Why You Need To Stop Chasing Cash Flowing Real Estate

The fixation investors have over cash flowing real estate investments is, sadly, a huge misconception on how to grow wealth and… well, cash flow.

That seems counterintuitive.

But I’ve had some 200+ conversations in the past year with novice and (somewhat) experienced real estate investors and it’s become quite clear.

Folks understand the basics. Or at least they think they do. But they don’t know how to think outside the box and see the big picture.

My fear is this leads people away from fantastic deals and into mediocre ones.

Even worse, this lack of education and awareness may even result in folks completely failing to meet their financial goals. 

That’s pretty scary.

And hopefully it’s motivating enough for you to take a step back, hear me out, and consider if you’re thinking about cash flowing real estate all wrong.

Why People Are Obsessing Over Cash Flow

Before we get into why investors need to stop looking at cash flow as their top criteria, it’s worth understanding how we got here.

In an era of an over abundance of information, the easy to understand, seemingly logical stuff dominates.

More complex and long-term plans seem to get drowned out by anything that promises immediate gratification.

This is exactly what’s happened with the cash flowing real estate investing strategy. And there are two primary drivers for this obsession.

Driver #1: They’ve Been Told This Is THE WAY

Go on any real estate investing forum and announce that you are buying a property that ***gasp*** does not produce positive cash flow on a monthly basis.

You will be met with ridicule and hate. 

People will be quick to tell you that you are NOT a real estate investor. In fact, you are gambling!

This is what people have been told and, on the surface, it makes sense. That’s why they believe it.

People will scream that appreciation is not guaranteed but fail to acknowledge that nothing in life is guaranteed or that inflation essentially DOES guarantee appreciation.

It’s a very flimsy argument.

The reality is people have been fed the equivalent of Dave Ramsey financial advice for real estate investing.

Just like Ramsey’s advice, hyper focusing on cash flow is simple, straightforward, and at the most basic level it works.

It’s great for people who really have no clue what they are doing and need to make a change financially (with Ramsey’s approach) or want to get started in real estate investing by focusing on cash flow.

While I don’t like Grant Cardone anymore than I agree with a lot Dave Ramsey advice, Cardone makes a good point that this kind of thinking will not make you rich.

It’s the same for real estate investing.

If you focus too much on cash flow, you’ll likely never get rich.

So why then are people valuing cash flow so much?

Driver #2: It’s Tangible & People Want To Retire Early

Cash flow is fun to count.

Trust me, there are few things I enjoy more than rent payments flowing in at the beginning of the month. 

And it’s easy to run some numbers on new acquisitions, drill down on the net cash flow, build out extensive spreadsheets, and project how it will build on itself in the future.

Most newer investors are attracted to cash flowing real estate because they want to start working their way out of their 9-5 job.

It’s easy to run some numbers and start daydreaming about how many houses they’ll need to retire.

When you take cash flow out of the equation it’s much harder to visualize the path to early retirement. It all just feels too abstract and uncertain.

So what’s the solution?

First, it’s understanding that appreciation is EXACTLY what we’re after. Not cash flow. 

Then it’s about finding the right market that makes sense for our own personal situation.

I’ll tell you exactly how I think about it and perhaps you’ll agree or poke holes in my thought process.

You Don’t Actually Want Cash Flowing Real Estate

That sounds like a bold statement, right?

But it’s not, and I’m going to prove it.

If you really wanted to invest in cash flowing real estate you would be purchasing mobile home parks.

They are a pure cash flow play with high cash-on-cash returns.

Now ask yourself why you aren’t out shopping for mobile home parks…

I can tell you in one word: Appreciation.

If I told you to go out and buy a mobile home park you’d probably cringe and say, “Eh, that’s never going to appreciate”. 

And that’s exactly the point.

While that cash flow may seem great today, deep down you know that true wealth in real estate is made through appreciation. 

That is what’s going to build significant equity and pull rents higher along with it. As a result, appreciation builds cash flow. 

So let’s talk about appreciation for a moment.

Real Estate Investing In Appreciation Markets

On the other extreme, as far away from mobile home parks as we might possibly get, is investing in a market like San Francisco.

I LOVE San Francisco.

I spent a lot of my “coming of age” years in the city. I met and fell in love with my wife there. I have a ton of great memories, many fuzzy ones, and some completely lost to too many drunken nights.

Maybe it’s the nostalgia of it all, but owning something in San Francisco is on my bucket list.

But San Francisco is what we consider an “appreciation market”.

And I can’t afford it. 

Or, rather, I can’t justify it yet.

So we understand there are extremes when it comes to cash flowing real estate versus more appreciation markets. 

And the ideal market is one that could somehow thread this needle and provide both opportunities.

How I Approached Cash Flowing Real Estate

When I started investing in real estate in 2019 I looked at all available options.

Stuff like mobile home parks was absolutely out of the question for me. If you don’t believe in the underlying asset appreciating, you can’t possibly believe rents will increase either.

I want my rents to move up and outpace inflation so I can retire on this stuff, after all!

Markets like San Francisco were also out. 

For starters, simply saving up the downpayment for a $1,000,000 or more property would take a long time. And then sitting on $2,000 or more of negative monthly cash flow wasn’t going to work for me.

So I needed a market that would be a better fit.

Locating A Cash Flowing Market That Makes Sense

But what does ‘make sense’ mean?

I could write an entire post about picking a real estate investing market (and I intend to) but for this post I’m going to boil it down.

The market that makes sense is one you believe has significant appreciation potential coupled with cash flow numbers you can stomach today.

Both of these parts are incredibly important. But it’s worth unpacking.

Ultimately, you want the market with the most appreciation potential.

Why?

Because as things appreciate, rents will go up as well. Suddenly, even negatively cash flowing real estate is now printing money.

That’s what all these investors in markets like San Francisco understand.

Little guys call this gambling, largely because they can’t afford to do it or simply don’t truly understand it.

And for them, yeah… it WOULD be gambling. 

But if you can comfortably afford the negative cash flow, by all means you should be investing in the market you believe has the greatest potential to appreciate.

This Is Why I Invested In Detroit

In 2019 I simply could not afford San Francisco real estate. And I certainly couldn’t afford to cough up the negative cash flow each month.

But when I looked around my local markets and visited downtown Detroit, I saw something special. 

I witnessed the revitalization Detroit had been goin through. And as I dug further into the market I genuinely believed Detroit had huge potential for outsized appreciation in the coming decades.

And when I looked at the numbers, I found that I could buy houses in decent areas, at cheap prices, that had some slight cash flow or operated at break even after a BRRRR.

This, my friends, is a unicorn market!

I Ran My Numbers Once And That’s It

As soon as I realized that Detroit had massive potential upside and that it was going to cost me nothing, or very little, to hold these properties, I started buying everything I could.

And I wasn’t running the numbers on these purchases!

I knew, directionally, that everything I was doing made a ton of sense. It didn’t matter to me whether a property cash flowed $100 per month, or $40, or had negative cash flow of $75.

None of that was going to make or break me financially.

But I knew that if the market did what I expected it to (appreciate aggressively), rents would go up significantly and I’d be sitting on a cash flowing real estate gold mine.

This is how I summed up my process on X the other week:

My rentals each produce ~$600 net cash flow per month.

But I didn't get there by obsessing over cash flow.

I obsessed over strong, up-and-coming areas;

Made sure there was SOME cash flow.

Then I waited.

— Travis Biziorek (@TravisBiziorek) February 10, 2024

When I’m Happy To Take Negative Cash Flowing Deals

Most of what I said so far is probably making a lot of sense.

But here’s where I believe most people get tripped up.

Real estate investors, especially the newer folks, simply can’t wrap their heads around negative cash flowing real estate today.

I get that. And I can understand it. 

They might not be able to see the big picture. Hopefully all the stuff I’ve said throughout this article helps get over that mental hurdle.

But here’s a situation I absolutely love that a lot of people can’t seem to grasp no matter what.

The Negative Cash Flowing BRRRR Deal

We had a deal last week that was a fantastic full BRRRR candidate. It was this gorgeous looking colonial in a strong area where we’ve done a lot of deals.

Look at this house and then scroll over and look at the numbers:

This home was tenant occupied at well below market rents. It’s worth, conservatively, $110,000 in its current condition.

That means you’re pulling out all of your capital plus $11,500.

But people were having a hard time with the $283 per month in negative cash flow.

It’s a huge mistake.

For starters, you are getting $11,500 on top of your entire initial capital contribution. 

You could set that money aside in a separate account and service the negative cash flow for more than 40 months.

Heck, put it in a 4.5% high-yield savings account and you’d probably squeeze another 3-4 months out of it.

That’s nearly 4 years before you’re paying anything out of pocket for this property. In that amount of time I would be shocked if this property doesn’t significantly go up in value.

And as it does, rents will likely move higher. Market rent here today is $1,200 – $1,300. In four years it may very well be $1,500 – $1,600/mo. 

Suddenly, your numbers look like this:

That’s $143/mo net cash flow on a house that very well might be worth $150,000 – $200,000 by then.

That may sound crazy, but that’s what’s happening in these pockets of Detroit. And this is exactly how a lot of my bigger BRRRR projects played out.

And while $143/mo is nothing to write home about, you have to remember that there is NOTHING invested in this property. 

Those are infinite returns!

Appreciation Trumps Cash Flow Investing

I hope by now you’re understanding that appreciation is what we’re really after when investing in real estate.

That’s where real wealth is made.

And as that appreciation unfolds it will drastically change your cash flow numbers.

As appreciation does its thing, rents will follow, and your cash flow will balloon. 

That’s why I love locating markets like Detroit.

You can own properties that operate extremely close to cash flow break even in a city that is undergoing a generational transformation.

That simply doesn’t happen every day. 

And once you understand that, your entire mentality changes. You stop worrying about every dollar in your underwriting or pro forma and you see the opportunity that lies in front of you.

It shifts from a game of “how do I maximize my cash flow” or “how do I best balance cash flow with equity” to “how can I gobble up as many of these properties as possible as quickly as possible”? 

That’s the realization I had in 2019 and I’m incredibly thankful I did. The good news is most people are still sleeping on Detroit.

There’s still time to participate!