Cash flow is still king, convince me otherwise

[Allen L.]

I hear Dave Greene on the BP podcast always talking about high appreciation markets and sort of put down midwest and other high cash flow markets and I think this is actually detrimental advice for people looking to grow a portfolio of rental properties with BRRRR. Here's why:

As you grow your real estate portfolio, you no longer qualify based on your own DTI, instead on DSCR which based on the asset's own performance (local banks may differ slightly from DSCR private money; local banks are more like common sense lenders and may ask for your personal financial statements as well). Well, if you don't have cash flow you won't be able to pull out max LTV on a refi, which means you're leaving more money in the deal and growing your portfolio slower. In a high cash flow market, you can take out max LTV on refi and grow your portfolio faster. Your total portfolio size will grow faster in a high cashflow market with DSCR financing. In addition, in high cash flow markets, you might find deals easier because people care less about the price of their home and there's less competition.

To give an example, say you buy a place in Austin for 450K and rent it out for 2750 a month, there is no way that a DSCR lender will let you take out 75-80% LTV on a refi. But if I purchase a place in Wichita KS for 100K I can rent it out for 1000 a month, I can take out 80% LTV on a refi with my local bank. Now do this over and over again for many years, I can grow my portfolio size at a faster rate than if I had invested in Austin. If the high appreciation market appreciates twice as much as high cash flow market, but you can grow the dollar value of your portfolio twice as fast in high cash flow market, then your dollar return attributed to appreciation is the same, but you would end up with higher cash flow in high cash flow market and about equal appreciation dollar, so advicing people to go after high appreciation market is an illusion and could be detrimental for people looking to build big dollar value portfolios using BRRRR. So in sum, I think cash flow and appreciation are a balance, tilting in favor of high cash flow markets.

Who benefits from high appreciation markets? Syndicators, because they use other people's money in a way that is 1) short term gains instead of long term compound return such as building a portfolio of BRRRR'd rentals 2) almost entirely OPM (mix of debt and other people's equity) 3) resets with each funding

[David M.]

@Allen L.

Look at this middle/end of this thread:  https://www.biggerpockets.com/...

Looking at mike dyminski's table, while cash flow might show a larger IRR, the appreciation wins out in shear volume of "wealth." Even this simple example shows the difference. I think all investing strategies are "situational." For the younger investor, say start with appreciation. Then, with the "massive wealth" gained, then plough it into cash flow with which to retire (or any other investments). Also, the example doesn't even take into account taxes, I think. The income is taxed year over year. Long term capital gains are taxed once at a lower rate, generally.

while the argument goes that investing for appreciation is speculation (which really real estate investing has always been speculation since the colonial days in this overall region), so is income.  The income route, to me, still gambles that the rent will increase as fast or faster than expenses.  How would I have known 20 years ago that rents would skyrocket in these past few years?  Before that it was interesting to keep up.

Having lots of smaller (valued) properties to me definitely requires higher relative rents because you have that many more kitchens, bathroom, roofs, hvac's, etc. to deal with.  A single $1m property just has one set..  Ten $100k properties has tens sets that you may/should need to budget/spend on in your portfolio.

I think your confusion is what I keep seeing over and over:  confusing with strategy vs. the implementation.  Your example is about the mechanics of doing the investment, not the overall strategy.  Since the investor, in your example, lacks the income/resources to sufficiently scale up their investment, they need to use the investment to generate income to support the investment.  Nice, but I think it otehr confuses the issue or is basically doing dual duty.  This is investing, whereupon one using their "excess" resources (income, existing capital, credit) to make more "wealth."  Many, especially with all the sales pitches of "investing with no money," take this to be a "job" where they can at the beginning earn lots of income.