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The Cash Flow Myth: Why It Won’t Make You Rich in Real Estate
Debunking the Cash Flow Hype
One clear sign that a real estate influencer might not be as knowledgeable as they claim is their overemphasis on cash flow. While it’s not as blatant a red flag as showcasing a luxurious beachside lifestyle in supposed educational content, hyping up cash flow as the golden ticket to wealth is still highly misleading.
That’s not to say cash flow is unimportant—it is. However, the real value of cash flow isn’t in quickly funding a lavish lifestyle, as many self-proclaimed gurus suggest. Instead, cash flow primarily serves as a tool to keep you financially stable. But before we dive into that, let’s take a look at the current real estate market.
The Harsh Reality of Today’s Market
In today’s real estate climate, where home prices continue to rise and interest rates have nearly doubled in the past five years, achieving positive cash flow on an investment property with a loan is increasingly challenging. The once-popular BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method, which aimed to get investors all-in on a property at 75% of its value and refinance to recover the initial investment, is struggling to work in these conditions.
Real estate forums are filled with discussions about this shift:
- “Is the BRRRR Method Dead in 2024?”
- “Why BRRRR Isn’t Working Anymore”
- “Here’s Why You Can’t Rely on Cash Flow Now”
Even David Greene, the author of a book on BRRRR investing, now acknowledges that relying solely on cash flow is no longer a viable strategy.
Let’s Crunch the Numbers
To understand why, let’s break down the numbers using real market statistics. In Jackson County, Missouri (Kansas City), where I live, the median home sale price in January 2025 was $250,000. Zillow reports that the average rent for a house in Kansas City at that time was $1,500 per month.
Now, let’s analyze what happens if you purchase a median-priced home and try to rent it out with a 75% loan-to-value (LTV) mortgage at a 7.01% interest rate (a generous assumption, as investor rates are often higher and amortization terms shorter).
Monthly Breakdown:
- Rent: $1,500
- Mortgage (P&I on $187,500 loan): $1,248.70
- Remaining balance: $252.30
That may not seem terrible at first, but remember, this assumes 100% occupancy and ignores all other costs. Let’s factor in typical expenses:
Income:
- Rent: $1,500
- Vacancy (10%): -$150
- Other income (late fees, etc.): +$30
- Total gross income: $1,380
Operating Expenses:
- Property taxes: -$200
- Insurance: -$60
- Utilities (when vacant): -$25
- Management fee (10% of gross income): -$138
- Maintenance and turnover: -$100
- Contract services: -$25
- Replacement reserves: -$200
- Total expenses: -$748
Net Income: $632 Debt Service: -$1,248.70 Net Cash Flow: -$616.70 (negative)
Even if you secured the deal at a 25% discount ($187,500 purchase price instead of $250,000), your loan payment would drop to $936.53. However, you’d still be losing $304.53 per month. Sticking strictly to the BRRRR method would mean financing the property at full value again, putting you back to losing $616.70 per month.
Cash Flow vs. Wealth Creation
This financial reality isn’t unique to today’s market—it has always been this way to some extent. While cash flow is essential for covering expenses and avoiding bankruptcy, it is not the key to becoming wealthy.
Successful investors understand that wealth in real estate comes from appreciation, strategic use of debt, and principal paydown—not cash flow alone. My father built a portfolio of over 1,000 rental units over 35 years. While his student housing investments generate cash flow, most of his long-term wealth came from property appreciation, not rental income.
If you think cash flow is a shortcut to financial independence, consider this: The median personal income in the U.S. as of 2023 was $42,220. To match that with rental income alone, you’d need 35 properties generating $100 per month each. Yet, only 6.7% of Americans own any rental properties at all, and the average landlord owns just three. That’s far from the number needed to achieve even an average income through cash flow.
Is There Still Hope for Real Estate Investors?
While BRRRR is currently struggling, real estate investing isn’t dead. There are still viable strategies to consider:
- House hacking: Buying a duplex or fourplex and living in one unit while renting out the others can significantly offset mortgage costs.
- Investing with less debt: Reducing leverage makes it easier to generate positive cash flow.
- Larger multifamily properties: These tend to cash flow better than single-family rentals.
- Flipping properties: Since home values continue to rise, flipping remains a profitable strategy.
Final Thoughts: Cash Flow Won’t Make You Rich
The myth of cash flow as a pathway to quick wealth has been around for decades, but the current market conditions expose it more than ever. Real estate is a get-rich-slow strategy—one that requires patience, intelligent debt management, and long-term appreciation. Cash flow is necessary to stay afloat, but it is not the golden ticket to financial freedom.
So, if your favorite real estate influencer is selling you on the dream of passive income through cash flow alone, take it with a grain of salt. True wealth in real estate has always been built through time, strategy, and smart investments—not through the illusion of effortless monthly rental profits.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
The Cash Flow Myth: Why It Won’t Make You Rich in Real Estate
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“