Cash Flow VS Capital Growth



Awesome post. I love these ones where Jeff Brown goes into the numbers and compares scenarios. I always knew there was going to be good money involved with getting good at story problems when i was young in school. I didn’t know how, but i knew..

Written By: Jeff Brown AKA “Bawld Guy”

BawldGuy Axiom: To the extent the real estate investor pursues cash flow, they hinder capital growth. The converse is equally true.

Let’s construct an example to illustrate the principle.

At 42, you own your own home, but will be buying your first income property. Your plans are to retire at 62, if possible — giving you 20 years to get the job done. You have no problem going to 65 if it makes sense. You have a total of $200,000 for down payment(s) and closing costs to get you started. If you opt for bigger down payments and higher cash flow, using accumulated cash flow for future purchases, you’ll begin with two initial acquisitions.

Two properties at roughly 260,000 apiece, using 35% down plus closing costs will take about $190,000 or so. The cash flow generated will total approximately $14,300 annually. It’ll take ya 6 years 8 months to accumulate enough for your next purchase. That’s IF interest rates haven’t risen too much, and IF there’s been no real increase in values. If either one of those is true, much less both, your plan hits a significant roadblock.

Let’s pause here and see how the capital growth approach plays out, using the same initial capital.

Using 20% down on one, and 25% on two more, he’ll begin with three properties. His cash flow will exceed $15,000 a year, but we’ll use that figure here. Each month he’ll be applying $1,250 in cash flow directly to the principal pay down of one of the property loans — not all three. I’ve dubbed it the BawldGuy Domino Strategy. You knock ‘em down one at a time.

In 8.75 years, (105 months) the first property is debt free and now cash flowing at just over $1,500 monthly. We’ll round down to $1,500.

With the vastly increased cash flow the second property is completely paid of in the next 4.67 years, (56 months). Elapsed time: 13 years, 5 months. Let’s finish it off now.

The third and last property is then paid off in 3 years, 1 month. Total elapsed time: 16.5 years.

In the 3.5 years he has left before retirement, if he chooses to wait, his cash flow would add up to, give or take, a tad under $193,000. ($55,080/yr) Think he might be able to find a use for that cash about then, don’t you?

OR . . .

He opts for borrowing enough to buy a couple more duplexes at 25% down. That option leaves him with an annual cash flow of $50,500 AND 5 properties. He pays off the newly refinanced property in 33 months. This leaves him just 9 months short of his planned retirement. What to do?

I have a suggestion: Delay retirement if necessary by 20 months. At that point all 5 properties are now completely debt free and producing annual retirement income of a couple steak dinners short of $92,000 — a 67% increase.

What he did there, was decide it was worth 20 more months of working to increase his ultimate retirement income by over $3,000 a month. If he decides against that, his income would be $55,000 yearly, but he’d retire on the date planned.

Let’s revisit the alternative strategy of using cash flow to buy more property.

Though a silly, and frankly, a dangerous assumption, prices remaining static for nearly 7 years — this strategy does just that. It’s no less silly than assuming prices will do anything, as his crystal ball is as cracked as the rest of ours, right? Right.

Anywho . . .

He buys his third property, which closes at the end of his seventh year. His first 2 properties now sport loan balances of about $149,400 apiece — almost $300,000 PLUS the new property’s loan of $165,000. Cash flow remains static. He owes $465,000.

He buys another property about 5 years later. Elapsed time: 12 years. He buys his 5th property at about the 16 year point. Let’s review where he’d find himself at 20 years, his intended retirement date.

He’d own 5 properties, though each one would be relatively heavily encumbered. Let’s me specific, shall we?

The initial two purchases are still sportin’ loans with balances of roughly $87,000 each.

The third property’s loan has a remaining balance of just under $123,000 at the targeted retirement date.

The fourth property’s loan still has about $146,000 left.

The fifth one has barely been dented, with a remaining balance of $155,000 or so.

Income at his scheduled retirement date using this strategy would be $37,000 annually, give or take a weekend getaway. I’m underwhelmed. You?

He’d still owe almost $600,000 before he’d have the same income had he used the more efficient capital growth strategy.

Go over these numbers a few times. Get comfortable with ‘em. Make your own charts or columns for comparisons in order to really get a clear picture of what they mean in real life.

BawldGuy Takeaway

In order to increase cash flow initially the real estate investor is forced to put more capital into each investment. The more down he puts, the less property he, or she, can buy. Over time this results in a somewhat nasty surprise — a sorta good news/bad news joke — only not funny.

The good news? Ha! Ha! You bought the same 5 properties as you would’ve doing it my way.

The bad news? When retirement time arrives, your choices are not too cool no matter how ya spin ‘em. Either retire at just over $3,000 a month till ya pay off another $600,000 in debt — which will take a truly long time.


Delay your retirement by about the extra decade or so it’ll take to finish payin’ all that debt off. In simple terms, you can wait till your 70-72 to retire, or exist on $3,000 monthly till the $600,000 pays itself off — and that will be MUCH longer than a decade.

Beginning to see what I mean, Verne?

Look, this is nothing compared to what I could come up with, given enough time to get more deeply into the analysis. In fact, I’m fairly certain I could come up with a scenario with better results on the capital growth side of the comparison. But not so much on the cash flow approach. The whole “Save the cash flow and buy more property” comes from Grandpa.

Didn’t work real well for him, either. Just sayin’.


Flipping versus holding for cash flow

As with almost anything worth doing it essential to have an ultimate goal and adopt strategies that help you get there. For many of us the long term goal is retirement related. You may have many other short term goals as well that will influence your real estate investing. If you are a good planner then many more investment strategies can be employed.

There are lots of strategies and ways to invest, one strategy that can work well is actually a mixed strategy where some properties are purchased with flipping in mind and other properties are purchased to hold as rentals. You can flip turnkey properties but generally I see investors flipping fixers that need various levels of repairs or improvements. Fixers can often work out as great flips or rental properties if purchased right.

If you have decided to use this mixed strategy you need to be aware of the potential tax risks though. Flipping is generally treated as a business activity and taxed at ordinary income rates while buying property to hold is generally treated as a passive activity. There is no reason that an investor can’t use the mixed strategy, but clearly it is important to separate these activities for tax purposes.

So what must be done to keep these activities separate and enjoy the tax benefits of rental properties while flipping some properties? Most of the time as an investor you know what your exit strategy for a particular property is, for income tax purposes though you need to clearly show that intent to the IRS. That means creating some separation between your flipping activities and your rental activities.
Using separate entities for each activity is a good way to create the separation you need. Often an LLC is a good choice, but every investor’s situation is different and you should get good advice so that you don’t have to change the entity later.

You won’t always know what you want to do with the property ahead of time and it can be advantageous to purchase the property first in your own name and then transfer the property later to the appropriate entity. Timing of the transfer is very important though and you want to make this determination as soon as possible. It becomes more risky tax wise if you wait in making this decision though. A good tax adviser may be able to help you, but don’t wait until after the deal is done or heaven forbid until the year is over.

It is possible to separate your activities and not create two separate entities. I don’t generally advise this, but in can work and for a few, make sense. You will still need to create a way of separating these activities which can be done with separate bank accounts or a good accounting system or ideally a combination of both.

I will leave you with one other thought. When you are fixing a property many of the holding costs will need to be capitalized rather than expensed. There are ways to change the timing of expenses but they must be planned for and waiting for yearend limits your choices

 Written by: Charles Perkins


Why Real Estate is still not recovering and doesn’t appear to be anytime soon – and why that’s GOOD NEWS for real estate investors

Well… It’s good news for REAL real estate investors that is..The ones who understand cap rates and cash flow. Below is a post fresh off the presses from Jeff Brown AKA Bawld Guy.


Written By: Jeff Brawn at


So many from Realtor organizations at all levels, economists, and various elected (and unelected) officials seem to think we’re ‘just around the corner’ from the beginnings of a real recovery. These are the same Einsteins who, less than a year ago said we were in recovery. Go figure. My thoughts have remained consistent the last four years — we’re not close to a real estate recovery.

My crystal ball remains as cracked as yours, but here’re my thoughts.

In my opinion the vast majority of the country’s markets aren’t prudent places for your hard earned capital. Take San Diego — please. :) The same folks who were certain we’d hit bottom here in 2007 are explaining to those who believed ‘em, why their newly purchased properties lost 5-10% almost immediately. Sure enough, prices rebounded a bit as a result of temporary artificial stimulation. They’ve been steadily dropping ever since. It hasn’t been precipitous, but it’s been steady, according to Case-Shiller. I think it’s now been about eight consecutive months San Diego prices have been headed slightly down. Also, ya may wanna consider avoiding Vegas and Florida. Again, my considered opinion.

Why we’re not near a recovery now.

Sophisticated economic mumbo jumbo isn’t necessary here. It’s all about two factors: 1) Foreclosures/Short Sales and 2) Unemployment. This ain’t rocket science, people. Here’s how it looks from where I sit.

Unemployment and its ramifications speaks for itself. At nearly double digits, the drag on the economy, much less it’s affects on real estate markets are predictably negative. Duh. Till unemployment plunges significantly, real estate won’t have a healthy recovery.

Foreclosures and its pipeline are an even more predictable story. The numbers already bank owned are still gruesomely large. Add to that the equally prodigious volume of homeowners who’ve already defaulted but not yet made it to the sad, bitter end, and the picture worsens. But wait! There’s more! The final reason I think this factor has legs, is the daunting hundreds of thousands of those who’re 30-60-90-120 days — and longer, much longer — late.

Even if lenders figure a way to speed the process up a bit, not to mention develop the motivation to do so, the foreclosure problem can’t possibly be sufficiently removed as a drag on real estate markets before the end of 2013. Frankly, I suggest that timeline is a fantasy. If we’re back to relatively normal markets — Remember what that looks like? — by give or take 2015, we’ll be in decent shape, with one exception.

If unemployment is still significantly higher than 5%, considered ‘normal’ by most, say 7%+, owner occupied sales will still remain far from normal.

What this means for real estate investors.

None of this is bad news for investors, especially those thinkin’ big picture — long term. In some markets, demand for rental housing is rising quickly enough to be measured almost in real time. The percentage of renters vs homeowners will be altered for at least a generation, in my opinion. This is an extremely rare opportunity for those with access to sufficient investment capital. They’ll be able, and have been for the last few years, to acquire superbly located property in markets which are welcoming their capital with smiles and open arms. The location quality is also higher by far than is typically available, even in down markets.

Add to these perks historically low interest rates, treading in the 5-5.375% range, and you have the perfect storm. In all my nearly 42 years in the business, almost 35 of which have been on the investment side, it’s never been possible to put down payments as low as 20%, while acquiring a 30 year fixed rate loan allowing cash on cash returns of 5-10%. Remember, this for properties with very good to excellent locations. It’s simply unheard of in my experience.

Stellar location quality + new or newer properties + low down payments + extraordinarily low FIXED interest rates = THE perfect storm of a lifetime.

The normal cycles have never included the opportunities currently available in the economic reality in which we’re currently living. I entered real estate in the fall of 1969, a recession, and it didn’t happen then. Nor did it happen in 74-75, the ’81 recession, the S&L Crisis of the early 90′s, or the almost stealthy recession of ’01. What I’m tryin’ to tell ya, is that the debacle in which we’re all living, is offering real estate investors opportunities of a lifetime. That’s not hyperbole by any stretch. It’s as real as oatmeal ‘n raisins for breakfast.

Investors who’ve been buying in markets with all the right factors in place are settin’ themselves up for stellar retirements. This perfect storm will last as long as all of its ingredients remain in place. Common sense and simple logic tell us that those factors that have brought us this wondermous perfect storm won’t be here forever — and yeah, that’s hyperbole. :) Once it’s gone, that’ll pretty much be it.

If you’ve been wondering about the viability of your retirement plan, and wanna know the options on your menu, now’s the time to find out. Your retirement can become the reality for which you’ve been planning, but which hasn’t been materializing. If this describes your current mindset, I strongly suggest you seriously consider givin’ a guy like Joshua Gayman a call. In fact, try to make it happen sometime around 4:30 yesterday afternoon if ya can. :)


Real Estate Investor Priorities – It’s ALWAYS About Timing

I chose the above picture because it relates to the game we all know and love, Monopoly. The formula to win at the game of Monopoly is the same formula used to build wealth. That is, to buy cash-flowing properties. Landing on “Free Parking”(If you play that way) is great, but that is just a capital gain. Capital gains are nice, but you cannot win the game of Monopoly if you don’t buy properties for rent(cash flow) and then convert them to hotels(even if you were to land on free parking every time around the board.) Not to mention, in real life, when you land on free parking(or flip a property, AKA capital gains), it is taxed by the government, and taxed at a rate much higher than the tax you would be charged for your rental income(cash flow).

Cash flow is the #1 thing in real estate investing. Flipping is great to earn a check, but to build wealth you need to have cash flow. In real estate, this means owning property that puts money in your pocket each month, above and beyond your expenses for the property. These expenses include monthly payments for capital(if using OPM-other people’s money *strongly recommended*), insurance, taxes, property management, etc.

The reasons I prefer real estate investing to other vehicles is that it has great potential to leverage with OPM(other people’s money), it provides cash flow(money in your pocket on a regular basis), and it has AMAZING tax advantages.

One HUGE variable with real estate investing is time. This is true with cash flow investing just as it is with “flipping.” As with all investing, you should have a plan. Your plan will be different if you are 5 years from retirement as opposed to 40 years from retirement, and anywhere in between..

If you are not satisfied with what your retirement account is doing for you in your 401k, give me a call and we can discuss a personal real estate investment strategy to secure your retirement. 623-252-3234

I will now turn it over to a very wise real estate investor. My friend in San Diego, Jeff Brown.

-Joshua Gayman

The following written by: Jeff Brown AKA “Bawld Guy” –

Cash flow is a wonderful thing. Capital growth is truly something to celebrate. Yet both can derail your retirement faster than you can watch it happen in real time. So many real estate investors behave as if both concepts exist in a vacuum, unaffected by all other factors. One of those factors is time — and I’m here to tell ya, time won’t be ignored. Much like gravity, those who ignore it’s powers will either pay a stiff price, or look back and realize they were incredibly lucky.

Let’s don’t talk in terms of age, but instead, years before retirement. If you have more than 10, surely 15 or more years till that day, puttin’ cash flow at the top of your priority list will be the kiss of death — to your retirement income. Of course, that doesn’t matter much if your agenda isn’t to maximize cash flow at the point of retirement. I’ll assume your #1 goal is maximum reliable income at the point of retirement.

BawldGuy Axiom: To the extent the real estate investor goes for cash flow, capital growth suffers — and vice versa. You’ll only get the best of both in the movies.

There’s no gettin’ around that truth. There are types of properties more appropriate for capital growth, just as the same is true for cash flow. Also, the structure/strategy used to acquire a real estate investment property will dictate whether or not it will be more productive for growth or income.

But again, the elephant in the room is timing.

If you’re 43 years old with plans to call it quits at 65, and makin’ plenty of money at work, why on earth would you sacrifice capital growth for current cash flow for which you have no need? Putting cash flow at the front of your chronological line guarantees the inhibition of your invested capital’s growth. But, you might ask, why is that such a big deal? Excellent question, grasshopper.

What is cash flow anyway, but a yield on capital, right?

Retirement income is nothing if not the yield on your accumulated capital, set aside for that purpose. The bigger the pile of capital you amassed, the larger the yield will be in terms of, you know, actual dollars. To put it more simply, a 6% yield on $3 Million is more than the same 6% on $1 Million.


$180,000 is more than $60,000.

BawldGuy Takeaway: Those who opt for capital growth first, then switching gears to cash flow as retirement looms, will be living on the former. Those who insist on emphasizing cash flow now, will be settling for the latter.

There is no third alternative people. Make time your friend, cuz it’s a merciless enemy.

-Jeff Brown