All Forum Posts by: Kyle Kline

@Kyle Kline

My Take on Cash Flow: 
- Cash Flow is a hedge against corrections. Cash flow (in my portfolio as a whole) covers my expenses. 
- Forced Apperception (BRRRR or buying at a discount) is also a hedge against corrections. Forced appreciation allows me to build equity from the beginning of the investment, so if I need to firesale for an unforeseeable reason, I will not be underwater.
- Debt-Paydown is a result of time. This is the easiest to predict. Tax Benefits are also a result of time, good bookkeeping, and tax advisory.
- Market Appreciation is the least predictable, but historically, where you will make the most money. Real Estate values, nationally, have never decreased over any 10 years.

@Kyle Kline your post exposes your problem. You have a concept (investing in real estate), but you don’t have a specific plan. 

In other words. Like Covey wrote, begin with the end in mind. What do you want real estate to do for you? Once you are certain about that, then you can create the plan to get there.

Let me give you an example. My goal is to get to 50k per month in net income from our businesses. We had a large portfolio and have sold a lot of it. Currently we have about 50 single family homes with about 35% equity. We also have some mobile home parks that we are selling and we have some luxury short term rentals. We don’t get cash flow from our real estate right now. But for the most part it sustains itself. Over the next 3 - 5 years I plan to 1031 exchange all of our single family homes and purchase another 40 that won’t have mortgages (we use the lease option model to sell our properties to maximize profits so we cycle through properties every 3-5 years). I will be also partnering with other investors to purchase another 40 properties where we will split the profits. So with 40 paid off properties and another 40 properties with partners and the other businesses that we own we I should meet that cash flow goal. 

So Kyle, I would encourage you to figure out what you want your real estate to do for you and then work backwards. 

 It was the podcast with Dr Ben Aaker, he said he would fund the other real estate needs/expenses from his physician pay.  He was trying to avoid increasing his annual income which was already high from his W2 job.

I got slammed with cap ex issues my first 3 years of investing. Luckily I had war fund saved up for the HVACs, roofs and foundation repairs I needed. Now with 29 SFR, I don't need much in emergency $ because the rentals generate 19k/month profit. So if an hvac or roof needs to be replaced tomorrow, it's not a big deal. I'll just use some of my monthly mailbox money to pay for the expense. But when your monthly profits are less than $2000, then I'd make sure to have some reserves, because Murphy will come when you're least expecting it.

@Kyle Kline I don't generate huge amounts of cash flow but when I analyze a property to buy I make sure the income will cover an allocation of usually 5-7% for CapEx, Repairs, and vacancy.

The percentage needed to be saved will be dependent upon the property, the condition it’s in, and the overall general vacancy rate of the surrounding area.

One way to do this is with brand new construction. Most builders offer a 2/10 warranty. And there is little to no maintenance for several years. Of course you will still have the turnover costs with tenants. But you should budget this in with the amount of capital you have. Say the home is $250,000 and rents for $1600. You should keep 2 months rent aside, as well as 2% of the value of the home for turnover/repairs. So call it $60K for the down payment, and another $8,200 for reserves.

It's true that you make your money with appreciation and not cash flow, in the long run. You can bargain shop for an $80K property that cash flows $300/month. And it would appreciate 2% per year. Or you can buy a $400K property that cash flows $50/month but appreciates 6% per year. After 5 years, you would have made 3 times the equity in the more expensive property. Both properties won't leave you with cash flow, since you will need to use that for turnovers etc. So at the end of the 5 years, you are just treading water with the lower price point home, while you made headway with the other one. 

@Kyle Kline you bring up a great point, and it's important to clarify the idea of investing for equity versus cash flow. The concept discussed likely assumes that you're building equity through appreciation or loan pay-down, while any cash flow is minimal or neutral. However, this strategy doesn't eliminate the need to budget for repairs and capital expenditures (CapEx).

You’re right that without cash flow, unexpected expenses like emergencies or major repairs can be risky. To mitigate this, investors focused on equity typically maintain a CapEx reserve fund or factor in their personal finances to cover these costs, ensuring they don’t face financial strain. It’s not that these expenses aren’t important—they should absolutely be planned for even if the property isn’t producing extra cash monthly.

So no, you’re not misunderstanding—it’s just that the guest may have assumed investors in this strategy are prepared for such expenses through other means, like savings or planned reserves.

The majority of my rentals I have acquired were for equity not cash flow. I have a few for cash flow but I prefer equity - which I live in the Washington DC area so you are not going to be getting cash flowing rentals off the bat but if you hold them for 20 years you will not be complaining. 

Yes you will need to make sure you have the cash to take care of any repairs that are needed out of pocket. We keep "kiddie" as we say backhome which is a pot of money set aside for rainy day fund in case we need to replace appliances, perform repairs or other capital improvements. 

As someone who focuses more on equity than cashflow, I do include capital expenses in my initial analysis. So the property may break even or even "lose" $100-200 each month for the first year or so but that number includes the capital I'm putting aside each month for the eventual water heater, roof, or vacancy. 

That being said there are those that are willing to accept buying in an appreciating area where the rent only covers the mortgage (PITI). In these cases, maintenance and capex come out of the investor's pocket funded by their day jobs. If your a high income earner living below your means then this isn't a horrible strategy.