im down to 100/mo in cash flow or 1200/yr. 

Why would I recommend that, let alone invest in that myself? Lets look at some numbers from below. Now I get that zillow isnt always accurate, and as an agent I hate hearing, 'but zillow says my house is worth...." but this is factoring in what the market has actually done. 120k house at a 7% growth is ~128k. After that if you account for a modest 3% growth for another 3 years and you are at 140k. 40k profit in 4 years. Now I did this up on seller financing at very favorable terms for 9 mo which will aloow me to get through this with little to no money in the deal and with some equity, but and lets say I did a 20% down payment loan on the full 100k. Thats 20k down to make 40k in 4 years, do the math and tell me what that APR is? And notice how I didnt even have to factor in that measly 1200/yr cash flow or the fact that the first few years your tenants pay down your loan by 1.5-2% each year?

To recap for those who just scan. Cash flow is important, its what secures your investment, but dont discount the appreciation. Ive sold assets for clients that were taking a loss, but they held the property long enough that the appreciation still pushed them into double digit returns. Most of the properties I havent bought were the ones that investors "bought for the cash flow"

[Marcus Auerbach]

Right on @Adam Gollatz - without cash flow it's not an investment, it's speculation. But one should never look at cash flow in isolation. It's just out out of four ways how REI makes money. Cash flow can not create any type of wealth; equity, de-leveraging and appreciation is what creates wealth. Like so many things in life a well balanced approach is usually the best. A lot of the "cash flow only" buyers regret their decision a few years later.