Equity vs. Cash Flow

[djs13]

I'm about half way done with "The Millionaire Real Estate Investor" by Gary Keller. He gives an example about buying 15 properties in a 20 year period and being able to create equity over $2 million and having a $50,000 annual net cash flow. He talks alot about equity build up and how it's what matters most.

But my question for the real estate investors is that isn't the Cash Flow you get from your properties the reason why you can be a full time investor? Wouldn't equity only matter if you were selling off part of your portfolio?

I'm looking to buy my first rental property next Spring and I'm just thinking that I would have to focus on apartment/multi-units in order to create a higher cash flow because I would rather be free from a job than working full-time but having $2 million in equity. As you can see I'm a little confused.

 

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[Runum]

Good question. I havne't read the book so I can't comment on that. I will tell you that you are right. Cashflow puts food on the table and equity will make you rich. However, if you buy at retail and use your own money your only going to get cashflow, if that. You have to buy below fair market value to get equity. Most investors I know are trying to find deals at 70% of retail or lower AFTER repairs. If you can find those deals you will get equity and cashflow.

 

[White8]

However, if you buy at retail and use your own money your only going to get cashflow, if that. You have to buy below fair market value to get equity. Most investors I know are trying to find deals at 70% of retail or lower AFTER repairs. If you can find those deals you will get equity and cashflow.

Therein lies the key. If your network comes up dry, where do you find the properties and the cash(or at least a percentage of it)?

 

[Runum]

Therein lies the key. If your network comes up dry, where do you find the properties and the cash(or at least a percentage of it)?

Ahhh, yes. You are then going to have to expand your network, try a different market, and/or try a new strategy. My last deal was brought to me by a realtor that I have done several deals with. I also belong to a local REI group and we have a deal table. You may have to get out of your comfort zone. Good luck.

 

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[Runum]

Sorry, I just reread your original thread djs13. My strategy is more applicable to single family homes. If you are wanting to learn about apartments SteveO is the man.

There are a couple of opinions I will share with you though. The timeline that the book is talking about is pretty long term to me. $50000 annual cashflow is about $4000 a month. If it takes you 20 years to get there I think you are too conservative. Just my opinion.

The other thing is that the real estate market and lending rules are changing. Many of the strategies that are discussed in RE books may not be possible now. You still need to learn as much as possible, but the game is changing. Again, just my opinion.

 

[White8]

My last deal was brought to me by a realtor that I have done several deals with.

What are the legal requirements for realtors as far as deals? I would imagine that they run across a lot of undervalued properties but from what I have seen, most of the time when a realtor gets involved the price jumps to retail. I have nothing against realtors and a 6% commission on a property that's 70% of retail after repairs is more than worth it.

 

[M&T]

The best deals are the one's that they are not in on. When property owners want to sell they usually call the people next to them. Or if you are just an investor in the neighborhood. I have had this happen many times.It's just being ready when the offer comes...
M&t...

 

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[Runum]

My last deal was brought to me by a realtor that I have done several deals with.

What are the legal requirements for realtors as far as deals? I would imagine that they run across a lot of undervalued properties but from what I have seen, most of the time when a realtor gets involved the price jumps to retail. I have nothing against realtors and a 6% commission on a property that's 70% of retail after repairs is more than worth it.

I guess I'm not quite sure about what you mean by their legal requirements. If this broker brings me a deal, she wants to be my buyers representative. That would mean she works for me. She will get 3% commission, a split of the 6%. If the selling broker won't give up 3%(it happens sometimes) and the deal is good enough, I would gladly pay the 3% myself. If she is my rep then she has to do the best she can for me to get the deal.

I haven't got any selling realtors to call me first with their best deals, yet. I have found a few decent deals by just meeting people. I have also had my relatives pass out my cards to people that need some RE help. I have also been offered deals while physically working on one of my other houses. You have to observant, visible, and open minded. You won't usually find these kinds of deals in th newspaper.

 

[White8]

That's what I thought. It seems to be more difficult on MF properties because they often have management companies that are tied to realtors.

 

[Runum]

What I have heard SteveO suggest about large MF properties is to look on Loopnet for the names of the listing brokers. They are the players in the market for those types of properties. You may not be interested in the listed property but you can get the contact info from there.

PS: cool plane, is that a mustang?

 

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[White8]

My last deal was brought to me by a realtor that I have done several deals with.

I guess I'm not quite sure about what you mean by their legal requirements. If this broker brings me a deal, she wants to be my buyers representative. That would mean she works for me. She will get 3% commission, a split of the 6%. If the selling broker won't give up 3%(it happens sometimes) and the deal is good enough, I would gladly pay the 3% myself. If she is my rep then she has to do the best she can for me to get the deal.

I haven't got any selling realtors to call me first with their best deals, yet. I have found a few decent deals by just meeting people. I have also had my relatives pass out my cards to people that need some RE help. I have also been offered deals while physically working on one of my other houses. You have to observant, visible, and open minded. You won't usually find these kinds of deals in th newspaper.

I'm wondering about the selling realtor. If she comes across someone with a house with a $200k FMV and the seller thinks its worth $125k is she legally bound to tell the seller that they are giving the property away or can she say nothing and quick sell it to an investor for the $125k?

 

[White8]

It's a Hawker Sea Fury a British contemporary of the Mustang. I wish I owned it. They are very fast ~440mph with good flight characteristics. When I first started reading Trade-a-Plane in the early '90's they averaged $250k today an average one is $600k and the really nice ones are close to $1m.

I will have one before I'm too old to pull high Gs

 

[Runum]

If the realtor finds a deal for less than FMV and they are representing you as the buyer, the realtor is bound to your interest. They cannot tell the seller anything that you don't agree to. That means they cannot tell the seller that the seller is giving the property away. If you find out that a realtor violates their ethics and legalities you can complain to there licensing association.

 

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[Runum]

It's a Hawker Sea Fury a British contemporary of the Mustang. I wish I owned it. They are very fast ~440mph with good flight characteristics. When I first started reading Trade-a-Plane in the early '90's they averaged $250k today an average one is $600k and the really nice ones are close to $1m.

I will have one before I'm too old to pull high Gs

Never heard of it. Awesome looking craft.:icon_super:

 

[slim_jim]

Off topic of real estate and about mustangs....

My family and I went to The Gathering of P-51 Mustangs and Legends, Sept 27-30, 2007, Columbus, Ohio, Rickenbacker Field It was fantastic. Seeing over 50 of them flying at one time was incredible.

Now back to real estate.

 

[hatterasguy]

Its not an either or proposition, you should buy and make money on both. Thats why I prefer quality properties in quality areas. A good area will always do well, and generally appreciate nicely.

IMHO it comes down to forced appreciation, like you rehab a place or do what Steve does and turn around a failing complex. Or you buy a pretty place already, and just sit back and hope it goes up in value.

This is where RK comes up short, saying its all about cash flow is very narrow minded. RE investing is far more complicated than that.

 

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[hatterasguy]

It's a Hawker Sea Fury a British contemporary of the Mustang. I wish I owned it. They are very fast ~440mph with good flight characteristics. When I first started reading Trade-a-Plane in the early '90's they averaged $250k today an average one is $600k and the really nice ones are close to $1m.

I will have one before I'm too old to pull high Gs

I know someone who owns a Mustang, very cool plane! He actualy used to fly them back from South American in the 60's and 70's when the airforces down their went to jets. He was telling me one time the General really liked him so they loaded the plane down with .50 cal ammo for free! He didn't realize the guns were live until they landed in the US and checked them out! That was a mess.

 

[fanocks2003]

I'm about half way done with "The Millionaire Real Estate Investor" by Gary Keller. He gives an example about buying 15 properties in a 20 year period and being able to create equity over $2 million and having a $50,000 annual net cash flow. He talks alot about equity build up and how it's what matters most.

But my question for the real estate investors is that isn't the Cash Flow you get from your properties the reason why you can be a full time investor? Wouldn't equity only matter if you were selling off part of your portfolio?

I'm looking to buy my first rental property next Spring and I'm just thinking that I would have to focus on apartment/multi-units in order to create a higher cash flow because I would rather be free from a job than working full-time but having $2 million in equity. As you can see I'm a little confused.

Cashflow: Realised cashflow.
Equity: Not yet realised gain/loss.

Equity is what you put on the balance sheet as an asset. Cashflow is what you put on the income statement as income (of some kind).

That's the difference. Personally, I may have a lot of equity in my finance business, but I don't have an enormous cashflow stream (even though I live very comfortable on the cashflow stream I do have right now I am still not able to rent a jumbo jet for a week).

 

[MickeyDee]

Cash flow is king in todays market! At least in my local market. If you purchase with equity build up/appreciation as your primary goal you had better be independently wealthy and willing to feed those properties on a regular basis. Creating cash flow and forcing some appreciation is a good idea in my market (W. Mi.) There are lots of SFHs that would fill the bill nicely all around me, some uder $20K (with many $s needed for repairs).

 

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[fanocks2003]

What people seem to miss (those that are not wealthy) is that building equity is a childs game. It's extremely easy to do. Building cash-flow is where the real intelligence comes in. That is a lot harder to do.

There are billionaires and multi millionaires going bankrupt because they didn't have cashflow to support their expenses, but they did have all this equity that they couldn't sell of as easy as they thought.

People with low networth seem to think that a high networth will solve all their money problems. That is just a big illusion. A big cashflow pipeline will solve a lot of trouble. If you spend less, that is.

So what we come down to is: Controlled cashflow/expenses is what makes you wealthy, rich or whatever you want to call it. Networth is just a safety net "in case" something goes utterly wrong.

If you have a big networth, find quick ways to how you could liquidate that equity "in case" you would need it very quickly. I know that, for example, selling of a private company may take between 6 months and many years. If you are then strapped with bills you cannot pay now, you are toast. Unless creditors takes your private stock into custody (one way to solve the problem).

 

[andviv]

This is one of the most heated debates in the financial world. I still remember a looong thread in the RD forums about this topic.

I think the most valuable point I got from the discussion at the time was that one creates the other one. The more cash flows in the more valuable your business/property is.

I know ATW, SteveO, RussH, MJ and others discussed this in another thread probably a year ago, but I am feeling lazy this morning and don't want to go looking for it... feel free to search here in the forum and you will probably find a lot of great information in the topic.

 

[White8]

I know someone who owns a Mustang, very cool plane! He actualy used to fly them back from South American in the 60's and 70's when the airforces down their went to jets. He was telling me one time the General really liked him so they loaded the plane down with .50 cal ammo for free! He didn't realize the guns were live until they landed in the US and checked them out! That was a mess.

I've talked with people who did that too. That would be quite a surprise to find out that you were loaded. I'll bet the ATF was more than interested.

 

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[SteveO]

What an interesting thread. The topic is always worth discussing no matter how many times it is brought up.

Fanocks point is very valid that creating cashflow is the challenging part. Some people will buy a successful business and then lose it as a result of poor management. It does not take much to wipe out the equity. The flip side is true as well. Find a business that is not managed to its potential and work to maximize the income. Success will build value in a rapid fashion.

So apply this to the world of apartment investing. Build a system that can be applied. Purchase properties, increase cashflow (thus increasing value), sell and buy larger.

While it can be argued that this is increasing cashflow, my opinion is that the cashflow is minute compared to the money that can be made by improving and selling. Cashflow is an important part of the equation. If I would have stopped at the first 4-plex and used the cashflow to live on, I would not be living very well.

 

[djs13]

What an interesting thread. The topic is always worth discussing no matter how many times it is brought up.

Fanocks point is very valid that creating cashflow is the challenging part. Some people will buy a successful business and then lose it as a result of poor management. It does not take much to wipe out the equity. The flip side is true as well. Find a business that is not managed to its potential and work to maximize the income. Success will build value in a rapid fashion.

So apply this to the world of apartment investing. Build a system that can be applied. Purchase properties, increase cashflow (thus increasing value), sell and buy larger.

While it can be argued that this is increasing cashflow, my opinion is that the cashflow is minute compared to the money that can be made by improving and selling. Cashflow is an important part of the equation. If I would have stopped at the first 4-plex and used the cashflow to live on, I would not be living very well.

So basically your saying that the real money in real estate is buy improving the property, thus building equity in the process, rent for a while to pay off the monthly debt and then sell for a greater price? If you used this process would you just live off of the profits you made in your previous transaction until you sold another property?

 

[SteveO]

So basically your saying that the real money in real estate is buy improving the property, thus building equity in the process, rent for a while to pay off the monthly debt and then sell for a greater price? If you used this process would you just live off of the profits you made in your previous transaction until you sold another property?

Are you going to make more money renting 10 units or 100? I only hold long enough to realize the equity gain. This is potentially 1-5 years.

I still work for cashflow. The cashflow increases as you build your portfolio. I live off the cashflow for the most part.

apartment appreciation targeted

 

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[Runum]

Are you going to make more money renting 10 units or 100? I only hold long enough to realize the equity gain. This is potentially 1-5 years.

I still work for cashflow. The cashflow increases as you build your portfolio. I live off the cashflow for the most part.

apartment appreciation targeted

Hey Steve, after you have sold the property and the casfhlow is gone, what are you living on. Do you have multiple properties providing different income streams?

 

[SteveO]

Hey Steve, after you have sold the property and the casfhlow is gone, what are you living on. Do you have multiple properties providing different income streams?

Most of the time the property will be exchanged into a larger property. There is not a lot of time in between.

 

[djs13]

OK I understand what you're saying now. Thanks Steve.

 

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[hatterasguy]

I've talked with people who did that too. That would be quite a surprise to find out that you were loaded. I'll bet the ATF was more than interested.

Oh yeah it was a mess to say the least. I guess the General who was in charge of whatever part of the country they were in was quite strange. At first he held them up for three days and they couldn't leave. So when he had a change of heart they got out of their ASAP and didn't check the guns.

 

[hatterasguy]

Very interesting Steve, one of my uncles uses cash flowing properties in a similer way. He uses them like a bank, and uses the cash to live on, than sells them when a better use for the money comes along. He builds his capital by investing it in development projects with a far higher return than any cash flow he was getting. Than after the project buys a larger property that pays him better.