The Myth of Cash Flow

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In This Article

One dead giveaway that a real estate influencer is really more of a fake guru is an overemphasis on cash flow. Sure, it’s not as big a giveaway as having multiple clips of said “influencer” partying on the beach in what ostensibly is an educational video on real estate investment. But overemphasizing how great cash flow is still highly dubious.

That, of course, doesn’t mean that cash flow is useless. It is, in fact, very important, but not for the reasons most gurus would have you believe; namely, after a short while in real estate, you can live a luxurious lifestyle off cash flow alone.

Cash flow is mostly just a way to keep you afloat, but we will get to that shortly. For now, let’s talk about the current real estate economy.

In today’s market, where prices are still going up, and interest rates are about double what they were five years ago, achieving positive cash flow on an investment house with a loan is extraordinarily difficult. The BRRRR method—where you attempt to be all-in on a property for 75% of its value and then refinance out your entire investment with a bank—is all but a non-starter.

Indeed, the BiggerPockets forums are littered with discussions about this:

And on and on it goes. Even David Greene, the guy who wrote a book called BRRRR, now points out that “You CAN’T rely on cash flow anymore.”

By the Numbers

Is that true? Is it really so bad? Well, let’s look at the numbers.

We’ll run the numbers by using some actual market statistics. In Jackson County, Missouri (Kansas City), where I live, the median home sale in January 2025 was $250,000. I could use the average sales price of $306,586 to make my case even stronger, but I’ll go with the lower median value since I think it is more representative of your typical sale.

On the other hand, according to Zillow, the average rent for a house in Kansas City at the same time was $1,500/month.

So, let’s take a look at how purchasing the median house in Kansas City and trying to rent it will work for you. We’ll go with a 75% LTV (loan-to-value) loan at the 30-year fixed rate. As of this date, according to Mortgage News Daily, that would run 7.01%. (Again, this is generous, as that’s what homeowners are getting, and typically, investors get worse rates and, at least in the Midwest, very rarely an amortization of 30 years.)

At 75% LTV, the loan on a $250,000 house would be $187,500. So, let’s do the math for how this rental will work out:

Monthly rent: $1,500

Mortgage: $1,248.70

Proceeds: $252.30

Not a good start.

And remember, this is assuming 100% occupancy, and even if it didn’t, we still have to pay all sorts of other expenses, most notably property taxes (which, in Jackson County, indefensibly skyrocketed in 2023).

Let’s take a look if we add in some basic assumptions on vacancy and expenses:

Income:

Monthly rent: $1,500

Vacancy (10%): ($150)

Other income (i.e., late fees, app fees, etc.): $30

Gross income: $1,380

Operating expenses:

Property taxes (monthly): ($200)

Insurance: ($60)

Utilities (when vacant): ($25)

Management fee (10% gross): ($138)

Maintenance/turnover: ($100)

Contract services: ($25)

Replacement reserve: ($200)

Operating expenses: ($748)

Net income: $632

Debt service: ($1,248.70)

Cash flow: ($616.70)

In other words, it’s not even close. Yes, you would cash flow without a loan, but with interest rates where they are, a loan makes it exceedingly difficult.

Now you could do as the BRRRR method suggests and get the deal at a 25% discount (i.e., buy it for $187,500), which would help. But that would bring the loan down to $140,625 and the payment to $936.53/month. You would still be bleeding $304.53 per month. And remember, the BRRRR method is to be all into a property for 75% of the property’s value and then refinance it at 75% of its appraised value.

In other words, you would be all-in for $187,500 and then finance it for $187,500. BRRRRing this deal by the book would mean you would still be back to losing $616.70 per month.

Now, of course, the typical house is not the typical investment house. As Gary Keller noted, the best place to invest is in the lower middle part of the market. So the numbers on such a property will look better there.

This Is (Sorta) How It Has Always Been

Or, more accurately, this is an extreme version of how it’s typically been.

I remember talking with a very successful apartment investor at a BiggerPockets conference a few years back who acknowledged that when they included recurring capex (or replacement reserve, i.e., replacing roofs, repaving parking lots, etc.), they were actually losing money. It was refinances, sales, acquisition fees, and the rest that made them profitable. (Although I should note, their operation’s overhead was a significant additional reason that cash flow by itself wasn’t enough.)

It’s my experience that investors don’t fully account for recurring capital expenses. Just think how many months of $100/month cash flow you would need to overcome one $7,500 roof. Here, for example, is one list R.E. Tipster came up with:

And that doesn’t include anything with the foundation, driveway, insulation, or sewer line.

Over 35-plus years, my father built a real estate investment company of over 1,000 units in four states. His student housing operation in Oregon definitely has positive cash flow, but every other branch is tight. And his Oregon operation took several decades to achieve and is in large part because of how good the niche of student housing is at producing cash flow.

Indeed, my dad owns houses worth close to $1 million that he bought for around $50,000 in the mid-’90s. It’s appreciation that produced that wealth, not cash flow.

In fact, every successful investor I have ever met has told me the same thing: Cash flow is overrated. Or, at least, it’s overrated when it comes to becoming wealthy.

Cash flow is essential to staying solvent and not going bankrupt. So it’s quite important. But to become wealthy with cash flow is just unrealistic.

The median personal income in the United States as of 2023 is $42,220. You would need 35 rentals making $100/month just to make that and be “average.” Yet only 6.7% of Americans own even a single rental property. And the average landlord owns just three, i.e., less than 10% of what’s needed to get to the median American income at $100/unit per month.

And yes, you would make a lot more without debt, but that removes one of real estate’s biggest advantages. (And, at least in the United States, the stock market has had higher returns than real estate historically if debt isn’t utilized.)

Real estate is a get-rich-slow investment. Cash flow keeps you solvent, but it’s long-term appreciation (compounded with wise use of debt) and principal paydown that make you wealthy. This is what my experience is, as well as every other successful buy-and-hold investor I have ever talked to.

Becoming rich with cash flow has always been a myth. It’s just more of a myth now than it used to be.

So Is All Hope Lost?

As noted, BRRRRing right now is extremely difficult. Not impossible, but very difficult. In general, real estate investment is more difficult than it was five years ago. But no, not all hope is lost.

House hacking is still a good way to get your foot in the door, especially with a duplex or fourplex, where your tenants will help pay your mortgage.

Buying without debt or with less debt can still allow properties to cash flow and is still an option. Furthermore, it’s much easier to get larger multifamily properties to cash flow than houses or the like, so syndications are still a possibility, as are some commercial properties such as industrial. (I would be wary about office right now.)

Properties are still appreciating, and the market is still fairly active. So flipping is definitely still viable.

So while BRRRR is dead, or more accurately, hibernating, there are still opportunities in real estate. Perhaps one small silver lining is that the challenges this market has made for BRRRR investing highlight a general truth: Cash flowing to any substantive degree, at least with debt, is very difficult and takes a long time. Furthermore, that’s not how real estate investors get wealthy. It’s just how we stay afloat.