Well this is heresy on BP and I'll probably get crucified, but I don't really care whether or not a property cash flows a couple hundred bucks or not. In fact my favorite and best performing property had negative cashflow to the tune of ~$1,000 per month for the first several years. Why did I buy it?
1. Location. It's a Class A property in a great location where I knew there would be steep appreciation and increasing rents. It wasn't speculation, mind you, just good old-fashioned local market knowledge and education on the strong underlying fundamentals (jobs, population growth, desirability, affordability).
2. I bought it for $150k below appraised value.
3. Existing rents were well under market rates.
4. I knew it would rent well, have low vacancy, and be easy to manage (again, great location).
5. My plan is long term wealth building and wealth preservation.
6. I didn't need the cashflow.
7. I liked the property (it's classy).
Now that I've had it a few years, it's cash-flowing $2,500/month thanks to rent increases (good location= steep rent appreciation). That's nice and all but nothing compared to the equity I've gained through appreciation combined with principle pay down, which is now just shy of $1M, which breaks down to $12,000 per month. Subtracting the additional $30k I put in when it had negative cashflow, that's still $11,500/mo. That's not including tax benefits.
So which would you rather have?
1. A few hundred bucks a month in cash flow day one (but not much appreciation over time because you have to buy in a worse location to get that, your property value might increase enough to just barely keep up with inflation or may even be negative because these markets are historically boom/bust)
or 2. Negative $1,000/mo cashflow for 3 years then $2,500/month cash flow after that plus $11,500/month appreciation in year 7 because you bought in a good location?
Different strokes for different folks. Some play checkers, others play chess.
If you need the cashflow to make the payments, then you should stick with cash flowing property. However if your goal is actual wealth building (or wealth preservation), and your investment strategy isn't reliant on whether or not you get a few hundred bucks coming in every month right away, then you might consider buying in a better location where cash flow will be less positive up front but appreciation will be greater. Cash flow will come in time from more rapidly increasing rents and overall performance over time will be much better. Plus less turnover, fewer tenant issues, and less severe headaches.
Not to mention that a lot of these "cash flow markets" don't really cash flow in reality because the cost to maintain these properties often exceeds the rents. These markets are revolving doors with properties being resold every 2-3 years to new green investors looking for cash flow, who don't realize what it costs to maintain a property or that their budget of $50/month for maintenance, repairs and capex is not nearly enough ($300-500 is more like it, that's why rents under $1,500/door typically have no margin for error). Or they only have 5-10% vacancy factored in to the magic cash flow spreadsheet. One non-paying tenant that needs to be evicted or one unexpected capex issue crushes that $200/month cash flow and sends the property negative for years. A big unexpected $30k issue (I've had several) will take decades to recover from. It takes people a few years to realize this before they sell to the next person who doesn't yet realize this. True story.
I'm in a market where actual billionaires buy multifamily properties as 3-caps as soon as they come up for sale (which they rarely do). These buildings don't spin off positive cashflow using the BP calculator even with 50% down. These billionaires aren't stupid. So why do they buy these buildings with no cash flow? Because they don't care about cash flow, they just care about long term wealth building and wealth preservation. It's a location where appreciation has been consistent for the past 60 years (even during the global financial crisis 2008-2010 when many markets crashed by 50%, this market continued going up). If that's speculation, then so is thinking that rent will come in consistently every month. By the way rent is not a guarantee either my friends, ask me how I know. Sophisticated investors look at everything through a lens of risk vs. reward. Properties with just cash flow and little appreciation potential are generally in worse locations and are considered high risk (high cap rates), whereas properties in better locations are low risk. To some people, that's all that matters. They're looking for the least risky place to park their money and preserve their wealth and you see this in the best locations. They are priced for risk.
In my portfolio, the properties with the least cash flow on day one have performed the best over time, while the ones with the best cash flow on day one, I actually ended up selling. They never really cash-flowed as much in reality as they did on paper due to tenant issues and capex. Plus 99% of my headaches came from those buildings. I've seen a lot of others go through this same learning curve. All I care about anymore is location, the price of the property compared to surrounding properties, comps so that I know I'm getting instant equity, being able to force appreciation quickly through value add, and "pride of ownership"/ actually wanting to own the property (which also translates to renters actually wanting to live in the property). Cash flow always comes in a few years thanks to being in a desirable location with increasing rents, and that's cool too. But again my goal is wealth building and wealth preservation primarily. A couple hundred bucks a month in cashflow, whatevs. I've heard it said that cash flow is the cake and appreciation is the icing but it's been the exact opposite for me. Cash flow hasn't really moved the needle much for me financially whereas appreciation has been truly life-altering in the best way possible.
People also say that buying for appreciation is speculation and not real investing... sorry I'm calling b.s. Investing is expending money to eventually achieve a profit. Speculating is not having enough information to make a good decision. We have access to a lot of information these days, it's out there for anyone willing to educate themselves. A well-educated person who knows their market intimately can make a good decision about whether or not a specific location is likely to see appreciation or not. Sure it's never guaranteed but that isn't in the definition of investing, and let's be honest cash flow isn't ever guaranteed either. Estimating what rent will be in a few years is just an educated guess also. If buying for appreciation is speculating then using that same logic, assuming that rent will always stay the same or go up is also speculating. Rents can also go down, especially in crappy locations. Also if rents aren't going up at least as fast as appreciation, you're actually losing money over time even if you're "cash flowing". If you're buying in a bad location just to get cash flow, that's going to turn out to be an inferior investment every time compared to buying just about any other property in a better location.
I know I'm tipping the sacred cow here, but cashflow is checkers, appreciation is chess.
