Why are people so obsessed with rental properties yielding positive cash flow?

[Anonymous]

Anonymous wrote:Until retirement, no one‘s 401(k) is cash flow positive and yet no one says those are a bad idea. Amazon has never paid a dividend and yet, if you had bought Amazon stock at many points over the last 27 years, you would’ve become very rich. Houses in the DC area are only going to go up over time (yes, we may be due for a correction or even a crash in the short term).

But over time, buying the right house in this area can be a very good idea as an investment, even if the rental income does not cover your PITI and all other miscellaneous expenses (vacancy, repairs, etc.). Why is there this obsession that rental properties have to have a positive cash flow?

An investment has multiple dimensions:
- Return on capital
- Return of capital
- Leverage
- Liquidity
- Management costs

Diversify your portfolio to optimize all 4 across the portfolio. If that means investing in RE for you, so be it.

[Anonymous]

What rental properties give me is something that I cannot easily convert to cash. Had I instead invested in the stock market, it would've been too easy to cash that out for something I wanted or to deal with unplanned expenses. Instead, for those unplanned expenses, I got a personal loan that I quickly paid off.

I have a ton of equity across my properties, but no one would know it because I don't pull it out to increase my lifestyle.

I agree that positive cash flow is not a huge thing for me because my principal is being paid down each and every month, which is income to me.

The one downside to rental properties to me is knowing when to get out, if ever, knowing that the tax hit will come. When is the end game?

[Anonymous]

Anonymous wrote:I'm not a professional landlord, but over the years I've had three rental properties (a condo in Logan, an English basement in my primary residence, and a townhouse in NOVA). I've never had a positive cash flow in any of them when IRS-required depreciation is taken into account, and that's fine with me. It means I'm not paying any income taxes on the rental income because technically I'm operating at a loss. But the value of my rental properties is increasing every year. That's what RE investing is all about. The tax laws encourage losses. How do you think Trump got so rich? As much as I hate him, I know from personal experience on a much smaller scale that most of what he's done in the RE business is perfectly legal.

Your response makes no sense. Clearly you are not a professional landlord! If you charged $1000/mo more in rent for the property you'd still be depreciating and you'd still be getting money without paying taxes on much of the revenue. And you' still have appreciation. Those concepts are not mutually excusive from cash flow. You'd just have $1000 more in income per month. Would you be paying taxes on it? Sure. But if you wouldn't want to net another $8k/yr after taxes then you need to take a basic finance course.

One other thing you should make sure you understand (because based on what you posted, you clearly don't!) Depreciation is on the front-end, recapture is on the back end. If your real estate investing model is based only on appreciation you are going to be in a world of hurt when you go to sell and find out that 25% of the depreciation is now taxable.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I paid 290k cash my condo in a distress sale 10 years ago. Common charges and taxes are 700 a month and insurance $50 a month. I have it rented $2,250.

It is worth $450k. But I had $18k income for 10 years. If I bought more would have done a mortgage. This was a one time thing.

Some investor guy got three run down or worse location units three for 725k cash. He making $50k a year last ten years. His units way up.

Different strokes. That guy also bought a yacht cash.

That means you made $340k on a $290k investment, for a total of $630k. If you'd invested that $290k in a S&P 500 Index fund at the beginning of 2012, you'd have $1,235,549 now.

In this equities market I’m very glad I have the stability of my rentals. I’m the poster with 6k/mo after Tax after expenses cash flow. This does not even take yet into account my rent hikes in 2022. I’ll probably be up to 7.5k once recalculated at the end of this year. Not to mention I’m sitting on millions in equity that others have paid down (which I fully expect to dip).

Right now the interest I pay on the loans is a way better gamble than the losses I’m sustaining in the stock market and as a retiree I can tell you it’s a blooms bath and I don’t see light for quite awhile.

In reality, the reason why the condo owner made so little is because he had no mortgage. Should he invested $340K into a multi-family townhouse in 2012 at 20% downpayment he would have gotten:

-$1mm increase in equity in his home;
- mortgage interest and depreciation write offs from his gross income, around 15% additional savings every year from income
- continued holding an income generating assets whereby stock owners are now "stuck" with low-income generating stocks

[Anonymous]

Anonymous wrote:

Anonymous wrote:I'm not a professional landlord, but over the years I've had three rental properties (a condo in Logan, an English basement in my primary residence, and a townhouse in NOVA). I've never had a positive cash flow in any of them when IRS-required depreciation is taken into account, and that's fine with me. It means I'm not paying any income taxes on the rental income because technically I'm operating at a loss. But the value of my rental properties is increasing every year. That's what RE investing is all about. The tax laws encourage losses. How do you think Trump got so rich? As much as I hate him, I know from personal experience on a much smaller scale that most of what he's done in the RE business is perfectly legal.

Your response makes no sense. Clearly you are not a professional landlord! If you charged $1000/mo more in rent for the property you'd still be depreciating and you'd still be getting money without paying taxes on much of the revenue. And you' still have appreciation. Those concepts are not mutually excusive from cash flow. You'd just have $1000 more in income per month. Would you be paying taxes on it? Sure. But if you wouldn't want to net another $8k/yr after taxes then you need to take a basic finance course.

One other thing you should make sure you understand (because based on what you posted, you clearly don't!) Depreciation is on the front-end, recapture is on the back end. If your real estate investing model is based only on appreciation you are going to be in a world of hurt when you go to sell and find out that 25% of the depreciation is now taxable.

Professional real estate investors never sell (until they die when the tax basis steps up and goes to children). They do 1031 exchanges, or sell and reinvest and renovation/write off the gains same year from their taxes. So it's like a pyramid: one smaller property gets replaced by a bigger and bigger.
It's YOU who need to learn more about real estate finance

[Anonymous]

Anonymous wrote:

Anonymous wrote:I'm not a professional landlord, but over the years I've had three rental properties (a condo in Logan, an English basement in my primary residence, and a townhouse in NOVA). I've never had a positive cash flow in any of them when IRS-required depreciation is taken into account, and that's fine with me. It means I'm not paying any income taxes on the rental income because technically I'm operating at a loss. But the value of my rental properties is increasing every year. That's what RE investing is all about. The tax laws encourage losses. How do you think Trump got so rich? As much as I hate him, I know from personal experience on a much smaller scale that most of what he's done in the RE business is perfectly legal.

Your response makes no sense. Clearly you are not a professional landlord! If you charged $1000/mo more in rent for the property you'd still be depreciating and you'd still be getting money without paying taxes on much of the revenue. And you' still have appreciation. Those concepts are not mutually excusive from cash flow. You'd just have $1000 more in income per month. Would you be paying taxes on it? Sure. But if you wouldn't want to net another $8k/yr after taxes then you need to take a basic finance course.

One other thing you should make sure you understand (because based on what you posted, you clearly don't!) Depreciation is on the front-end, recapture is on the back end. If your real estate investing model is based only on appreciation you are going to be in a world of hurt when you go to sell and find out that 25% of the depreciation is now taxable.

It's not true: 25% won't be taxable in several tax planning strategies. When you sell stocks its taxable as well as capital gain, but in real estate you can completely avoid it. Plus write off mortgage interest, depreciation, have leverage (anyone tried trading on margin borrowing a million or two ? good luck!)

[Anonymous]

Anonymous wrote:

Anonymous wrote:Until retirement, no one‘s 401(k) is cash flow positive and yet no one says those are a bad idea. Amazon has never paid a dividend and yet, if you had bought Amazon stock at many points over the last 27 years, you would’ve become very rich. Houses in the DC area are only going to go up over time (yes, we may be due for a correction or even a crash in the short term).

But over time, buying the right house in this area can be a very good idea as an investment, even if the rental income does not cover your PITI and all other miscellaneous expenses (vacancy, repairs, etc.). Why is there this obsession that rental properties have to have a positive cash flow?

As

I’m not obsessed, but I certainly wouldn’t buy one that wasn’t! That’s just dumb and I shouldn’t have it explain it.

So far I net 6k/mo in rental income after Texas and expenses. This is a big deal because we retired at 50 and at the time still had kids who were 21 and 17. I use that rental income to pay our health premiums and all out of pocket health expenses. All leftover money (which is about 24k/yr) we keep in the kitty for a potential health crisis. It’s nice knowing I don’t have to pull from general funds for health which is a major barrier for people who want to retire early.

OP here. Why is that dumb? Isn't that like your 401(k), which is a huge money pit (i.e. you have to put money in every month) until you retire? For the investment property, the mortgage will be paid off when you retire and then you get cash flow.

Also, since a negative initial cash flow means the property is likely significantly leveraged, you return may even be better than in the S&P, meaning there would be no opportunity cost to buying the property.

[Anonymous]

Anonymous wrote:What rental properties give me is something that I cannot easily convert to cash. Had I instead invested in the stock market, it would've been too easy to cash that out for something I wanted or to deal with unplanned expenses. Instead, for those unplanned expenses, I got a personal loan that I quickly paid off.

I have a ton of equity across my properties, but no one would know it because I don't pull it out to increase my lifestyle.

I agree that positive cash flow is not a huge thing for me because my principal is being paid down each and every month, which is income to me.

The one downside to rental properties to me is knowing when to get out, if ever, knowing that the tax hit will come. When is the end game?

The end game is to leave it to your kids so they can take advantage of the step-up basis...no tax hit if they sell right away.

[Anonymous]

OP's question reflects so many basic misunderstandings of investments, dividends, and even basic financial and economic theory. The best response to OP is please go take a finance class

[Anonymous]

Anonymous wrote:OP's question reflects so many basic misunderstandings of investments, dividends, and even basic financial and economic theory. The best response to OP is please go take a finance class

Just to illustrate the naivety of OP's framing of things like 401ks and Amazon, it would be pretty much equivalent to asking something like "Why are people worried about global warming when it was really cold last week?" and then giving a bunch of unrelated facts like, "I bought three jackets in the past 5 years." That's basically the level we are on in this thread.

[Anonymous]

This is a really stupid question. Sorry OP, is what it is.

[Anonymous]

Anonymous wrote:

Anonymous wrote:What rental properties give me is something that I cannot easily convert to cash. Had I instead invested in the stock market, it would've been too easy to cash that out for something I wanted or to deal with unplanned expenses. Instead, for those unplanned expenses, I got a personal loan that I quickly paid off.

I have a ton of equity across my properties, but no one would know it because I don't pull it out to increase my lifestyle.

I agree that positive cash flow is not a huge thing for me because my principal is being paid down each and every month, which is income to me.

The one downside to rental properties to me is knowing when to get out, if ever, knowing that the tax hit will come. When is the end game?

The end game is to leave it to your kids so they can take advantage of the step-up basis...no tax hit if they sell right away.

The same is true of any asset, including stocks.

[Anonymous]

Tell me your don't know how to invest in real este by telling me you don't know how to invest in real estate

Wealth from real estate is made from positive cash flow, proceeds from the sale are an added bonus

[Anonymous]

Historically real estate appreciated little more than rate of inflation.
If you think of it that way you want your property to have positive cash flow.
If you want to compare it stock market it is like low growth and dividend paying company.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:What rental properties give me is something that I cannot easily convert to cash. Had I instead invested in the stock market, it would've been too easy to cash that out for something I wanted or to deal with unplanned expenses. Instead, for those unplanned expenses, I got a personal loan that I quickly paid off.

I have a ton of equity across my properties, but no one would know it because I don't pull it out to increase my lifestyle.

I agree that positive cash flow is not a huge thing for me because my principal is being paid down each and every month, which is income to me.

The one downside to rental properties to me is knowing when to get out, if ever, knowing that the tax hit will come. When is the end game?

The end game is to leave it to your kids so they can take advantage of the step-up basis...no tax hit if they sell right away.

The same is true of any asset, including stocks.

Hard to do if most of your equity are in 401k or pretax IRAs