Cash Flow is Starting to Disappear

Dave:
This is On The Market, a BiggerPockets podcast presented by Fundrise. If you were expecting an inflation show today because you listened to last week’s episode and we mentioned that, I’m sorry. My computer had a meltdown while we were recording that show and we’re going to have to come back to that in the future. But we have a great episode today that I think you’re going to enjoy.
Hello, my friends, and welcome back to On The Market. Today we are going to wade into one of the age old debates in real estate, cashflow versus appreciation. We’ll also be doing a two truths and a lie news quiz, and we’re revealing our top real estate investing market for 2022. Welcome back everyone to this episode of On The Market. Today I am very grateful to have my friends, James Dainard, Kathy Fettke and Jamil Damji with me. How are you guys doing?

Jamil:
Amazing.

Kathy:
Wonderful.

James:
Doing well.

Kathy:
Excited for the debate we’re about to have. I love a good debate.

Jamil:
She came ready. She came ready today. Kathy, it’s on.

Kathy:
We’re ready.

Dave:
There’s been a lot of trash talk between Kathy and Jamil before we started recording, just so everyone knows.

Kathy:
And it’s real-

Dave:
They’re gearing up for a fight.

Kathy:
… and it’s not staged.

Dave:
Yeah.

Jamil:
No. No, she texts me every once in a while like, “I hate your face,” and I’m like, “Okay, well.”

Kathy:
No. No, I love you in a dress, for sure, but …

James:
Yeah, Jamil, you might have to put that dress back on if Kathy beats you in the debate.

Kathy:
Yeah.

Jamil:
You know what, any excuse to put it on actually.

Kathy:
A red dress.

Dave:
If you guys don’t know what we’re talking about, go check out Jamil’s Instagram and you’ll understand.

Kathy:
Yeah.

Dave:
Before we jump into the debate that is forthcoming and I’m very excited for, we do need to go into our between the headline section, which is the section of the show where we talk about recent headlines that impact the world of real estate investors. And today, as we always do, we make a game out of it. And I have a new game for you guys. We’re going to be playing two truths and a lie, which personally I haven’t played since I was in middle school, but I thought this was the perfect opportunity to bring it back out.
All right, so I am going to read you a headline and share some information with, and you have to tell me which of the three statements I read is in fact false. All right, first one. In a recent episode, we talked about how back in 2021 rents grew at a staggering 15% year over year. And Redfin just came out with a pretty comprehensive report on rent data, updating all its information.
And it shows that as March, 2022, the average across the United States was 17% rent growth. It’s actually increased since last time that we talked about this. There’s all sorts of other data from this report. I’m going to read you three statements, you tell me which one is false.
First, Milwaukee saw rent drop nearly 10% from the year before. Second, none of the top 10 markets for rent growth were in the Northeast or Midwest. All of the top 10 were in the south or the west. And third statement, Portland, Oregon saw 40% growth year over year. James, let’s start with you. Which one is false?

James:
Portland, 40% rent growth. I’m very familiar with Portland and I highly doubt that.

Dave:
Kathy.

Kathy:
The false one is Milwaukee.

Dave:
All right. Jamil.

Jamil:
Oh man. Now, yeah, I kind of want to pick the one in the middle just because nobody did, but I’m actually going to go with what James had to say, because my opinion is if rents went up that high in Portland, they’d burn it down.

James:
I concur.

Dave:
Jamil, you should have stuck with your instincts because you’re all wrong.

Jamil:
Ah, dang.

Dave:
In fact, the false one was that none of the top 10 markets were in the Northeast or Midwest. And I found this particularly interesting, because most of the top 10 were actually in the New York region. We saw number three was New York, New Brunswick, New Jersey, Newark, New Jersey and Nassau County, New York all made the top 10.
And Portland was number one. 40% year over year rent growth there. And I found that pretty interesting too, that Milwaukee saw a 10% decline. There was only two markets that saw a 10% decline, that was Milwaukee at 10% and Kansas City, which was just slightly negative. But the spread on that is crazy, right? Portland, plus 40, Milwaukee, minus 10?

James:
That blows my mind. I would’ve never … 40% rent growth in Portland? I mean, a portion of that city is still not operating. That blows my mind.

Jamil:
That along with just the general sentiment in Portland. I mean, look, it’s an expensive place to live, but people there, they tend to be more on the liberal side of things. And they would have the opinion, I would think collectively, that rent increase of 40% might just be a little oppressive. And so it’s shocking to me that rents have gone up that high in Portland. But you know what, it’s Portland.

Kathy:
With rent control and everything, yes, it is surprising.

Dave:
I mean, liberal Portland, anything, 40% rent is unsustainable. There’s something wrong here obviously if we’re seeing this. And it’s not just in Portland, we have Orlando at 30%, Miami, 33%. This is all over the country we’re seeing rent growing at a rate that I think has to slow down, but is a little bit concerning. All right, let’s see if you guys can do better on the second one.
I mean, zero for three. Okay. The next question, we have recent data that came out recapping more of the March, 2022 market and which areas grew the fastest. This is in terms of home price appreciation. We just talked about rent, now we’re talking about home prices. Which of the following statements is false?
Number one, Tampa, Florida had the highest appreciation in the year ending March, 2020. Two, 3 cities actually saw price declines month over month from February to March, those were Baton Rouge, New Orleans or Buffalo. Or, over the last year, only Detroit, Michigan saw declines in the past year, year over year. Which of those three statements is false? Kathy, let’s start with you.

Kathy:
Oh, I think I’m going to go with the … Oh, it’s maybe Detroit. I’m going to go with Detroit.

Dave:
Jamil?

Jamil:
I was going to go with Detroit too, but then Kathy did it. No, she’s right. I think the third statement is false.

Dave:
James?

James:
I’m going to go with Tampa is false.

Dave:
Enemies are joining forces on this. They’re both correct. Detroit did in fact see year over year appreciation, just like every single other major metro in the United States. There was not a single metric that saw declines from March, 2021 to March, 2022. We did see some markets start to see month over month declines though, which is notable. Baton Rouge, New Orleans and Buffalo did see small month over month declines with something to pay attention to.
And if you listen to our episodes where we picked the best housing market for 2022, this guy picked Tampa, Florida, and it did have the highest appreciation in March 2nd, 2022. For the last question, I looked at a really cool new data set. It’s the first time I ever looked at this.
But the NAR has an affordability distribution curve and score, where it shows what areas, what metro areas, or what states are the most and least affordable. From that data set, which of the three statements is false? One, Idaho is the least affordable state in the United States. Two, Los Angeles is the least affordable city in the United States, or three, West Virginia is the most affordable state in the United States. Jamil?

Jamil:
I’m going to say statement number two is false.

Dave:
LA?

Jamil:
LA.

Dave:
All right. James?

James:
I’m actually going with that too, that LA is not quite number one. So that is false.

Dave:
All right, Kathy, this is your chance to distance yourself from Jamil and pick something other than LA?

Kathy:
No, I’m going three for three. Could be wrong.

Dave:
West Virginia.

Kathy:
No, I’m going with LA.

Dave:
All right, none of you were correct on this one.

Kathy:
Oh!

James:
Oh my gosh.

Dave:
This one shocked me. Idaho is now the least affordable state in the United States. And I guess after you saw these 40% increases in home prices over the last couple years, that shocked me. More than California, more than Washington, Idaho now the least affordable state. LA is the least affordable metro area.
And I was kind of thinking about that. LA is such a big area. It’s kind of hard to consolidate that into one area and understand it. But actually Ohio is the most affordable state in the US, not West Virginia. All right, I’d say good job, but I think only out of the nine guesses, there was only two correct answers, so I’m going to say that-

James:
[crosstalk 00:09:27].

Dave:
… I won that. I’m not going to award a winner. I think I won that by tricking you guys.

Jamil:
House wins. House wins.

James:
Yeah. I mean, this is kind of how I got into real estate.

Jamil:
House wins at this one.

James:
This is kind of how I got into real estate. I was bad at test taking, so I did real estate. I’ve been better at math than test taking.

Dave:
All right. Well, thank you for playing along. This is a fun way to understand what is going on in the housing market. But it is time for us to move on to our due diligence block. We’re going to talk all about cashflow versus appreciation. We’ll be right back after this.
Welcome back to On The Market. We are now going to our due diligence part of the show where we debate a big, broad topic that impacts the strategies and lives of real estate investors. And today we are opening a can of worms. This is one of the greatest debates in all of real estate investing.
We’re going to talk about cashflow versus appreciation. I know Kathy and Jamil are set to face off here, so I’m just going to start with you Jamil. Where do you stand in this debate-

Kathy:
Wait.

Dave:
… on cashflow versus appreciation?

Jamil:
Oh, he chose the favorite.

Dave:
Kathy just talked over him.

Jamil:
Oh my gosh.

James:
You always want to counterpunch, Kathy. Counterpunch.

Kathy:
Okay. Okay.

Jamil:
I’m going to have an answer here, but it’s not going to be exactly the answer you’re going to want. Because I don’t believe that cashflow or just simple appreciation is the answer. In fact, I think if you’re investing just for cashflow, it’s gambling. I think if you’re investing just for appreciation, it’s gambling. I believe in investing for forced appreciation. Okay?
You need to be able to pick markets that, A, are going to appreciate, but then also find properties that you can force appreciation by adding value to that situation. We can’t be lazy investors here, right? And so if you’re just looking for an opportunity to park your money, then of course, hopefully, appreciation will work.
But guys, we’ve seen where situations like that don’t work, right? You get a market crash, your appreciation is gone. You have a situation in a city, and a big industry moves and your cashflow is gone, because your tendency situations can change.
All of these events, and we watch this very unpredictable world, where very unpredictable things happen, you cannot just decide that you’re going to pick one of these two and put all of your eggs into that basket. It’s irresponsible. My opinion, it’s still appreciation, but you got to force it. So understand what a deal is and then pick that market right.

Dave:
Jamil, before we move on, and Kathy, I will let you have your say-

Kathy:
Thank you.

Dave:
… can you just explain to everyone who’s listening here what the difference between appreciation, let’s call it market appreciation in the traditional sense, versus forced appreciation is?

Jamil:
Absolutely. Absolutely. Let’s just choose Phoenix, Arizona, because I live here, right? I come to Phoenix, Arizona and I’m buying a property here. I can have $200,000 to deploy in Phoenix. Say, I just go onto the MLS and I randomly pick a property and I buy it. And I say, “Okay, I’m going to hold this property. Hopefully I’m going to hold it for 10 years and it’ll appreciate in value. And in 10 years, my property’s going to be worth more money than what I paid for it.” That’s appreciation. That’s market appreciation.
Over time, the market will go up hopefully, and you should be able to see a return. Forced appreciation is when you’re actually adding value to that property in order for it to appreciate. Before you even get into it, you’re buying it at a cost basis that is below base, right?
And so for instance, if I’m going to deploy $200,000 again in Phoenix, Arizona, I’m going to deploy that $200,000 in Phoenix hoping to buy something that’s possibly worth $300,000, so that I know that if I can force some appreciation, no matter what happens to the market, I get a market crash, I get a correction, whatever, interest rates go up, demand starts to slow down. I’m still going to have an opportunity to make money. I’m still going to have an appreciation opportunity there because I bought the property correctly.

Dave:
All right, thank you for that explanation. It’s super helpful. Kathy, where do you fall?

Kathy:
Hands down the way you create massive wealth is through appreciation. That’s how you do it. And that’s why Californians are so loaded. That’s why Californians are changing other markets, because they made so much money that they can go to other markets that are still cheap because they have not appreciated. And same is true for New York, same is true for Los Angeles.
What is it that makes those cities so appreciating? Right? Why do prices keep going up? Now, there’s a caveat that sometimes these markets are more volatile, for sure. You don’t want to buy at the top and then write it down and then have to wait for it to come back. It will come back, but it’s just a longer haul. If you bought in 2008, you’d be waiting until 2018 or whatever to get your money back, but then it takes off again.
If you time it well in an appreciating market, that is where great wealth is amassed. It’s not for everybody, not everyone can do it, but hands down, that’s how you create the most money. And I mean, I know this because I’m born and raised in California and I’ve seen it for 50 years, for five decades. There’s been lots of recessions, there’s been ups and downs, but people in California built their wealth by just living in a home.
They didn’t force any appreciation, they just lived there. Those markets are special because they’re international, there’s people from all over the world coming, they’re world class and there’s barriers. You’ve got the ocean, right? You can’t build out that far. And you’ve got mountain. And usually in cities like that, there’s sensitivity issues, so lots of limitation on building, and it costs a lot to build.
That is where, again, if you’re going to time it well, just nothing compares. Nothing compares. When I first moved to Malibu, I moved here in the downturn because it was actually much cheaper than Northern California. And I couldn’t believe there were houses that went down by millions of dollars. But if somebody was wealthy enough to buy that, it went up millions of dollars.
Wealth is created that way. Again, it’s not for everybody, not everyone can do it, it just depends on where you are in life. If you’re in a big city and you’re making big money, that’s usually people who salaries tend to be higher, then do what you can to live in a place, rent out the rooms and ride that appreciation up, so that then you can 1031 exchange into a cashflow market once you have the money.
When you have lots of money, cashflow markets are a lot more interesting. It’s much harder to build wealth in a cashflow market because cashflow is kind of limited really. It’s great if you’re wanting to live off that cashflow, but a lot of people getting into real estate aren’t in that position where they need the cashflow. They have jobs. And you should have a job.
If you’re 25 years old and wanting to retire, I’m sorry, you still have work to do in this world. There’s a gift you are here to bring. You’re not supposed to retire at 25. So usually people retire around a little bit older, 50, 60 when they’ve done their thing in the world. And at that time, what a great time to cashflow, because now you retire and you live off that income.
But if you can make money doing your job, doing your thing in the world and invest for the long term, such that at a later date, man, you’re rolling in the dough and then cashflow makes more sense. And again, I’ve seen that for years. That’s what we’ve been helping busy professionals do is, “You know what, hey, you don’t need the cashflow right now. Build for the future, buy for the future in areas where there’s a really good chance of appreciation for reasons.”
Maybe it’s hard to build in that area, or there’s boise, there’s mountains. You can’t build everywhere. It’s a sensitive area. That’s one of the reasons why it’s going up. And in Texas, it’s a lot easier to build. Typically there hasn’t been a lot of appreciation there, although we certainly have seen it recently. There you go. There are my thoughts.

Jamil:
She said she bought that property in Malibu when the market tanked, right? When the market tanked. And so all those people that sold when the market tanked in that appreciating state of California where it’s all glitter and gold old, right, they all took it in the keister. I’m just saying, okay, that if you follow what Kathy is saying, you get rich when you die or you’ve got to time a market cycle. That’s it.

Dave:
Well, is that what you’re saying, Kathy, that to get appreciation, you have to be able to time the market successfully?

Kathy:
It’s better. It’s certainly better to time the market. Any property you buy, you need to be able to hold it, right? You have to be able to hold it and not get in trouble like some people did. There was a lot of speculation back in 2005 and people were buying stuff they really couldn’t afford and didn’t have to qualify. I was a mortgage broker at the time.
And I’m not kidding. I’ve said this on past shows. People would come in to our office and say, “Hey, we’ve got $5 million loans.” NINA loans, no income, no assets, no proof of anything. These were the kind of loans that were going out. So of course when the payments adjusted people couldn’t afford those payments. If you’re locked into a fixed rate, there were plenty of people who held their properties during that time and in fact were making plenty of money from the rents, because there were more renters, right?
When there’s a recession, there tends to be more renters. It’s, again, a buy and hold thing. If you’re going to buy in an appreciating market, you have to be able to hold it. That’s the key. Yeah, I agree with you. You can definitely lose money. Would I be happy buying in 2008 right before the market crashed in California? If you were living there and planning to hold it.
Because in that 10 years, now you’ve paid that down. You’ve paid down your mortgage. And over time, in those markets, in those world class markets, prices do bounce back and they appreciate more than anywhere else.

James:
Yeah, and it’s not always timing either. It’s forecasting the right area. I hear a lot of that, like, “Oh, it’s timing. Timing is everything,” and that is true. But just forecasting as you’re looking down at your portfolio is so important when you’re evaluating anything. And if you forecasting correctly, that’s how you build that wealth with that appreciation.

Dave:
What do you mean, James? Can you explain to everyone what you mean by the difference between forecasting and timing the market?

James:
Yeah. I hear a lot like, “Oh, real estate is lucky and it’s timing,” and that is very, very true. I think we’ve timed a lot of flips recently and hit it right. But that’s also in a short-term window, I think timing is everything. What I’m looking at, at 12 to 24 month period, that’s in and out. And when the question of cashflow and appreciation is such an important topic, and it’s a question that every investor should be asking themself before they buy that next deal.
What is their long-term goals? It could be balance in their portfolio where they get high cashflow and they get the appreciation, which is the way I prefer to do things. Really look at my real estate portfolio as like a pie chart that the financial planners always show you, like, “Hey, your stocks go here. They go in the bonds. They go …”
There’s different risk factors that you can kind of balance out. But as you look at building your portfolio, where we’ve made all of our wealth was buying in 2008, ’09, ’10, ’11. The cashflow was not good during those times. We were paying higher rates, rents were not going up at the time, but we purchased the right type of property in the right areas that we could forecast down the road.
What does forecasting have to do with that is we were tracking areas with path of progress, zoning, upside. Where are the growth areas? And if you buy in those areas, and like what Kathy is talking about, buying in California even too, those are areas that where people want to live. There’s a lot of business growth there. Quality of living is really good in a lot of the spots too, besides how expensive it is, and that’s where the money goes.
And so this appreciation factor, whether you’re buying quality of life or zoning upside, a lot of where we hyper-grew our portfolio was buying single family houses with the right zoning, knowing that it’s not worth that much today, but a path of progress is bringing the population there.
And then all of a sudden we’re turning them into development sites and selling off the development. And we’re 5Xing what we initially put in a very short amount of time. Cashflow is great because you can kind of create … For me, when I’m looking at cashflow, I’m looking at how much liquidity I have, how much do I want to sit there and how much is it going to pay me, but that’s going to give me a more steady return.
The appreciation is where you can build that rapid wealth, where we took 15 single family homes and we turned it into over a hundred units. That was buying an appreciating asset that we could 1031 exchange and kind of increase our portfolio. I’m an appreciation guy if you want to build wealth, but it really depends on where you’re at in your investing career.
And if you want to be more passive and less risky, then go for the income. If you’re younger, like I was when I got started building my portfolio, I went for value ad, where I could create equity day one and then also get the appreciation factor because those are two different things. Walking into the equity, and then the appreciation is just buying the right property in the right location that has the right potential of growth.

Dave:
All of you are pretty active real estate investors and you do this full-time. I’m surprised to hear you say that, because that none of you really select cashflow. Because I would be curious, you obviously have expenses on a month to month basis, are you also trying to find supplement in cashflow, but you just prioritize that less than appreciation, or are you really not even looking at cashflow at all? Jamil, let’s go to you on that.

Jamil:
This is a really great question. And I did some mathematics the other week. And I looked at, right now, my wholesale business generates me a million dollars a year in income. Okay? I would need $27 million worth of property to generate a million dollars a year in income. And it would’ve taken me a lifetime to generate that, right?
I don’t even have to go into my office anymore. That’s how passive it is. Now, I still do, I’m still involved and I love being a paw part of it, but it’s not necessary. I’m not required to be there. And so for me, I look at real estate as an opportunity, a vehicle, of course, right?
But I’m building a business around the real estate. I’m building a business and I’m looking at assets as opportunities to get in, get out, create cash, create opportunity, but then build something that’s just beyond the sticks, that’s beyond the foundations, right? I’m building opportunity, I’m building growth potential for other people.
And by adding that value to the marketplace, I generate cashflow for myself. And so for me, having a company that, A, generates me that kind of cash that I can one day take an exit from, was just way more of an investment than buying houses.

Dave:
But so you’re saying you don’t essentially need cashflow from properties because you have a business, a wholesaling.

Jamil:
Correct. Correct. That is surrounded, that is basically a part of real estate investing. I mean, my wholesaling business is real estate. I’m buying and selling paper essentially, but I’m generating cash to do that. And because I’ve built a business around that, I haven’t found it necessary to have to go and buy a house.
Look, I can buy a house. I can get a mortgage on that house, and I can cashflow $500 a month, $700 a month. Guys, how long, how many $500 a month checks do you need to really be financially free? Think about it, right? It takes a long time, and it takes a lot of grit and it takes a lot of effort to get to that point where you have a really incredible lifestyle from stacking small $500 checks a month. It’s just not appealing to me, right?
I’m looking at this as an opportunity to change my life, to do something that I can actually get out there into the world and have all the freedom I want. And it’s not going to be coming from onesie, twosie houses and taking $300 or $400 checks on my rents. It just doesn’t excite me.

Kathy:
Jamil, I just really feel like you’re agreeing with James and me. I thank you for letting us win that debate. However, now I’m going to debate what you just said.

Jamil:
Please do. Please do.

Kathy:
I’m in a debate, our debate, which is it all depends on your dreams. And everybody’s dreams are different. Jamil wants to fly first class. But maybe I’ve interviewed people on my podcast who … My very close friends that live down the street, they are really comfortable living on less because they want more time and freedom.
She’s in her late twenties and he’s in his early thirties. And they saved every single penny. They worked really hard, but saved all that money and lived very cheaply, and then were able to buy enough cashflow properties in Detroit, ironically, that give them enough cashflow which is, I don’t know, $6,000, $7,000 a month, that’s enough for them.
And in that way, they are retired basically and they’re traveling. They go to Africa, they go to Asia, they’re doing whatever they want because they have enough income coming in because they did work and their, I guess their needs were much lower. My daughter is in Asia right now and she just told me she was getting a $5 massage and a $2 meal.
It doesn’t take a lot of money to live a little bit more of a creative lifestyle like that. Again, it all just comes down to depending on what you want to do with your time. If you want to fly first class and have fancy cars and whatever, Jamil does wear dresses on street corners.

Jamil:
Have you ever flown to Africa coach, Kathy? I have. Have you ever?

Kathy:
No, I just flew-

Jamil:
Hell.

Kathy:
… first class to-

Jamil:
It’s hell.

Kathy:
… Spain for the first time, and it was awesome.

Jamil:
You’re not going to Spain-

Kathy:
It’s way better. It’s-

Jamil:
… You’re not going to Spain in first class on $400 a month cashflow checks. I’m sorry, you’re not.

Kathy:
… Well, I did. You know how I did that? That was through putting all of my business expenses on my credit card and getting points. That’s how I got that. I can’t spend the money, I just can’t do it, but I did spend the points.

Dave:
Well, I think this is a really good point, Kathy, because not everyone is capable or even wants to start an entire business. Some people are really passionate about what they do. For example, if you are really motivated by the purpose of your job and you want to stay in that job, or for some people, I do think a thousand dollars a month would make a really large difference in many people’s lives.
And I don’t think we should discount that or overlook that fact because … When I first got started in real estate investing, I was waiting tape tables and I was making a couple hundred bucks a month in sweat equity. And it made a huge difference to me at that time, and it also gave me a lot of confidence and a lot of … I should say I felt more secure in taking more risks with the rest of my career because I could fall back on that cashflow should anything happen.
I went to grad school, I was able to pay for that, a lot of part because I was able to generate cashflow. To Kathy’s point, I think it really just depends on where you are in your life and where you are in your career. I’d like to turn the conversation a little bit to that. James, I’d like to ask you, who should … Are there types of investors that you think should be looking at cashflow? And if so, how should they be thinking about balancing cashflow across their entire portfolio?

James:
Yeah. And it comes back to where are you at in life. We all want to be the investor chasing cashflow, because that means we made it. Right? We’ve saved up enough liquidity, we can now live off our liquidity, put our money on safe assets and watch it grow. The problem is you got to get that lump sum of money, right, and you got to work it backwards. How much do you need to kind of live off of it? Whether it’s a $500 a month cashflow, or maybe it’s substantially more.
But for when I’m sitting down with clients or when I’m looking at things or even balancing my own portfolio, it always comes down to how much income am I trying to subsidize, right? I’m looking at my whole portfolio and going, “Okay. With this amount of liquidity, I can’t have it all in high appreciating assets. If I do that, my cashflow may lag and also I’m susceptible to a lot more risk.” Right?
Going into the next three to four years, we might not see as much appreciation. The banks are going to control that a little bit. And that’s okay, because as long as you’re riding it out on the 10 year basis, but you can balance it out. So right before rates started spiking, I looked at my whole portfolio and I go, “Okay, where am I at? Am I in the right positions?”
And I looked at how much cashflow, I set my monthly cashflow goal. It was I wanted to be, A, my minimum cash is always at 10% on any property. If I’m not making 10% on that deal, I’m not buying it. In addition to, I’m always making sure I’m walking into a walk-in margin. If there is no walk-in margin, there’s no value add for me, I’m not buying that deal anyways.
And so those are my two requirements. But then based on that, I look at how much liquidity I’ve saved up over the last 18 years and I put that to work. And some might be in real estate notes, some are in holdings. And in those holdings, I’m then breaking that up. I want have cash that is always going to cover my portfolio payment, because I did learn in 2008, when I was too tight on my cash and I was only chasing appreciation, when there was that correction, it hurt. And I had to pay for my portfolio.
I do not want to be paying for my portfolio at that time. In my portfolio, I had some high cashflow items. There’s like 30% of it is high cash deals, where I’m clearing good … I’m at 15 to 20% cash on cash return. These are in areas that have steady growth. They’re not going to giving me that huge value pop. And then in my other 70%, because I am still in a growth setting, I’m not at where I want to be yet.
I need to probably double my liquidity position to get to my passive goal of where I want to be. And so I have the other ones. The other 70% I put in higher appreciating ones, where I moved the money around. I went into future development sites. I went into path of progress locations. In Washington, our local government announced that they are going to upzone anything close to transit and freeways.
I started looking at purchase same properties in those areas, because they might not get up zoned tomorrow, but they’re going to get up zoned in the next 10 years because they just told me. And so moving those things around you can protect yourself by looking at, “Okay, what’s my total monthly net? How much extra cash do I need in case there’s any sort of correction, whether it’s interest rates rising or rents dropping for whatever reason?” Even though rents look like they’re going to raise.
My cash pays for any kind of negative or close negative on my high appreciating. So it’s just you let your portfolio kind of feed itself. And it really comes down to if you’re looking at cash, I think you have done well in life. You want steady returns. And if you’re trying to get to that next level, then you want to buy value add, discounted properties that you can get the upside on.

Jamil:
I mean, I feel like everyone is just saying what I said, in one way or another, but that’s fine.

Dave:
Do you want us to just give you a crown, Jamil?

Jamil:
No, no, no. No. No. No. I want Kathy to have it.

Dave:
Are there any scenarios where you think that people, new investors, people who want to retire earlier, are there any scenarios where you think cashflow is a viable strategy?

Jamil:
Absolutely. James nailed it actually. First, beginning investors when you’re just getting in and you’re looking for an opportunity, financial freedom is going to come to you through cashflow. When you’re a baby, you need specific things, you need cashflow. That’s the sustenance that’s going to keep you going. Then you have opportunity to take risk. You can go do other things.
And then just like all things, you become a baby again when you’re super rich and now you want cashflow again, right? You’re going to go back to that situation where, “Look, I’ve made 20 million. I’m going to go park it in cashflow assets and I’m just going to live off my cashflow.”
Great. Great. But I think in the beginning and in the end, that’s when cashflow is great. In the middle, it’s appreciation all day. And forced appreciation. Not just appreciation, forced appreciation.

Dave:
That’s an interesting way of putting it. I’ve always said that cashflow really is ideal only for people who want to retire soon. And it’s funny about the cycle because I think a lot of people who are in their twenties or thirties, they start working and they’re like, “Oh, this kind of sucks. I really want to retire.” And so they start going after cashflow because they want an alternative.
And I know for myself a lot of what has motivated me is not that I want to retire, but I want the option to retire. I don’t want to have to work if I want to take a year off, if I want to go do something else. I’ve always wanted that. And so I pursued cash in the beginning of my career. And then of course, as people age and they really do want to retire and actually stop working, that is also, in my opinion at least, a good time to pursue cashflow.
I think we’re all sort of in agreement that early in your investing career, late in your investing career, it could be a good time to go after cashflow. Kathy, you said something earlier I want to get back to, that is if you build a lot of wealth, you can translate that into cashflow later. Can you talk a little bit more about that?

Kathy:
Absolutely. I mean, I think Jamil and James both said it that if you have a bunch of money, what better place to put it for a yield if you’re wanting a return than in cashflowing property in more affordable markets? It takes money though. And if you’re just starting out, it’s going to be a little bit harder. It might be that you just save enough money to buy one house or you learn how to wholesale. But that’s a business, right? That’s creating a business.
Fix and flipping is a business, but investing tends to be more buy and hold, right? You’re not doing much with it. It’s more passive, not completely passive. But you basically bought a building, a warehouse, an apartment, a single family property or a business. Maybe you buy a business that runs itself, and you’re not having to put a lot of your time into it, it is generating cashflow.
And in the case of real estate, also paying a loan down for you. When you’re young and you’re getting started, oh my gosh, you guys, like, ah, just save your money. Don’t spend it a all on Coachella. Although maybe once, it’s okay.

Dave:
You got to live.

Kathy:
Okay.

James:
Coachella is fun.

Kathy:
Get a free ticket somehow. But invest it because then you will be able to retire early. If you can find properties that cashflow and appreciate, to me that’s the bingo. If you can find areas where all the metrics are there. Like James was saying, this is my thing. Finding the areas where the people are going, where the jobs are going, but it hasn’t taken off yet. It’s still somewhat affordable in that market. Then you get both.
And it’s usually not too expensive. For example, I mentioned when we first started buying in Dallas 17 years ago, the properties we were buying brand new, no forced appreciation. I don’t have the time for that. A lot of people don’t have time to fix things up. I just bought a new brand new home. I didn’t have to do a darn thing with it.
It was $140,000 for a brand new home in Dallas and it rented for 1500 a month. And we knew that a new freeway was coming in to that area that was going to make the commute to jobs 20 minutes instead of an hour, having to go around a lake. And we knew that jobs were coming in and drove, so it just made sense, like, “Well, if the appreciation doesn’t happen, it’s okay, we’re still covering all our costs and we’re getting all the tax benefits from this and the loan is getting paid down by the tenant. But if the appreciation happens, whoa, bonus.”
And it did because those metrics were in place. There are still opportunities like that today. When you really search the areas where people are going … And let’s face it, jobs and people go where it’s affordable. That’s what we’re seeing. Employers are saying, “I don’t want to pay all this rent. I’m going to go to Austin, or I’m going to go to Birmingham or wherever, Salt Lake City, and where it’s more attractive for business to do business,” right? That’s why Texas took off.
They gave so many tax benefits to businesses so that businesses move there. Look for states that attract business and aggressively try to attract business because that will attract people. But the housing takes a while to get up and running along with commercial, and everything else is really the jobs that can come first and the infrastructure to support that.
If you can find those areas, buy cheap enough. If you’re in the $200,000 range, which is still possible, even less. There’s areas where you can still buy properties for less than, that’s $40,000. You can do that. You can save that kind of money. Or if you do the forced appreciation, you put no money, right? Because you just refi and get all your money back out and then go do it again, that’s how you can really build a beautiful portfolio.

James:
And real quick, what kind of Kathy touched on is that is the real estate great lie, that you can’t get both. You can get both. You can get cashflow and high appreciating markets. I mean, look at opportunity zones, that’s why that was set up. You are buying them a little bit cheaper, the cashflow is good, and it’s an opportunity zone where there’s money coming because of the tax benefits. You just have to buy right, but you don’t have to pick one or the other. You can do both. It’s a matter if you want to do the work to get both.

Dave:
I think that’s a good example of why experience investors all use, or at least I do, use IRR, internal rate of return, as their metric of choice, because it’s a way to combine appreciation and cashflow into a single metric to measure the total amount of wealth that you’re building.

Kathy:
I just want to say one thing, we just closed our single family rental fund. And it was really educating to me. It was really enlightening. Because all of these years I’ve been telling people, “In your portfolio, buy some really high cashflow properties. They probably won’t appreciate. And then offset that with high growth properties that don’t cashflow at all, maybe even negative,” although I don’t recommend that.
But that there’s a real upside. You could tell that there’s going to be an upside. And just balance your portfolio out that way, and then you’re diversified and all that. That’s been my thing. And then we did it with our single family rental fund, which we just closed out. We’ve had it for five years. And we bought in Alabama, we bought in Ohio, in Michigan, in Florida and Georgia.
Kind of the Southeast was our growth markets, kind of lower cashflow, and in the Midwest was our full cashflow. We didn’t expect any appreciation. We have just sold those properties, we’re closing out the fund and I can tell you the returns. It’s clear. The Ohio ones, 7%. Alabama was 16% and the Florida properties were 35%.

Dave:
Okay. But that’s a good segue to the last part of this discussion I want to get to. We just went on one of the longest bull runs in housing prices in the history of the United States over the last 12 years. There might be people listening and it might be true, that it is easy to say that appreciation wins because we just had this crazy amount of appreciation over the last couple of years. James, do you think appreciation is still the way to go in today’s market?

James:
I think both. Yes. I think you can still, depending on how long you want to keep these properties, you can still forecast out path of progress on a 10 year basis. I still am in going after high appreciating markets. But at the same time you can track both. There’s certain metrics that … Right now, I’ve been using the price to rent ratio. That’s actually what I’m tracking. I’m looking at expensive markets. Because I’m on the west coast, and the media home pricing is soared, right?
Like what you said, it went on a bull run. They’re up 20, 30, 40% in these markets. And even though the housing cost is high, you can actually track to see what’s the affordability of rent versus meeting home pricing, and that can give you rapid growth factors. And so when I’m trading things around right now, I’m still after good locations, because a lot of the good locations, depending on what the metrics say, have the most potential and rent growth too so you can actually hit the cashflow at the same time.
I have over the last 12 months definitely repositioned. I got into better long term five to 10 deals, because the ones that I currently had, I felt were kind maxed out, so I repositioned those. And then I have been chasing higher cash or high growth for cashflow. I want to know where the markets are, where the rents are below market.
And just like anything, right, that’s how you buy value add, right? I’m buying an asset below the appraised value. That’s a win. If I’m also buying assets where they’re performing well below the median rent metrics, that’s going to have that same value add pop on that. And so you can do both. Right now, I am tracking cash. I am also trying to get more cash in my portfolio, because I do think inflation’s going to eat up some of my cashflow and different expenses, higher maintenance costs.
Property management cost could go up. But my operating costs I’m projecting to go up. And so the more cashflow I can get in, I can also offset those costs. Because again, the last thing I want to do is have a portfolio where I’m stuck feeding that thing over some kind of transitionary time. I want it to pay for itself and pay for itself in a healthy way. You just really want to balance it out and make sure that you have both in there.

Dave:
I’m with you, James. I’m doing something similar, just trying to get out of a couple of properties where I think they’ve seen great appreciation. They might go up more, but they don’t cashflow that well. And looking for things that are cashflowing a little bit more. There’s a very good chance that we’re heading for a recession in the next couple years. The fed has made that sort of clear. And want to put myself in a position, rebalancing my portfolio a little bit to be a little more cashflow heavy than where I’ve been over the last couple of years.

James:
Yeah, just prepare and everything will be okay. Forecast, prepare, put that plan in place, move all your pieces right now, guys. Don’t wait too long to move. You want to audit your portfolio, look at the performance. Is there any more upside or are you happy at the cashflow? If not, trade it out for something else, get it done now and then you can just ride out whatever wave we got coming our way.

Jamil:
On our end, because again, we’re in the business of real estate, we’re in the business of buying and selling. For us, how we position our cash is super important, right? Where we’re putting our cash, how we’re placing it, where we’re closing on deals, where we’re investing in infrastructure to build out new corporate stores and whatnot, that’s truly where our investment is being made right now.
And it’s following along the same lines of what Kathy was talking about earlier and what James was talking about earlier, and even you in these cashflow markets. That’s where we’re putting heavy investment in our wholesale business because we see great opportunity. Just like Kathy had said, go where the jobs are going, go where there’s affordability. That’s where we’re placing bets.
But from the wholesale standpoint, we understand there’s going to be a great opportunity for us to trade there. We’re building infrastructure so that we can set ourselves up to do heavy trading as the market starts to fluctuate. And as you said, Dave, it’s an engineered recession, it’s coming, so we just got to be prepared for it. Move your pieces, like James is saying, now. Now is the time. If you wait, you are going to pay for it.

Dave:
All right, Kathy, last word on the cashflow appreciation debate. You just sold off an entire portfolio. Are you going to adapt your strategy for the next thing you do or what are you thinking?

Kathy:
It was just in the offering documents that we will sell it after five years. I would’ve much rather kept it. We just had to follow the business plan, right? So yeah, I would’ve kept it. Because those homes that made all that money, those were new homes. I mean, it’s just so funny because it’s not sophisticated investing at all. These were just new homes that we bought in Florida for the fund that did the best.
And that’s kind of been my thing for 20 years, is keeping it easy. Because there’s a lot of people who are busy. They like their jobs. They’re good at their jobs. They make a lot of money. They want to invest it. They don’t have the time to be an active investor. So sometimes they’re not going to get as good a deal as someone who is a more active investor. But over time, it makes sense.
I think that the last word is, for sure, we’ve talked about this. We are in a changing market, changing tides. The fed is aggressively raising rates. Just a few months ago, there was talk that it wasn’t going to be so aggressive just a little bit. Now there’s talk that, no, they’re going hardcore to fight inflation. And so we don’t really know where we’re going to end up. We don’t know if they’re going to take their time on, if they’re going to go raise rates till we end up in a deep recession or just a soft one.
Fannie Mae came out with their new predictions and it was just going to be a gentle recession. So who knows? We won’t know till we get there. But what I do know having been through several really bad recessions close to depression, just close to the Great Depression as any, and then watching my dad go through those, is that people still, again, prefer to live indoors. That’s the bottom line.
If we’re talking about housing, whether people own or rent, there still going to be people that would like to have a roof over their head. No matter how bad things get, you will probably have a pool of renters. The question is, do you have the ability to lower rents if it comes to that? And in the case of 2008, we actually didn’t. Our rents actually went up because there was more people chasing rental property.
But if there was a recession and people lost their jobs, could you lower the rent a little bit and still be okay? It all comes down to reserves and your ability to hold that property. When you guys were talking about having everything in place, to me, that’s really making sure you have about 12 months reserves for each property, so that if you are running into problems, you’ve got like a pool of money, just like a business.
There’s so many times I want to put the reserves for our business to work and invest it. It has to be in really short term stuff. But we got employees to pay. If things slow down, we need reserves to pay them, right? You have to have that reserve. So if you treat your real estate like a business, which you should, you’ll get through it just fine if you are in low cost, long term debt, plenty of reserves and hopefully have taken care of the property.
That’s the other thing. You don’t want any surprises on repairs, right? So having really good insurance and making sure that you’ve got really good property management to make sure that the home is being cared for along the way.

Dave:
I love that advice, because cashflow often is seen as sort of defensive. You want to make sure that you have cashflow so you can hold onto your property in a downturn. But I think it’s important to know that also just having reserves, even if it doesn’t come from cashflow, if it comes from your W2 job, if it comes from a flip that you just did or a wholesale that you just did, that is another way that you can give yourself that confidence and that cushion in case things don’t go bad.
I’m also considering putting down a little bit more than 25% on deals right now on a longer term, because that will lower my payment, give me just a little bit more cashflow to sustain what might come. Again, as Kathy said, we don’t know. But if you do want to be more defensive, those are a couple different options for you. All right, that is it for our due diligence section. Thank you all so much for this great debate. I think we actually agreed more than I thought we were going to.

Jamil:
Yeah, it’s strange, but great.

Kathy:
Yeah. We try to fight, but we just can’t.

Dave:
All right, Kathy and Jamil-

Jamil:
I love you, Kathy.

Dave:
… are you still friends?

Kathy:
I love you too.

Jamil:
Yeah, she’s the best?

Kathy:
Aw, you’re the best

Dave:
All right, we’ll be right back after this where we are going to reveal the best housing market in America for 2022 as voted on by the BiggerPockets community. We are back for our crowdsource section of the show where we interact with all of you, our loyal listeners. I guess I could call them loyal, right? This is episode four right now, four or five. So if they’ve come back four or five times, that’s pretty loyal.

Jamil:
Yeah, they’re loyal.

James:
I’m still waiting for my first groupie, hopefully.

Dave:
[crosstalk 00:51:31]

Jamil:
Everybody flood James’s DMs and let him know that you’re his groupie. I’m your groupie, James.

Kathy:
I’m your first.

James:
You really are. Okay, good.

Dave:
Actually, James, I did an Instagram takeover for BiggerPockets yesterday. I did an ask me anything. And I’m like the data deli on Instagram. People ask me sandwich questions all the time. But someone asked me what your favorite sandwich was, which maybe that’s your first groupie. Someone really wanted to know about you.

James:
Ooh! My favorite sandwich?

Dave:
Yeah.

James:
Wow. I am definitely like a spicy chicken … Anything spicy chicken, I’m into.

Dave:
That’s a very, very good choice.

James:
Always grilled. I try to stay away from the fried. I drink too much Rockstar. I want to make sure I’m somewhat balanced out. I try to eat clean, drink too much fuel.

Jamil:
Eat clean, drink Rockstar.

Dave:
That’s very admirable. Because like a fried Nashville hot chicken sandwich, mm, that’s pretty good.

Jamil:
So good.

James:
I mean, I definitely prefer the fried. I’ll take fried all day long.

Dave:
All right. Well, if you guys listen to our second episode, we picked some of the top markets in the United States. James, unfortunately, you weren’t here for this episode, but you can be Henry’s proxy because he picked a few. And if you recall, just as a reminder, we had eight markets entering the bracket.
Henry selected Cleveland and Northwest Arkansas. I picked Tampa and San Antonio. Jamil picked Austin and Denver. And Kathy had Salt Lake and Charlotte. We pitted these all up against each other. People voted on the BiggerPockets Instagram. If you want to be a part of any of these social media contests that we’re doing, make sure to follow BiggerPockets and all of us on Instagram.
And what happened was a little disappointing for me and for Henry who’s not here. But Henry and I didn’t even get one of our markets out of the first round. The way it worked out was Charlotte, Kathy’s picked, Cleveland for Henry, Austin. Jamil beat me in Tampa. Denver, Jamil, again, beat Henry in Northwest Arkansas. And Salt Lake beat San Antonio. Jamil and Kathy, you both beat me and Henry won, so congratulations. You had all four of the final four.

Kathy:
Wow.

Jamil:
Well done, Kathy.

Kathy:
We’re totally in sync.

Dave:
In the next round, we had Charlotte versus Austin, and we had Salt Lake versus Denver. It was you two against each other twice. And I have to say, Jamil won both of those. It was a Denver-

Jamil:
Whoa!

Dave:
… Yeah. It was a Denver versus Austin showdown.

Jamil:
How do I beat myself?

Dave:
We’ll get you a gold add to silver medal for this, and Kathy, we’ll get you a bronze one.

Kathy:
All right.

Dave:
It was a Denver versus Austin showdown. Do you guys have any guesses who won?

James:
I’m going with Austin.

Kathy:
Austin.

Dave:
It was Austin in a landslide. It was like 70% to 30% Austin as the best housing market in America. A couple recordings ago, I was there looking around, it was going wild there, so I’m not surprised to hear that. Given the conversation today, the voters picked pretty high appreciation markets. As someone who invests primarily in Denver, who’s just in Austin looking not exactly cashflow markets. So it seems like voting, people mostly picked appreciation markets. What do you think of that?

Jamil:
Makes sense to me.

James:
I mean, I think a lot of people are picking this based on their past 12 to 24 months of real estate, right? People do tend to go … They live in the recent, so I think that’s probably why people picked it more. They kind of forget the long term over … But I think Austin’s got massive job growth, it’s going to continue to expand out. I am a guy that goes where the jobs are, and I think it’s going to keep skyrocketing along with our Seattle market as well.

Kathy:
I think whatever Elon Musk does, other people follow. He moved his company there, right?

James:
[crosstalk 00:55:43].

Kathy:
Yeah. That’s a big one. And Austin’s really cool.

Dave:
It is a lot fun, very good barbecue. I had a great time down there. So no surprise there. Thank you to everyone who voted on our best housing markets in the US. We will do this again next year, and we’ll revisit and see which ones actually won. Thank you guys for listening to On The Market. We’ll see you all next week.
On The Market is created by Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, edited by Joel Esparza, copywriting by Nate Weintraub. Special thanks to Lisa Shroyer, Eric Knutson, Danielle Daly and Nathan Winston. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions and investment strategies. (Silence)