Does anyone remember the old Great Taste Less filling advertisements? This question is really location specific and business model specific. I am in a location that there is never a reason to buy a property that does not cash flow. Some people like people in California can’t buy properties that cash flow. I passed just yesterday on a house that would sell for $180,000 I had an offer accepted for $120k. It needed $25k to bring to top shape. I would have $150k in a house that would sell for $180k. Everybody said that is $30k you left on the table. The problem is that it would rent for $1200/month. That would make it negatively cash flow $300/month.
The problem with the deal is that it would take me until October to get the house on the market. I would carry it at hard money rates until October at $2000/month and then nobody is going to buy it until the spring (nobody wants to move their kids to a new school in the middle of the school year). I would have to sit on it for 9 to 11 months losing about $15k. The remaining $15k would lose about $10k of it in selling costs. No deal.
I replaced it with a deal I just locked up today that is going into the 7 day option period. This house will sell for $128k I offered $95k. The same $30k spread. This house will rent for $1000/month and my monthly PITI will be $800/month. That is a $200 positive cash flow. If I sell it next year, I still get the $30k plus the $1200 to $1500 because of cash flow. Here, cash flow dictates what you do, not appreciation.
Historically appreciation is around 6% long term. With a 20 % equity postition in real estate, your return is 6% times 5, or 30%. This is much better than the 10 - 20 % return to the same 20% equity position that is returned by cash flow. However, you have to have deeper pockets, because there will be times that you can’t sell, and have to hold on, and if the cash flow is negative… :(.
I think that cash flow is important mostly so that you can hold a property through the ups and downs of appreciation to get the larger returns that appreciation offers. If you don’t need positive cash flow ( you have deep pockets ), then you have more opportunities available to you.
I hate to play the devils advocate, but appreciation is no longer a safe bet... Based on the market currently cash positive rentals are the ones set to appreciate, just not yet....
Think about it what drives up value moreso than demand... I know a lot of you are sitting in negative cash flow pools...
Cash out and buy cash positive.... These overpriced markets are thru!
I think too few investors think like business owners (even though they are), and it’s evident in this discussion. Cashflow is the lifeblood, and first priority of any business.
Without cashflow, you can’t enjoy appreciation. The only way to take advantage of appreciation is to pay cash, or use leverage. Either way, you’ve got to have the cash to begin with-- so the question is: where does the money come from to either pay cash, or service debt? You can have all the appreciation you want, but with no cashflow-- you won’t be keeping it for long.
So, what’s missing thus far in this discussion is the relationship between the two. $1000 a month represents purchasing power to buy equity positions, and/or enjoy appreciation.
I discussed the relationship between the two in depth in another post. Understand that I am talking about my situation, not that of someone starting from scratch. With what I have done, you must start out with some cash.
In summary: I use profits from flips and the sale of appreciated properties to offset negative cashflows and buy more real estate. I don’t worry about small longterm negative cashflows (on keepers which I rent) or large short term negatives (flips) on some properties. Those situations are just part of the big picture. The OVERALL REI PORTFOLIO CASHFLOWS because the flips and sales bring in much more cash than is needed to feed the negatives. I have a 45% equity position over my rei portfolio now, not exactly out on a limb. Each property is purchased with multiple exit strategies in mind. The market and my personal financial situation will determine which strategy I use.
I am in an appreciating market. When the market flattens out, I will do a higher percentage of fix and flip deals than I am doing now.
The “Every property must have a postive cash flow” types explain that this is unsound. It doesn’t fit their dogma.
I agree that your strategy is sound. As long as you’re willing to work to make up the negative cashflow, you’ve defined a strategy that works for you. I have no problem with it-- especially considering your substantial equity position in each property.
You’re on very sound financial footing-- and you’re doing what more investors need to do and thinking like a business owner. You’re looking at the portfolio as a whole.
I personally do not like negative cashflow properties, though for the right equity position I would do it. Then I would refinance the equity out, find an investment(s) that would balance the cashflow just as you have done.
What I would not do is use money from flipping to cover negative cashflows, or lower my cash-on-cash return to facilitate positive cashflow. I don’t like working for money, and I don’t like my money not working.