Chasing Chump Change Cash Flow — Sacrificing Tomorrow’s Dollars For Today’s Pennies

Today I’m addressing the investor interested in growing their net worth through real estate. I’m not talking about those who are investing solely for the benefit of monthly cash flow. Furthermore, there is much room for folks to disagree with what they think the #1 most abused principle might be. I think it’s this one. I’m sure it’s a frequent hot topic around the family fireplace in your home, right?. :)

Regardless of the passage of time, one of the constants remaining firmly implanted in many investors’ mindset is the idea that an investment property without abundant cash flow is to be avoided at all costs. The problem inherent with that school of thought is rooted in a few related principles, plus the difference between today’s realities and Grandpa’s memory of the way ‘it used to be’ — which in reality means to Grandpa, ‘the way it should be’.

The Principle in play: To the extent you go for growth you retard cash flow — and vice versa.

A very simple way of saying pick one. You want more cash flow in a particular region, you must begin with a larger equity chump change
position. If you wish for your capital growth velocity to be greater, you must, to the extent prudent, increase leverage. Also, put enough oversized down payments into several properties, and before you know it, the guy who isn’t chasing chump change cash flow has bought a couple extra properties — using the same capital amount you did.

Notice how this isn’t rocket science. As a matter of fact, a principle of Purposeful Planning calls for the aggressive avoidance of growth inhibiting behaviors when capital growth is your investment goal. :)

Before we continue with our regularly scheduled post, a word from one of our loyal sponsors.

Prudent means you have a generous Sominex (Ambien for those under 40) Account. For those new readers, that’s BawldGuy for CASH RESERVES.

Please don’t allow me to give the wrong impression here. The ‘there must be cash flow school‘ is just as valid as any new approach or thinking. After all, who would argue against having cash flow, if that’s all you were talking about, right? An investor won’t go wrong limiting themselves to buying only cash flow properties.

They will however limit the size of their menu, eating cakeas properties offering both leverage and cash flow, (regions for that matter) are few and far between. Consequently, those who insist on having their cake and eating too, will find themselves spending the majority of their time looking, instead of doing. That’s fine and dandy if you don’t have much capital. If you’re trying to spend a couple hundred grand using low downs while demanding cash flow — hunker down good buddy, cuz yer in fer a buncha lookin’. :)

Your also in for a less rewarding retirement.

This wasn’t as nearly universally true a short while back.

For example: Clients in San Diego were consistently using great leverage while enjoying a modest cash flow up until as late as 2002-03. Up to 2000 it was possible in most of the area. Now? In San Diego using leverage to a break-even is anything bought with less than a 30% down payment. This is why I’m telling SD income property owners to move their equities to lower priced growth regions. They’ll acquire more property with far superior leverage, while gaining more actual capital growth dollars — but with the exact same net equity. There’s simply no argument, objectively speaking, for staying in San Diego with our real estate investment capital.

Here’s the point.

There are enough growth regions around the country that allow for decent leverage. There are precious few that allow that leverage and reward you with cash flow. If you’re an investor wanting growth you’re not concerned with cash flow.

Why?

Let’s say you’re a married couple in your late 30′s to late 40′s, tahiti sunsetand earning a total of $75,000 yearly. Unless you’re living up to your eyeballs, (which means you haven’t managed to save any real money anyway) what do you care about cash flow? You need to grow your net worth as big and as quickly and as prudently (capital P) as you can. Don’t lose sight of your main goal and keep your eyes on the prize: Retirement income.

What is cash flow?

All cash flow, in the final analysis, is simply a yield on capital invested. If two investors put a million and two million bucks respectively into an investment upon retirement, yielding 8% — they both make 8%. The difference, of course, is the guy with twice as much capital is now sitting in retirement with twice as much monthly income. Duh. So by stressing over cash flow when your main goal is, or at least should be, growth, you’ve sacrificed future retirement income. You want to be the guy with the two mil, right? Right.

Ah, now I have your attention. :)

The lesson is to grow your net worth like crazy — then just before and in anticipation of retirement — convert your energy to obtaining cash flow — yeah, like crazy.

Let’s get this boiled down to where we all live — dollars in our Levis.

Over the long haul — I’ve seen investors literally cost themselves from $1-3,000,000 in net worth by making just this kind of mistake. It’s not that hard — when your mistake is compounded and repeated over a couple decades. Let’s take the midpoint — $1,500,000. At just a 6% yield — chasing cash flow to the extent you’ve consistently retarded your capital growth — your retirement income has been reduced — forever — by $90,000 a year. What?!! Yep — $90,000 every year. And you lost it because you were chasing chump change during the biggest earning years of your life.

Imagine the guy next door getting to live on almost a million bucks more over his first decade of retirement — just because he didn’t chase chump change cash flow while he was earning well over what he needed to live very comfortably.

The only benefit I’ve ever scene from a growth client chasing cash flow, is their ability to brag about it at their neighbor’s backyard BBQ. :)

They won’t be bragging when it comes to adding up their retirement cash flow — and isn’t retirement when they really wanted needed it?

Yeah, I thought so too.

This entry was posted in Cash Flow, Purposeful Planning, Real Estate Investing on by .

About BawldGuy

I'm second generation real estate, first licensed in fall of 1969. Having been mentored by several iconic brokers, I'm also CCIM trained, having completed all 200 hours back in 1980. Have successfully executed well over 200 tax deferred exchanges, many of which have been multi-state in nature. Strong points are analysis and the creation and real world application of Purposeful Plans employing several strategies synergistically. The idea is to arrive at retirement with the most after tax income possible, backed by the largest net worth.

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6 thoughts on “Chasing Chump Change Cash Flow — Sacrificing Tomorrow’s Dollars For Today’s Pennies

  1. Chris Lengquist

    Two things;

    1. For me, if the house pays for itself that’s all I care about. My earnings are delayed but should be sizeable.

    2. There seems to me to be a direct correlation between large cash flow and large tenant headaches. Because usually, not always, great cash flow with little leverage means substandard neighborhoods. I better stop. I’m making some people mad, I can feel it.

    Reply
  2. Jeff Brown

    Perfect timing Chris. Yesterday i spoke with a KC title guy in charge of commercial biz development. He was telling me stories of folks he knows in related businesses who have found themselves stuck in the endless spin cycle of buying dirt cheap property in neighborhoods more or less owned by ‘The Bad Guys’ who are then surprised when they end up terrible tenants, followed by no income, followed by being shunned by lenders sporting a three digit IQ. :)

    The ending to this spin cycle is a tumble in the dryer, conveniently set on ‘cottons’. :)

    You can find those rare gems with solid location and higher than normal rent to price ratios – but then you have to listen to guys like yourself who’ve done three other deals in less than half the time. :)

    Reply
  3. Geoff Phelps

    Jeff, I am familiar with this concept but have never seen the consequences presented as your Dollars in Our Levi’s example. Fantastic! Great way to bring the future into the present.

    Do you have a rule of thumb for Sominex accounts?
    Most lenders these days require 4-6 months PITI. Do you go further?

    Reply
  4. Jeff Brown

    Geoff – thanks.

    I look at every client individually. For example, I just took on a young Idaho couple recently. They are currently under contract for one property. They currently have cash reserves of $12,000 AND a $20,000 HELOC earmarked also for Sominex duty. :) I’m a little protective of young people with kids.

    I also started a middle aged lady, divorced, with no kids at home with $50,000 in the bank. She’s a hospital administrator, making less than $50,000/yr. She now owns four investment properties. Because she’s not making say $80,000 a year, and totally on her own, I’m more comfortable erring on the side of too much than too little.

    No real rule of thumb though – except having too much rather than too little. :)

    Reply

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