Cashflow versus capital gains thread?

[Sid23]

I thought there was a thread discussing this somewhere. I tried searching for it and could not find it. Anybody remember where/what it is?

 

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[andviv]

I hope you are not refering to the Cashflow vs. Networth discusison that was in the General forum in the RD forums.... man, that was something!!!
I don't recall one like that here.

 

[Sid23]

oh wow, maybe that was it...oops!

I bring it up because I spoke to "Bounce" who's been pushing me to find a deal that creates cashflow from Day 1. His advice runs counter to much of the other advice I've received - "do deals to generate capital (cap gains deals) and then invest those gains for cashflow."

I was just hoping to read through the thread if it existed.

 

[JScott]

I think the suggestions to go after capital gains first stems from the fact that many people can't afford the downpayments and financing terms that often lead to cash-flow on day 1. For example, in many areas of the country, if you can't put down at least 10-50%, it can be difficult to find a cash-flowing property.

Don't get me wrong, I'm sure there are plenty of strategies that can be employed to get cash-flow with a minimum of up-front cash, but in-general, it's difficult to boot-strap with nothing.

Additionally, some people prefer shorter-term deals where they can add value and generate quick capital gains because the return can be much larger than the typical cash-flow property.

There's no right or wrong answer; it all depends on your personal plan. If you're looking for long-term cash-flow, and you have the cash, there's no need to do capital gains deals...

Again, no right or wrong answer...just what's right or wrong for *you*...

 

[venom]

Hmm
No right or wrong answer ? Since when ?

So Sean what kind of "deals" looked at?

 

[JScott]

Hmm
No right or wrong answer ? Since when ?

I've never heard anyone *prove* that going after cash-flow was right or wrong. And I've never heard anyone *prove* that going after capital gains was right or wrong.

Therefore, as far as I know, there is no right or wrong answer. In fact, people have made millions (and even billions) doing either and both...

If you know of a right or wrong answer, please post it. There are millions of real estate investors around the world who would love to hear the "right answer"...

 

[venom]

:smxF:

There's no right or wrong answer; it all depends on your personal plan. If you're looking for long-term cash-flow, and you have the cash, there's no need to do capital gains deals...
..

If you bought your neighbors house for cash at retail how long would it take for you to just get your money back ?
I think you answered the question already :smxF:

 

[camski]

If you bought your neighbors house for cash at retail how long would it take for you to just get your money back ?

If you bought the house for cash, you have your money (it is just in the form of real estate and not cash). It isnt a question of getting his money back, it is a question of ROI on that investment. Now whether or not one should buy a propety at retail with cash is whole other topic.

 

[KyJoe]

2 different animals, without cashflow you will never find out what capital gains are!

 

[JScott]

If you bought your neighbors house for cash at retail how long would it take for you to just get your money back ?
I think you answered the question already :smxF:

Not sure exactly how I answered my question already (I can be dense sometimes ), but in answer to your question, it depends...

If I had bought my neighbors house "at retail" two years ago, I probably could have gotten my money back within a couple weeks. If I did it 6 months ago, it would probably take me several years.

A good friend of mine bought his neighbors house back in August, did some work on it, and sold it to another friend of mine last month for $80,000 profit.

Another friend of mine bought a house for about 20% below FMV (@70% LTV), but can't rent it for enough to cover his mortgage because the rental market in his area is so overbuilt.

So, I'm still not sure of *THE* answer to the question...

I still am sure that it's a very personal and situational thing. Some people in some areas will be able to benefit from REI in terms of capital gains, some will be able to benefit in terms of cashflow, some could benefit from either, and some could benefit from neither.

If you believe there is an answer to the question, I'd still love to hear it...

 

[venom]

You dont have your cash someone else does. Meaning you cant use it on other investments.
My point was what cap rate are you going to get ? If your earning 10% its going to take you along time to just get your original investment back in your hands.

 

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[camski]

I guess i am not understanding this from venoms point of view. Here is my understanding of the situation (everyone please correct me if I am wrong). If I have $100,000 cash and I invest it at a 10% annual return, I would double my money in 10 years (100% return). If I buy my neighbors house for $100,000 and then rent it out for $10,000 a year (10% return) I would aslo double my money in 10 years (100% return). Now this does not take into account any reinvestment of return, just simple interest on my money or my property. Either way it amounts to the same thing, the difference being that my initial 100k is in property vs. some other investment vehicle.

 

[andviv]

I think the point is that 10 years is a long time to recoup your money (kind of slow lane).

In my case, I've settled for a formula that is very simple... generate cash now, and invest it in cashflowing properties later so it can keep growing.

If I recall correctly, SteveO's point is that cashflow and net worth go hand in hand. If you get capital gains (thus increasing your net worth) and invest that for cashflow then your wealth will keep growing.

The strategy is to work hard on deals that generate big returns (90% in a year), take that money and invest it in another deal that generates another, say, 80% return in a year. That would double your money in roughly two or three years. Why wait ten years if you can double your investment in one or two? That's why I am focusing in capital gains at this point for me. Once I accumulate enough then I can turn it for cashflow to sustain my lifestyle.

 

[JScott]

I think venom is assuming everything has the same goals as he does. There are plenty of people who would be happy investing their $1M for a 10% YOY return, not including tax advantages and equity accrual, and not have to work very hard. For those people, they are making more than $100K a year in income, plus another $5-10M over the next 10-30 years (depending on their leverage and loan amortization schedule).

Perhaps this isn't venom's goal; perhaps he would prefer large capital gains but have to put in a lot of hours putting together and executing on deals. And if that's what he wants, there's nothing wrong with that.

But again, it's not necessarily what everyone wants. So, don't assume this is the "right" path for everyone...

So, this goes back to my original statement: "there's no right or wrong answer...just what's right or wrong for *you*"

 

[Diane Kennedy]

I plan on coming into this thread later when I have more time (lots of clients with year-end, last minute tax planning right now). For now, some brief comments:

- Cash flow. Without it, you're dead. But, does the cash flow have to come from that particular property? I say "no". In fact, if you have cash flowing properties, businesses, etc..., then that gives you the freedom to invest for appreciation. WARNING: I see people with too little net worth go immediately into cash flowing...work their hearts out for $200/month. Those are the guys that need to get their stake up first and then go to cashflowing properties.

- Capital gains. THe CPA in me twitches a little when I see that, because that implies (at least to me) that you're going to sell the asset and pay tax. I want to be really clear - you do NOT have to sell the asset and pay tax to access appreciation. In fact, in most cases, you won't want to. And, another thread, another time, you dont' ever have to pay tax, even if you do sell it, if you do it right (pension money, 1031, CRT)

- Appreciation. There are two types of appreciation: active appreciation (where you go in and make changes that kick up the value - this is the kind of stuff that SteveO does) and passive appreciation (rising tide raises all boats) - just buying right and sitting.

Right now I'm doing appts with the last minute planner types who are often making over $1 mill per year and love what they do...but don't want to do it forever. THose are the guys that I recommend go into a mix of appreciation (active appreciation ONLY if someone else is doing the work) and cash flowing properties. If they have a net worth of $5mill+, then there is no problem at all going directly to cash flowing properties, but only if they want the cash flow. In a lot of cases, they make so much money because they're brilliant at something in their business - take the money instead to create a passive stream off of that and keep their real estate investments into appreciation. They don't need the cash flow right now anyway.

Bottomline - the final answer is "it depends."

 

[Diane Kennedy]

If I have $100,000 cash and I invest it at a 10% annual return, I would double my money in 10 years (100% return). .

Quick correction for the math - divide 72 by the return (72 divided by 10) and you come up with the length of time it takes to double the money. 7.2 years It's called the Rule of 72 and has to do with compounding of interest.

Camski, that makes your argument even more powerful.

 

[kimberland]

Hhhmmm... why do we have to choose?
With stocks, I prefer to have both.
Get paid while I wait.