Should you Invest Just for Cash Flow?

I am a huge proponent of investing in rental properties for cash flow, but I don’t invest just for cash flow. I love the almost $8,000 a month my rentals produce in income, but I also love the equity I have. My 15 rentals (I am not including the turn-key rental I bought with my IRA) have almost 1.5 million dollars in equity and I bought my first property in December of 2010. I put 20 percent down on almost every rental property I bought, and I figured I have invested less than $300,000 to get that 1.5 million dollar gain. The cash flow from my rentals has been awesome, but not nearly as awesome as the equity gain. I still invest in only rentals that will produce great cash flow, but that does not mean I ignore appreciation or forced appreciation. In fact, one of the reasons I have built so much equity is I have gotten extremely good deals on the rentals I bought.

How much equity have I built up in my rentals?

I bought my first rental property in 2010 and have since bought 15 more (one of those being a turn-key property in Cleveland). One reason I love this blog is it forces me to really look at my numbers and analyze my investing. I want to give people a clear view of what my investments look like, which makes me go through all the numbers to see what has actually happened in my portfolio. A while back I calculated all the repairs, maintenance and property management costs to see if I was actually making $500 in cash flow on each property, which they did! Here are the numbers on my 15 rentals:

Purchase price   Down payments       Repairs           Current Value    Value when Bought

$1,628,000           $407,000                  $156,000         $2,915,000           $2,260,000

The total amount of cash it took to buy my 15 rentals was $563,000. There were actually more costs than just the repairs and down payments, like closing costs and loan costs. However, I am a real estate agent and I made a commission on all of these houses when I bought them, which should more than make up for the closing costs. Even though it took over $500,000 to buy these rentals, I did not spend that much money because I refinanced two rentals in 2012 and two in 2015. Those refinances allowed me to take out about $152,000 in cash plus I have a line of credit on my first rental for $120,000. I have only spent about $291,000 in cash to buy my 15 rentals. I also bought rental property number 16 with cash, because I was not sure if I was going to keep it or rent it when I bought it. Had I financed that property, I would have about $70,000 less cash invested as well.

How to complete a cash out refinance.

If you look at the numbers above, I have increased my net worth by $1,131,000 thanks to my rentals (total value minus purchase price and repairs). The loans I have on my rentals total about $1,265,000, which means I have about $1,494,000 of equity in my properties. The $291,000 I have invested into my rentals have produced almost 1.5 million dollars in equity and $8,000 a month in cash flow. Not a bad investment!

How did I gain so much equity with my rental properties?

All my rentals except for one are in Colorado and Colorado has had a very hot real estate market. Prices have doubled in some areas in the last five years, which had been awesome for the equity gain on my rentals. I did not buy all my rentals five years ago, in fact I bought five in 2015. Appreciation has caused part of the gain in equity, but so has buying properties below market value. If I look back at what my rentals were worth when I bought them, I gained about $476,000 as soon as I bought my rentals even after accounting for the repair cost. Appreciation accounted for about $655,000 in the gain on my properties and buying below market value accounted for about $476,000.

How to buy real estate below market value.

Appreciation can be an awesome way to increase net worth, but it is not easy to predict. I knew I was getting great deals on my rentals, but there is no way I thought housing prices would increase as much as they have. I cannot predict appreciation, but I can buy houses below market value and I can buy houses that I know will have cash flow. I like to be in control of my investments, which is one reason I love real estate.

How can you use the equity you have in rental properties?

Having a lot of equity in real estate looks great on paper, but it does not do you much good in the real world. Luckily there are ways to take advantage of that equity. Refinancing properties, obtaining lines of credit, and selling houses are ways to tap into that equity. I am actually selling two of my rentals this summer. In fact, I sold one of them already and honestly I only have 14 rentals (not including the turn-key) right now. I wanted to write this article based on the 15 rentals I had because many of the numbers I pulled for this article were calculated before I sold that house. I am also in the process of selling another one of my rentals this week. When I first made my plan to purchase 100 properties, I never envisioned selling any of my rentals, but plans change. The market has gone up so much that I feel I can put that equity to better use by buying new houses. I also am getting rid of two of my least desirable rentals.

I sold rental property number five for $199,500 a couple of weeks ago after buying it for $88,000 in 2012. I got an awesome deal on that home and it has increased in value greatly. After making repairs, and selling costs I made about $88,000 on the home and that does not include the cash flow or money I saved buying it as an agent. On the other rental property I am selling next week, I will make about $45,000 on a house that I bought in 2015.

That $45,000 is just the profit I will make, I will be getting even more cash back. I will be getting $86,000 cash back on one property and I got back $125,000 on the house I sold. When I figure in the cash I am getting back on these sales, I will only have about $90,000 in cash invested into 13 rental properties.

I am not done yet tapping into my rental property equity. I have been trying all year to refinance some of my rentals to take cash out. I have been working with Jordan Capital Finance to refinance 7 of my rentals into 30 year fixed rate loans at 6 percent interest. I got as far as having the loans conditionally approved and I ordered appraisals. Then the lender Jordan Financial uses for 30 year loans, stopped lending! I was not very happy with the situation, especially since I had no idea Jordan was not financing the deals themselves. I tried some other lenders and could not find nearly as good of a deal, although Lima Capital was close. My local lender who had financed all of my previous rentals had stopped wanting to lend to me as much, because I reached 2.5 million dollars in loans with them. However, since I am selling two of my rentals and I have been slowly paying off the loans on my other properties, my local portfolio lender said they would refinance my properties with up to $244,000 cash out.

I am in the process of refinancing 4 of my rentals including number 16, which I previously paid cash for that will give me about $244,000 cash back. After refinancing my properties and selling a couple, I will actually own 13 rentals and will have received back over $150,000 in cash. My payments will increase about $1,200 a month with the new loans, reducing my cash flow and my equity will be reduced, but I can do a lot of things with $244,000. When I finally start investing in rentals again, I can more than make up for the increased monthly payments and equity lost. Three new rental property purchases would make me $1,500 a month (using my historic standards) and give me around $200,000 in equity (using historic standards).

Why do I still invest for cash flow?

As you can see the equity gain and appreciation have caused my rentals to perform very well from an equity stand point. However, I am not going to change my strategy and start buying any property I can hoping it doubles in value in a few years. First off, there is no guarantee prices will continue to rise, and I like to invest my money in a sure thing. Second when you invest with little or no cash flow, it makes it harder to buy more properties. Many banks lend money based on the cash flow a property has. They want to make sure that if something happens to the borrower financially, the rent will allow the property owner to continue to make payments. A poor cash flowing rental will also increase debt to income ratios, making it harder to qualify for loans. One of the reasons I have been able to get loans pretty easily is I make a decent income, and my rentals have awesome cash flow and are great deals. It is easy for the bank to lend money on these homes, because there is so much built-in equity and a lot of rent to cover all the expenses and then some. Last, I am buying rentals to provide me with passive income. As long as I own my rentals they will continue to pay me every month with very little work from me. The reasoning for selling some of my rentals is not to cash out my investment in real estate, but to use those proceeds to buy even more rentals and increase my cash flow in the long-run.

How to qualify for a loan on investment properties.

My strategy moving forward

Another problem with buying rentals in high appreciating locations with little cash flow is they are usually expensive. I would have to spend at least $150,000 on a rental in Colorado to get something in areas similar to where my other rentals are. That would be an awesome deal and it would not come close to cash flowing as well as my current rentals. Plus I would have to put much more money down. It has been my goal this year to find new markets to invest in, and I think Florida still has a lot of potential. I have been preoccupied with my flipping business this summer, but with the refinances on my rentals, selling a couple rentals, and getting my flipping business under control, I should be able to focus on buying more rentals in the second half of the year.

If you would like to find out more about how I find rentals, finance them, manage them, and how to determine what a great rental property is. Check out my best-selling book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook.



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