Cash Flow Will Not Make you Rich
I came across the following article or blog last week and the title was, Cash Flow Will Not Make You Rich, caught my attention and I thought it would be good reading for everyone. I agree and disagree with the emphasis of this article.
I agree, cash flow alone will not make you rich. Investors in 2004 thru 2006 proved this as they made tons of money flipping properties that were structured with negative cash flow. Many put very little down and since the properties appreciated so quickly, they were making amazing returns. See, the great thing about investing in real estate is that you gain appreciation based on the property value, not your initial investment. If we ignore the boom period and look at investing into a property with reasonable positive cash flow with historic appreciation, the investor could expect to make 15% on their money. Do that over and over with some vertical moves and you can create wealth.
I disagree because cash flow may not make you rich but it certainly should be an important ingredient for most investors. Look at those investors who bought near the end of the bubble or soon after the bubble broke. If they had very little cash flow or were negative a fair amount, many unfortunately lost the property to foreclosure or short sale. So I believe that the typical investor should seek positive cash flow. In fact, I think that ALL investors should first address cash flow before moving onto other aspect of the investment. Right now, with the right property, that cash flow can make you around 6% on your money; and that is better than the bank. Because you have positive cash flow you should be able to ride the market out and once property values begin to appreciate again, you can expect that return to improve. So it’s a balancing act and I believe that my performance can help you weigh out different scenarios.
Have we hit Bottom?
Everyone keeps asking me, have we hit the bottom yet? As I have said in the past, I don’t think we’ll know it until after the fact, but looking at the data, it looks like we’re at the bottom. In prior months, if we saw a 4 plex sell at $215K and an identical 4 plex came on the market a month later, that sales price would be $215K or lower. Well, we have now seen that exact scenario, but the 2nd 4 plex sold for over $230K. The short sales and foreclosures are still dominating the market and there are many more coming down the pipe, but I think the market has found that sweet spot and I think we just might be there. Years ago I said that our inventory levels would have to get to or below a year’s worth of inventory. Well, guess what, we’re there. So all the indicators are there. I’m looking forward to seeing the data over the next couple of months.
Boise Rental Market
As predicted our vacancy did drop this last week and I further predict that it will improve throughout the remainder of the month. Things are still looking pretty good.