All Forum Posts by: Christopher Morris

@Christopher Morris I get the sense that your falling into the all-too common fallacy of absolutes. 

Let's re-frame this to help better understand. 

Real Estate Investing is for the vast majority of time not classical "investing", it's a business. And with much more in commonality with starting and running say a restaurant. 

With running this "business" there will be operational input costs. Things wear out over time, require updating, upgrading, replacement etc.. If let it get outdated and go into disrepair, well, that will dictate the clientele we can attract right. 

Does that operational aspect have to devour all cash-flow, no not necessarily but it could, all depending on situation specifics right. 

And over time, as those assets to make our product we sell had a fixed price, the dollar does not sit fixed, our cost of product increases meaning increased cash-flow. Or the market get's better, the product we sell get's more scarce etc etc.. 

Now if your thinking location jumps out as a big factor to all this, you hit the nail on the head, location location LOCATION. 

This is why very often "buying for cash-flow" has less than desirable outcomes. Because the often dynamics of those locations. It's often C-class or worse areas meaning not a place anyone really wants to be and more people get stuck having to be, that's not a recipe for appreciation. 

I believe you have to be creative in real estate to live off cash flow and by that, you do what others aren't doing. For instance, using bank financing to buy in expensive places like California, Washington, New York or Illinois are really tough to cash flow. People that buy in those places say they make up the negative cash flow in appreciation. Maybe. But you still have to eat today.

Buying in  Ohio, Indiana, Missouri, and Michigan might be cheap and you can make a little cash flow but, the trouble with vacancies, trashed properties and evictions off sets a lot of that.

What I have found, is that by buying decent properties in decent areas, before they even get listed and taking over the current financing at 3% or 4% provides cash flow in almost any situation. It's just that you have to have some money to do these, they are not zero down. So to make money, you need money. I started off by doing flips, built my "bank" and real estate knowledge and started looking for "off market" properties, which has turned out quite nicely. Yes, it can be done and it can be done correctly. Not like the hype on Youtube which will eventually get you into trouble.

You've got time on your side at age 29, so you can definitely retire earlier. But there are so many milestones in between, the first one is when you realize REI works and you are now actually a real estate investor. Another one is when you start to feel a little weight off your shoulders because you don't depend entirely on your boss. And then your REI income matches your W2 income the first time etc

To your question: equity is the name of the game. Cash flow is basically a function of equity. The more equity you have, the more cash flow. Equity first comes in the form of down-payment, but you can also force it into existence with rehab or wait for it with appreciation.

This is why it is so important that you re-invest your cash flow into more equity. It's like full dividend re-invest on an index fund. It grows so much faster and that early growth compounds over time, so having a little more invested early on is worth more than a ton invested later.

There is a metric called cash on equity return. It is typically lower than cash-on-cash and you can put it somewhere around 6% conservatively. So for every million dollar in equity you'll get about $60,000 in net cash flow.

Play around with a BP calculator, plug in a million worth of RE with 20% down and see what happens over time. Change some of the variables, it will give you an intuitive feel for where you need to focus next given the opportunities at hand.

Finally, the ultimate combination is having a business AND invest in real estate. Flipping is a production business. But it could also be a coffee shop or an etsy store and the cash flow goes into real estate. Even part-time is fine. Any type of business income will supercharge your investing.

I was lucky that I started in Milwaukee in 2008, but I was always trying to sail downwind", so whatever the market provided. When foreclosures dried up, we went after short sales and when those dried up we started to focus on properties with mold or foundation issues and learned how to fix those and when that started to become too difficult and the rehab was not worth it anymore I had to pivot again and we buy properties in good shape that fell through with another buyer. Today I would probably figure out to make money online with AI, that's an opportunity that did not exist in this form.

Hey Christopher, congratulations on making it through that mess. 

I have a dozen properties. They generate about $300k in rent, I get to keep about $250k of that in cashflow. But, ON AVERAGE those properties appreciate about $325-$400k per year. No, I do not extract that income to live on because I don’t even need the $250k to live a pretty extravagant (To me a boring Midwest guy who never made more than $60k/yr while working. Plus with no state income tax, cheap insurance, and very low property taxes, I’m probably starting $20k ahead of most people, and that’s a tax free $20k.). Then think about writing off your cellphone, your internet, you car, your home office, your tax prep, etc etc etc.  And there’s another $20k tax free head start I have over the “worker bee”. 

It’s like I have a bunch of clones out earning money for me. (Others would be more boring and say it’s just my money earning money. But it’s also saving me taxes. :-))

But yes, I could take a $200k or $300k tax free loan every year on the appreciation if I couldn’t manage to make ends meet at $20k/mo. But to me that would be a spending problem, not an income problem. 

Imagine something as simple as deciding tomorrow to spend 3-6 months in Australia because it’s too cold here, or I haven’t been, or a friend dared me. Most people couldn’t afford to do that. Either they don’t have the money, or more likely they don’t have the freedom. They’re a slave to their job. If they stop going the income stops. More importantly to me. Most of the people who could would just do it, leaving their home empty.  I would rent out my primary and end up making more than I spend living in Australia. And it wouldn’t even be ONLY profit motivated. To me, having my home sit empty is wasteful. It’s the reason the lake front “retirement” home I bought on Lake Minnetonka in MN has had a tenant in it for the last 10 years. The idea of it sitting empty caused me emotional damage. 

I think a lot of it is mindset, or personality or whatever it is that controls how you act in certain situations. My classic example is:

The richest man in the world works harder and longer hours AFTER becoming rich than almost anyone else is willing to work to become rich. It has to be a personality trait. People talk about being a rush to retire early on $1-5-$10 million. Here’s a guy with 400,000 billion working his butt off. And the world’s a better place for it. Don’t be wasteful and try to make the world the better place while generating income and it won’t even seem like work. 

And I’ve rambled on again. Hopefully you found a nugget in there somewhere. And congratulations if you made it to the end again. 

Ps. Can you believe how much time and information Tax, 1031 exchange, accounting, and financial experts give away here? Many of them have already “made it” and do it just to make the world a little better. So I try to thank them every time for providing information I would have to pay for, if I knew who to ask and who to trust. They are a more local and relatable example. 

I tried to skim most of the replies so I wouldn’t repeat what’s already been said but here’s my response to OP about real estate and retirement. 

Treat it like a retirement plan, in fact I replaced my retirement contributions with real estate. This means…

Don’t count on it to cashflow, your 401k or your ROTH doesn’t cash flow, they never have. And yet every retirement expert tells you to sink every dollar you can afford in to these accounts. 

From 2015-2020 everyone on BP was cash flow, cashflow, cashflow. Cashflow is guaranteed, Appreciation is gambling, blah blah blah. Then in 2020 it turned out cashflow wasn’t guaranteed, the government could burn your cashflow to the ground and you could lose everything. To me this was always a false narrative. All my rentals were in Vegas during the Great Recession. You tell me a market that was hit harder than Vegas? Well.  I never made more money than that time period. Rents were skyrocketing, 10-20% annually. I had waiting lists of tenants for the first and only time in my career. 

Personally I don’t think you are ready or that you should buy real estate if you NEED the cashflow. Especially if it’s less than $1,000/months per property. It’s just too easy for it to go away. In fact I went out of my way to get 15 year mortgages because I knew that even if I had zero or even negative cashflow I was literally making more money as my interest expense was lower. I care about income waaaay more than cashflow. I sank every dollar my rentals provided back in to paying off debt and acquiring more properties. (You know, zero cashflow, just like a retirement account.)Even today with only paid off properties generating a boatload of cashflow I generally make more every year on appreciation. 

Sure, it took almost 10 years to retire, but compared to the 30-40 year plan most people use it was a dream come true. And none of that counts the 10’s of thousands in tax advantages I reap without any advanced skills or planning, the government just hands them out. 

It’s not a binary on/off choice. Not convinced? Buy a new primary every 2-5-10 years, whatever you can afford. Keep it as a rental and I GUARANTEE your life will be better in 20-30 years than if you ignore me and the simple get slow plan. After all, if your 5% down properties only double in 20 years you’ll have 40x your money. And that extra $40-$50k a year will be life changing. Every single new investor wants to say it was easier “back then” or “it’s too hard/impossible today” so they don’t have to start today. When I was buying 1/2 price homes not ONE person I talked to said it was smart. EVERY single one said “aren’t you afraid they’ll keep dropping?”  Now they tell me I was lucky I bought back then. I was buying homes for $100k with $25k of my money, and the mortgage was paid off by the tenants. Did they really think 3 year old Vegas homes would drop below $25k? Now they’re hoping they’ll drop below $525k. 

You’re surrounded by a support group I never had, and that’s a positive. But I also didn’t have all the negative Nancys (sorry Nancys of the world) saying it was too risky too late or couldn’t be done. Maybe that’s why it was easier doing it alone. I literally didn’t know a person that owned 2 homes, much less a rental. I just did the math and it was obviously better than stock account retirement. And experts said that was a good idea. So if this was better it couldn’t be a bad idea. Get started and look back on today in 5-10 years with all your new knowledge. Keep asking questions. And Good luck. Sorry again to rant but I never plan my response beyond the first paragraph and I’m sure it shows. 

What RichDad does not tell you is that it takes a driven personality to build a portfolio and if you have that type of personality you will not enjoy a retired state. It does however give you a degree of independence to choose what you want to do.

As your portfolio grows you'll also feel the weight of future capex responsibility more, which ironically points you to growing more cash flow through more real estate.

The other issue is that you are chasing a moving goalpost. The number you feel would be enough to retire on will keep moving. But that will be your decision and at least you have options. It may take you 10 years to get there, real estate is slow, but it works reliably and it's not rocket science.

I have properties in all neighborhood classes. On paper, my C rentals have amazing cash flow. The reality at the end of the year is always much different. I get way more vacancies and repairs. In these neighborhoods it's just much harder to rent the units to somebody who will not wreck it on the way out. My B+ rentals are a different story. I get repair calls maybe once or twice a year, and tenants often stay years at a time. The C rentals still cash flow better, but the difference is marginal and honestly not worth the extra headache. 90% of my gains have been through appreciation and forcing equity through value add. I'm at a point now where I am able to live off of my cash flow, but it took me a lot more units than I thought it would. Honestly if you are trying to retire off the income just purchase value adds in the best neighborhoods you can afford. Rents will increase and you can pull equity out of these homes when they go up in value. 

On the other hand, you can flip in any neighborhood as long as you are buying at a steep discount below ARV.

@Christopher Morris

You hit the nail on the head.

The “retire on real estate cash flow” gurus sell the dream of quick retirement from cash flow.

Buy two houses a year that each cash flow $1000 a month and retire in 5 years, they preach.

Or invest passively in real estate syndications and financial freedom will soon be yours, they promise.

What they don’t tell you is:

In order to owner enough real estate to generate say $10,000 a month income let’s say, you need at least $2M of capital invested in YES cash flowing real estate.

Let’s say one could buy rental real estate that provides a 6% annual cash on cash return. It could be either single family or multifamily. And truth be told, a 6% ConC return year one is hard to find but let’s stipulate to that return.

To get $10,000 a month, $120,000 a year off 6% annual cash on cash, how much capital does one need invested?

$120,000/0.06 equals $2,000,000.

So in my mind the target should NOT be cash flow but rather building net worth.

Despite what the gurus say, sufficient cash flow to be financially free can only come once one has sufficient capital to invest.

Let’s be clear I only buy apartment propeties that cash flow but immediate cash flow to put spendable dollars in my pocket is NOT the primary goal. The primary goal is appreciation adding value building equity and therefore net worth.

I’ve been at this “game” 46 years  and there is no magic bullet.

It takes time, discipline and consistent effort.

But it can be done in 10 years.

Of course this means living below one’s means - ie spend less than they make - to develop and build cash and capital that can be invested and then watch ot grow over time.

Hope this helps.

Arn

@Christopher Morris

You got alot of great insight already. I'll add that every successful real estate investor i know personally has a w2 job and none intend to get rid of it anytime soon.

Making real estate your primary income source isn't passive unless you have access to significant capital. Not debt but YOUR money. The example that Arn gave you probably gets a whole lot more expensive when you give 8% of gross to a manager to make it passive.