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Mike,
Thanks for your reply. Don't think that I didn't know I'd be batting at a hornet's nest here, and people that reply to these posts tend to favor their view very strongly. Clearly, you're someone that focuses on cash flow, and that's an acceptable strategy.

My post is to raise awareness that it is not the ONLY factor to consider when you are investing. During the 2003-2005 boom, many, if not most real estate investors, especially the new ones, were looking ONLY for rapid appreciation. As prices in those markets rose above a positive cash flow scenario, many of them accepted a negative cash flow in hopes that the monthly increase in their equity would greatly outpace their negative cash flow. So when I said:

I was citing the fact that a very large segment of the real estate investment industry, and that includes many of the large bulk buying companies and many of the schools, had shifted their entire focus towards rapid appreciation, dropping positive cash flow out of their sights. Only after the current adjusting market have they started to focus back on positive cash flow. The frustrating thing is they need to be considering ALL of the factors when determining the value of an investment.

I would agree with you when you say:

That would be a great investment opportunity, and if you can find them, buy them. Most investors aren't coming across these types of investments themselves, and if you have a line on them, I would suggest you go into the business of supplying other investors with them.

I would like to point something out in your quote above. You say that your last investment was 50 cents on the dollar and you had equity and cash flow, yet you "raise the BS flag" when I say you can make a property cash flow in Raleigh:

First of all, yes, you CAN ABSOLUTELY DO this, even at the "retail" that you casually threw in, in spite of my not saying that you would be buying at retail. But yes, you can buy retail in Raleigh and still make positive cash flow. I would recommend you Google Jan Wynns, Scott Snyder, or Tiffany Elder and ask them about this.

Secondly, if you can say that you buy property at 50 cents on the dollar and that you can make a property cash flow and have equity, how is it that my statement of making a property cash flow a measly $150 "raises the BS flag?" I don't mind a valid argument, but please, make it valid.

You go on to say:

If a person can afford to provide a $40,000 20% down payment on a $200,000 house, is it not conceivable that they could afford to provide a $10,000 5% down payment and use the remaining $30,000 to cover the $200 a month ($2,400 a year) negative cash flow? That's over 10 years of cash flow that they could cover, and more than likely rents will rise by $200 over the next 10 years. If you're looking for cash flow to "pay the bills" as you say, then doesn't it make sense to keep the $30k in the bank and use that for bills? Doesn't using a lower down payment or buying at "50 cents on the dollar" as you claim you can do make more sense than trying to find a property that brings in a measly $150 per month?

Look, I'm not saying that it's not nice to have a positive cash flow, and I'm not saying that you should accept any level of negative cash flow just to have a lower down payment. I'm just saying that you need to consider BOTH, and you need to be smart about analyzing it. Just relying on the mantra "I need positive cash flow" is just as irresponsible as relying on the mantra "I need rapid appreciation."

Any intelligent reader will recognize this as a poor attempt to weaken my argument. I am clearly not trying to convince anyone to "lose money." I am raising their awareness that they need to consider all factors and not fall into the trap of focusing on only one thing like cash flow.

Again, thanks for providing the yin to my yang, as all good discussions need to be strongly supported by both sides. I look forward to your response as well as anyone else that wants to dive into the debate.

Cheers,

Sean

Thank you. I will edit my original post to remove the mention of the specific product. I don't think the mention of the live teleconference is a solicitation as we will not be selling any product there, we're just inviting people to discuss the issue of Equity vs. Cash Flow. Let me know if that is agreeable.

Sean

With all of the media on the housing market today, it is tough for real estate investors to know what to do. If you live in one of the markets that is suffering from a sharp price correction, you might think that the entire housing industry is imploding. The reality is that there are many markets across the country that are experiencing double-digit annual appreciation. Reference the OFHEO.gov Housing Price Index report http://www.ofheo.gov/HPI.asp. Wenatchee, WA appreciated 25.6% over the last year. Provo and Salt Lake City appreciated over 19%. Grand Junction, Ogden, Gulfport, Biloxi, Myrtle Beach, and Boise appreciated around 15% or better. So there is plenty of buy-and-hold investing still going on in this country, you just need to know where to look.

One of the trends in real estate investing that has resurfaced in the last year or two is the idea of buying properties that have positive cash flow. This is where the rental income exceeds monthly expenses. While it is certainly beneficial when an investment property provides revenue, it is important to realize why an investment might be doing this.

For example, you can pretty much make any property cash flow positive if you provide a large enough down payment. The problem with large down payments is that you end up diluting your ROI. One of the greatest benefits with real estate is leverage, and utilizing large down payments is counter to that advantage.

Positive cash flow is not a panacea. Blindly looking for positive cash flow without considering all the other angles of an investment opportunity is just as wrong as looking for rapidly appreciating markets without regard to any other element. What you need to do is analyze all of the different aspects of an investment opportunity before moving forward with it.In doing so, it is critical that you determine where you are going to get your return. It might be cash flow, it might be future appreciation, it might be the equity you get when you buy right, or it might be a combination of the three.

Cash flow is basically a return you get every month. It will be considered income that you will need to report on your annual taxes. You and your accountant will need to address the tax issue, either by writing off losses against it (such as depreciation or related expenses), or you

LOL, well, just remember, you asked for it! If you have read any of my posts here, you'll find that I tend to write A LOT, and this one is one of the longer ones.

The short story is that the flying job allows you to do what you imagine it could, and it has worked out great for me. I actually took a three year leave of absence from flying to build my career, but once I had it established, it was no problem going back.

Good luck, especailly with the flying. I am saddened by the path that the airline industry has taken, and I often wonder if I would have gotten into it had I known it would have gone this way. I'm fortunate in that I'm flying widebody aircraft for a recovering airline, but there are a lot of less fortunate guys that bust their behinds to scratch out a just-barely-fair living.

Cheers,

Sean

Agreed, but don't look at him as the final answer to whether a guru or mentor or what have you is a good guy or bad guy. Look at it as one piece of the puzzle. On some people, he's short and harsh. On others he provides a LOT of detail as to their negative issues. Read it, consider it, and add it to the other research you do.

Again, once we come up on his radar, I'm fully expecting a negative report because we advocate highly leveraging long term holds and think Neg Am loans (if we're still able to get them) are a good tool for someone who knows how to use them. But just because he's conservative and negative that doesn't mean you should avoid his information all together.

Sean

Scott,
Agreed. I'm definitley not supporting quality of the values that Zillow provides. Zillow definitely does not consider any improvments that have been made. The way they do this is by using the last sold price on the property compared to other properties in the area. But this does not reflect any improvements that the owner has made since THEY purchased the property.

I think it's a great WAG, and if your property is par for the neighborhood, it might be close at best. If you are much more improved or if the condition is far below the rest of the homes, the number is much farther off.

I'm only supporting the opinion that Zillow should be allowed to continue to do what they are doing.

Sean

Oh, I definitely see the appeal, and I see the ease, and I see the savings on the cost of a real appraisal. But I think our discussion has been focused on the issue that people are either duped or blindly believe that a Zestimate IS and appraisal as opposed to being in lieu of an appraisal. Since both parties have equal and opposing interest in the valuation, both parties should be responsible for determining if the value is right for them. Zillow was not intended to be an end solution, but a piece of the puzzle. They say so on the very top of http://www.zillow.com/howto/Zestimate.htm

With regard to:

Rats, I couldn't find where the disciplinary actions were on their page http://www.appraisal.state.az.us/ (and I'm sure it's right there in front of me! Argh!) I would assume that most of those complaints were dealing with things like providing an inappropriate appraisal. As Zillow is not passing thier information off as an appraisal, I don't think it's an apples-to-apples thing.

I know that you and I differ on this point, because you have said that regardless of Zillow's clear claim that a Zestimate isn't an appraisal, it IS an appraisal, while I maintain that if they aren't presenting any form of communication (written, web result, email, etc.) as AN APPRAISAL, it isn't an appraisal. And that is what the courts are definitely going to have to determine, and they really are the only ones with the authority to make that interpretation. I believe that ultimately, thier finding will be in line with my thoughts. I do think it says a lot that the Appraisal Standards Board of the Appraisal Foundation http://www.appraisalfoundation.org (The banner reads: Authorized by Congress as the Source of Appraisal Standards and Appraiser Qualifications) says (as Zillow's President cites) "The output of an Automated Valuation Model (AVM) is not, by itself, an appraisal." http://commerce.appraisalfoundation.org/html/2006%20USPAP/ao18.htm

Sean

Here's Zillow's reply to the Arizona Board of Appraisers:

The link is very interesting and worth following, but it is a bit long.

Sean

TN-Apprentice, good job in coming up with some good examples in how someone could get in trouble by applying a bad valuation. I think I couldn't come up with those because in each case, I imagine that if I had no idea of how to value a property, I would have sought competent counsel. Doing so would have prevented each of these situations.

The damage in these cases all comes down to the fact that the parties involved were either cheap, ignorant (lack of knowledge or understanding, not stupid), or too lazy to do the right thing and get a REAL appraisal. I know that you have been arguing that these people are "outside the industry" and that your position exonerates them from investigating to any level of detail before they wrongly accept the Zestimate for an appraised value. I would have to say that at some point, we have to let common sense and intuition play into it, and if they don't perform the due diligence on the situation to determine that they should get a real appraisal, why should the rest of us be denied the information?

Someone buying a house should do an inspection. It should be by a licensed house inspector. If you choose to not get the house inspected, or if you choose to have your brother the handy man to inspect it and you get burned, whose fault is it if the house turns into a money pit the day after close? It's called due diligence.

If you have a stomach ache and you go online to a medical website and you read that a stomach ache could be indigestion, should the website be sued if you don't go to a doctor to find out it's an appendicitis?

And one odd thing that this brings up is that an "Appraised Price" is not "THE Appraised Price." Most real estate professionals know that an appraised price is not rock solid number. There are pushers (appraisers who will return higher values) and squashers (appraisers working for buyers who intentionally return lower values as a way to negotiate down a contracted price.) VERY OFTEN if an appraisal comes in low, a bank or one of the parties involved will request a second appraisal to see if they can get the number they need. Many relocation companies have clauses where they will average the "appraised prices" if they are within 5% of each other. What is significant about that is that the appraisals are beyond 5% of each other often enough that they have had to develop that clause.

I'm not arguing that there shouldn't be appraisers. But in the instance of the divorcing couple or the forclosing family or the probate issue, if one wants a higher appraisal to serve their cause, they can find a pusher. If one wants a lower appraisal (the wife is staying in the property and wants the value to be lower to buy the husband out), she can find a squasher. So appraisal numbers can be used to the advantage of one party or another, just like a Zestimate. I just don't know how much government regulation is needed to protect people from themselves, especially when Zillow provides enough disclaimers. If they are willing to take the single number from the party presenting it to them (instead of going online themselves, pulling up their address, and spending a whole 5 minutes reading the information on the page), perhaps they should learn a bit about life, a bit about negotiating skills, a bit about the source of information they are basing their HUGE decision on.

I guess that I'm just frustrated with the fact that we will defend those that do not accept responsibility to look into something that affects them so much, and that a governmental body would feel it's necessary to BAN the information source from the rest of us than to expect the people to be responsible adults. If they don't have the skills and knowledge, they should seek the assistance (most often free) to help them. (If you called a Realtor, they'd give you a CMA on your house in a snap, and it would be free. You could do that to several Realtors.) And as for understanding what the Zestimate is, we're not talking a 40 hour course here. We're not even talking about a 1 hour education. We're saying that these people should have the intelligence to, and be held accountable for, reading a web page or two in all of five minutes. If we can't expect them to do that, what else are we willing to exonerate them from?

Sean

I think this is exactly why I even got into this discussion. I can't believe that the government has to step in in a case like this. I would understand if Zillow came out and said "These are appraisals" and then the people were damaged by using them as appraisals. But that's not what is happening here, and I have yet to determine what damage is being done to those who wrongfully assume that a Zestimate is an appraisal. Keep the predators away, that's fine, but this is a case of excessive governenmental interference in my opinion.

Sean